What to know about the first reference-based pricing lawsuit

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Under the new healthcare payment model known as ‘reference-based pricing,’ employers bypass the traditional insurance carrier contract and pay hospitals directly. The amount paid is based on a multiple of Medicare’s reimbursement rate rather than being based on a discount off of the hospital chargemaster.

Supporters of this strategy often present reference-based pricing as a more rational, transparent and cost-effective method for paying for healthcare. The risk, however, is that without a negotiated contract, hospitals can balance bill employees.

The conventional wisdom is that this is rare—even more rare than balance billing through traditional insurance plans. And if balance billing does occur, it is easily resolved via a little back-and-forth negotiation between the hospital and the third-party administrator or employer.

The thinking is that that no hospital wants to take on the public relations battle that could result from suing or bankrupting a former patient over a balance bill.

That thinking may be correct in many cases, but it has proven to be wrong in at least one instance.

In Martinsville, Virginia, there is a reference-based pricing lawsuit pending that industry insiders are watching closely, because it could set a precedent for these types of lawsuits moving forward. In this case, a Virginia hospital has been pursuing an $84,000 balance bill from a former patient for nearly four years and through two separate courts.

Considered the first balance billing suit to go to full trial, it’s a study in how these plans can go wrong. Here’s what happened.

The hospitalization and the bill
In May 2014, Carter Bank & Trust employee Glenn Dennis had a heart attack and was admitted to what was then Martinsville Memorial Hospital and is now Sovah Health Martinsville, owned by LifePoint Health.

Dennis’ insurance did not have a negotiated contract for reduced rates, and he received a bill for the hospital’s chargemaster price of $111,115. Together, the patient and the insurer paid $27,254 to the hospital, and Carter Bank & Trust’s TPA encouraged the hospital to accept the payment in full.

The hospital declined and balanced billed Dennis for the remaining $83,861.

Here’s where the case gets more interesting. Attorneys for Carter Bank & Trust filed for a declaratory judgement that, because 25 percent of the chargemaster rate is accepted as full payment from uninsured patients, the hospital should not pursue any additional payment from Dennis.

But, while waiting for treatment in his hospital bed, Dennis had signed a “Consent for Services and Financial Responsibility” contract that purported to make him liable for the full chargemaster price, and LifePoint Health responded to the declaratory judgement filing with a breach of contract counterclaim.

So, for what appears to be the first time, a balance billing case went to trial.

Glenn Dennis vs. Memorial Hospital of Martinsville & Henry County
In the Circuit Court of Martinsville, Carter Bank & Trust attorneys argued that because Dennis was incapacitated at the time of signing, he and the hospital had not mutually entered into the contract. There had been no “meeting of the minds.”

The judge agreed. “Your money or your life,” he wrote in his option, quoting another contract case. “‘Few of us...would, like Jack Benny, pause and respond, ‘I’m thinking, I’m thinking.’ Most of us would empty our wallets.’ Does that act of acquiescence demonstrate acceptance of an offer and create a contract?”

Finding that it did not, the judge determined that 25 percent of the chargemaster was reasonable and sufficient payment.

LifePoint appealed, and in 2016, the Supreme Court of Virginia agreed to hear the case.

Supreme Court of Virginia ruling
The Supreme Court disagreed with the lower court’s ruling, and determined the evidence showed that Dennis did assent to the terms of the contract and sent the case back to the Circuit Court to consider Dennis’s affirmative defenses. The case is now pending at the Circuit Court.

Carter Bank & Trust attorneys will likely now argue that the contract between Dennis and the hospital was unconscionable. A ruling is expected this spring.

But even if attorneys successfully defend Dennis against LifePoint’s breach of contract claim, the hospital system will almost certainly appeal again.

The case raises a lot of questions about reference-based pricing, but perhaps the first is how Carter Bank & Trust came to implement such a plan, especially prior to 2014. Since that time, the buzz around reference-based pricing plans has grown, but this was a notable move for a mid-sized company outside of a major metropolitan area.

One employer takes a stand
Revered in his community, Worth Carter Jr. was a former grocery cashier who started a single-branch bank in 1974 and grew it into a 950-employee company with assets of $4.5 billion.

Carter, who passed away last year, undoubtedly did many interesting things in his lifetime. For the healthcare community, the stand he took with respect to reference based pricing is nothing short of amazing.

As brokers know, business leaders of 950-employee companies are not typically involved in, much less driving, their benefits strategy, and companies are often averse to the kind of risk that reference-based pricing plans present. But it seems that Carter came to the same conclusion that the CEOs of Amazon, JP Morgan Chase and Berkshire Hathaway have recently reached—that there are more rational ways to pay for employees’ healthcare than today’s status quo.

As brokers continue to share the risks and rewards of reference-based pricing and direct contracting, more employers may be willing to bargain with medical providers in the same way they do with other vendors who provide services to them and their employees. And if they do, they just might thank Worth Carter for laying the groundwork.

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