Unbalanced Billing In California Hospitals: Is This A Problem the State Can Solve By Getting Out of the Way?

Imagine if you bought an airline ticket to fly from San Francisco to Chicago and after the flight you received an extra bill from the co-pilot for what he claims is a fair price for his services. He is unsatisfied with the airline’s pay, and would like you and your fellow passengers to make up the difference.

Needless to say, you would be appalled. Nevertheless, this is the situation that patients in California, and many other states, face in the hospital, especially when they present at the emergency room. In some cases, neither the hospital nor the ER doctors are “in network.” In other cases, the hospital might be “in network, but the doctors “out.” Patients are entirely and reasonably ignorant of this. Out-of-network doctors and hospitals still bill the health plan, but they are not obliged to limit their fees to the contracted rate. So they bill patients for the balance.

Well, you can’t just allow hospitals and doctors to make up whatever fees they want to charge a patient in an emergency, and an emergent patient cannot always get to an in-network ER. On the other hand, providers do deserve to get paid, while the emergent patient is in no shape to determine what price he is prepared to pay.

This situation requires a judgment of Solomon to craft good public policy. The governor, however, has simply decided to side against the hospitals and doctors, a few months ago ordering the Department of Managed Health Care to propose a regulation to stop the practice. Last month, DMHC closed the comment period, and it has now swung into action against one hospital chain that is violating its new rules.

The regulation is DMHC’s good-faith effort to stop patients being victimized, but it is also a blunt tool: compelling doctors and hospitals to accept rates they have not voluntarily negotiated. Further, it uses a screwdriver on a nail: DMHC does not have clear statutory authority to regulate hospitals. They’re licensed by the Department of Public Health , inspected by the Office of Statewide Health Planning and Development , and rated by the private, non-profit CalHospitalCompare.org .

There are a few ways to improve this unsatisfactory situation by rolling back the state’s interference in health care, rather than extending it.

The first is to repeal laws preventing so-called “corporate practice of medicine,” which is actually restraint of trade with a more opaque name. The “corporate practice of medicine” doctrine prevents hospitals from employing doctors directly and thereby negotiating a comprehensive contract with health plans.

The second is this unique exemption that health care providers have from the civil code that governs all other transactions: doctors can send people bills claiming “usual and customary charges” and create a liability for the patient where there was no contract. The first time a court tells a doctor that he is owed nothing, because there was no contract, practice will change pretty quickly!

The resulting crisis would force providers to figure out a more creative way to get paid fair prices for their services by out-of-network health plans. I anticipate that both sides would invest less in lobbying for a political solution and find something mutually acceptable. I expect that the solution would be binding arbitration, which has been used successfully in labor-management disputes. The interested parties could agree to appoint panels of independent, expert, arbitrators who give straight and simple votes, up or down, on out-of-network ER claims.

Binding arbitration would result in prices stabilizing pretty close to “market clearing” prices very quickly, and it would minimize the interference of the state regulator.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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