By: Carol K. Lucas, Esq.

On June 10, 2014 the California Court of Appeal for the Fifth Appellate District ruled unambiguously that billed charges do not constitute reasonable and customary value for purposes of non-contracted provider claims. Children’s Hospital Central California v. Blue Cross of California, 226 Cal.App.4th 1260 (2014). The court found in favor of Blue Cross in a dispute with Children’s Hospital Central California regarding post-stabilization medical services provided during a ten-month period during which the parties did not have a contract in place. The hospital’s billed charges were $10.8 million; Blue Cross had paid the hospital the Medi-Cal rate of $4.2 million. (The Blue Cross plan was a Medi-Cal managed care plan.) The trial court held that Blue Cross was required to pay the Hospital’s full billed charges for services rendered during the non-contracted period and set damages at $6.6 million. Blue Cross appealed and the trial court’s ruling was reversed. The case will now go back to the trial court for a new trial on the value of the non-contracted services.

A long line of California cases, including the California Supreme Court’s Prospect decision, have stated that a non-contracted provider is entitled to “quantum meruit” compensation, i.e., compensation equal to the reasonable and customary value of the services. However, until Children’s Hospital v. Blue Cross, the courts had provided very little guidance on how reasonable and customary value was to be determined. As a result, 28 CCR §1300.71(a)(3)(B), the DMHC regulation that specified the Gould factors as factors to be considered in determining reasonable and customary value for reimbursing non-contracted provider claims, constituted the only available guidance regarding the evaluation of a non-contracted provider claim.

Because Gould was a workers’ compensation case, and because workers’ compensation reimbursement is largely based on a fee schedule, the regulation included “the fees usually charged by the provider” and “prevailing provider rates charged in the general geographic area in which the services were rendered” but did not include any factors relating to payments accepted by the provider for the same services. This led Children’s Hospital to assert in the trial court that evidence relating to the amount that it accepted under its contracts with payors was irrelevant, and the trial court did not permit Blue Cross to present evidence regarding amounts that Children’s Hospital actually accepted for the services. Because the trial court viewed the Gould factors as the exclusive method to determine reasonable and customary value, the only evidence of value the jury was allowed to consider was the hospital’s full billed charges. The Court of Appeal held that this was reversible error.

The Court of Appeal held that the Gould factors do not provide the exclusive standard for valuing the services provided by the hospital and rejected the hospital’s contention that its billed charges alone determined reasonable and customary value, (The court also rejected Blue Cross’s contention that Medi-Cal rates established reasonable value). Instead, the court held that “relevant evidence would include the full range of fees that Hospital both charges and accepts as payment for similar services. The scope of the rates accepted by or paid to Hospital by other payors indicates the value of the services in the marketplace. From that evidence, along with evidence of any other factors that are relevant to the situation, the trier of fact can determine the reasonable value of the particular services that were provided, i.e., the price that a willing buyer will pay and a willing seller will accept in an arm’s length transaction.”

In the wake of Children’s Hospital v. Blue Cross, it is clear that determination of reasonable and customary value requires evidence of amounts accepted by the non-contracted provider for similar services, even if those amounts are paid pursuant to a contract. The non-contracted provider’s billed charges are also relevant, but a payor will be permitted discovery regarding how often the provider actually receives its billed charges. Although not specifically addressed in the Children’s Hospital case, it seems likely that evidence relating to payments accepted by other providers in the area would also be relevant to the issue of value of services in the marketplace. Consequently, this case, while not providing a formula or an exhaustive list of relevant factors, represents a significant decision in the area of payment for non-contracted provider services.  The case’s new trial on damages should provide a helpful guide for both adjudication of non-contracted provider claims and resolving disputes between payors and non-contracted providers.

Critics of the decision have asserted that it will result in the death of contracting in California, because payors will no longer have any motivation to negotiate reasonably with providers. Because payors will be able to pay contract rates to out-of-network providers, the argument goes, there will be no reason for payors to contract at all.  However, it seems just as likely that the decision will promote contracting. The fallacy in the argument of the critics is that the quantum meruit inquiry will now consider contract rates to the exclusion of charges (a 180-degree shift from the Gould factors), but that reading cannot be supported by the language of the decision. Rather, the decision requires, as the common law of quantum meruit did before it, that all relevant factors be considered, resulting, most likely, in a value between the two poles of billed charges, on the one hand, and contract rates or government rates, on the other. Providers who previously pursued a no-contract strategy because they believed they could collect billed charges (regardless of how high such charges might have been), may now see value in contracting if their reimbursement will be reined in anyway. After all, contracting has some tangible and practical benefits: certainty, direct and prompt payment, volume and the ability to be paid without protracted dispute and litigation. It may still be that individual providers and payors will be unable to come to terms, but there seems to be every incentive for them to try.