Contract law offers solutions to surprise medical bills

May 2, 2017 – The DCRI’s Kevin Schulman, MD, MBA, and his colleagues suggest that taking action through the courts would be preferable to legislative or regulatory solutions.

Surprise medical bills occur when patients inadvertently seek care from providers that are not within the patient’s insurance network, often in emergencies. Such surprise bills tend to be very burdensome, reflecting prices that are far higher than what most insurers pay. They also subject patients to prices that are inflated, to which no insurer ever agrees, and which are set by hospitals—in fee schedules called “chargemasters”—to establish bargaining leverage against insurers. These hospital billing practices, which also ensnare the uninsured, have garnered national condemnation.

In a paper published in the American Journal of Managed Care, Duke University’s Barak D. Richman, Nick Kitzman, and Kevin Schulman (pictured), along with Arnold Milstein of Stanford University, provide a new legal analysis based on common law principles that can prohibit balance billing at inflated prices.

“These surprise bills should not be honored,” Schulman said. “Providers are entitled to compensation but at market prices.  Judges should never have allowed claims for charges set by hospitals in chargemasters to be enforced.”

Those in favor of balance billing argue that it increases compensation for high-quality healthcare providers and would not be necessary if insurance companies reimbursed them appropriately.  Critics, including consumer advocates and legislators, argue that it succeeds due to a lack of transparency in pricing, creates patient confusion and unnecessary administrative costs, and absolves insurers from helping patients secure good value by passing along costs to patients.

“That argument for balance billing is akin to saying it is okay for hospitals to steal money from patients because they’re putting the money to good use,” Richman said. “Billing patients for prices that they did not agree to—prices that no one would ever agree to—and then demanding payment, often through collection services, is abusive.”

“We reviewed contract law and examined the law’s handling of cases where prices have not been specified in advance, which are the controlling authority to guide courts in disputes over surprise and out of network billing problems, and found that providers have no real legal authority to collect inflated bills,” Richman said. “Courts are divided in their rulings on this issue, not because they disagree with our legal analysis, but because they don’t understand how medical bills really work.”

“We urge state attorneys general to challenge provider claims for charges on behalf of vulnerable patients. Patients and their attorneys can also challenge these claims directly, without waiting for delayed and cumbersome legislations or regulations. Courts can also support judges administratively to help them reach a reasonable and uniform definition of ’market price’ for their jurisdiction that would end these practices immediately.”

The authors argue that a simple legal solution through the courts would end the abusive practice and facilitate meaningful price competition in healthcare markets more effectively than many of the legislative and regulatory solutions currently under consideration.