On October 15, 2014 the California Supreme Court declined to hear the Children’s Hospital Central California v. Blue Cross case, decided by the Court of Appeal in June 2014. The Court of Appeal in Children’s Hospital ruled unambiguously that billed charges do not constitute reasonable and customary value for purposes of non-contracted provider claims. Following that ruling, Children’s Hospital appealed to the California Supreme Court, seeking a ruling that the Gould factors, which tie reasonable and customary value to billed charges rather than contract rates or payments actually accepted, represent the correct way to evaluate out-of-network claims. Children’s Hospital also requested the Supreme Court to depublish the Court of Appeals decision, which would have taken away its precedential value for other cases. The Supreme Court denied both requests, effectively making the Children’s Hospital case the controlling legal authority regarding the determination of reasonable value in California.
The Children’s Hospital case involved payment for post-stabilization medical services provided during a ten-month period during which the hospital and Blue Cross 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. Now that the Supreme Court has denied the appeal by the hospital, the case will 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 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 to plans and IPAs confronted with a non-contracted provider claim.
Because Gould was a workers’ compensation case, and because workers’ compensation reimbursement is largely based on a prescribed fee schedule, the Gould factors 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 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.”
The court provided one additional piece of guidance regarding reasonable and customary value: costs are not relevant. The court noted that “quantum meruit measures the value of the services to the recipient, not the costs to the provider.”
Now that the Supreme Court has rendered the Court of Appeals decision final, California law 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, provides a clear and authoritative framework for evaluating non-contracted provider claims.
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Carol Lucas is a Shareholder in the Los Angeles office of Buchalter Nemer, a professional law corporation. She can be reached at clucas@buchalter.com.