Billing patients at chargemaster rates may be illegal

Charging patients at the list prices for procedures and services set by the hospital chargemaster isn’t allowed under contract law, according to a study published in American Journal of Managed Care.

Chargemaster rates have come under greater scrutiny thanks to the focus on “surprise billing,” when patients unknowingly receive care from an out-of-network physician or specialist and then get billed for the difference between the hospital rate and the insurer’s reimbursement.

The study, led by Duke University law professor Barak Richman, JD, PhD, sought to “develop an effective legal mechanism” to combat abuses by chargemasters that doesn’t involve legislative solutions, which have become popular at the state level. What Richman and his coauthors determined was by applying the basics of contract law, hospitals have no legal authority to collect from patients or payers at the chargemaster rates.

“The key motivation is that mutual assent is at the core of commercial transactions,” Richman and his coauthors wrote. “Chargemaster prices, in contrast, are prices that neither patients nor payers accepted in advance nor are they prices to which payers would ever assent. Instead, the law entitles providers, as one court ruled, to ‘the average amount that (the provider) would have accepted as full payment from third-party payers such as private insurers and federal healthcare programs.’ The law therefore entitles providers to collect no more than prevailing negotiated market prices for any (out-of-network) services.”

The study argued a consistent application of this standard in court would be the best strategy to curb pricing abuses by chargemasters, who can set rates on average three times the hospital’s actual costs without any improvement in quality.

Compared to passing something through a state legislature, it would also be simpler, according to Richman and his coauthors. The specifics of “surprise billing” laws varied from state-to-state, and can have negative consequences, such as forcing insurers to cover the balance, or may be limited, like only applied to certain services. Those sort of laws could also remove the incentives for hospitals and providers to price competitively in narrow network plans.

Overall, the study concluded there was no better remedy to “surprise” bills than applying established contract law, and for prosecutors to make their stance on the issue known publicly.

“For example, a state attorney general who announces a commitment to enforcing contract law in chargemaster disputes would both protect vulnerable patients and bring some clarity to healthcare prices,” Richman and his coauthors wrote. “Providers will know that subversive pricing strategies will be ineffective, and that they instead must forthrightly disseminate and obtain assent to their prices in a transparent market.”