July 19th, 2010

Analysis of Sharp Healthcare Decisions

Recent Unfair Competition Cases Raise Questions about Health Insurance System

Two indications of the problems of the American health insurance system are that some 50 million Americans lack any health insurance, and that many hospitals are in financial trouble.  As a result, uninsured patients forgo care until they come to the hospital emergency room where treatment is expensive and payment for the treatment is practically uncollectible.  Hospitals strain to cover the costs of the uninsured by shifting those costs to insured patients.
In contrast to most advanced industrialized countries, which have a single payer system with a guaranteed level of care for all, in the U.S., hospitals negotiate with many private insurance companies to set prices for a multitude of procedures. In addition, Medicare and Medicaid each set their own terms under different complex formulas.  One result is that the cost of care for similar procedures can vary substantially based on whether the patient is insured and with whom.  Hospitals are required to set forth, and on demand make available, their basic charges listed in the “chargemaster,” but these amounts usually bear no relationship to the charges that insurance companies may obtain in negotiation.
The California Court of Appeal recently issued a pair of decisions on whether such a system treats uninsured patients unfairly.  They reach contrary results. While scores of cases across the country have unanimously declined attempts to be lured into trying to fix the U.S. health care system, one of these two cases is the first to hold that an uninsured patient may claim under California consumer statutes that she is entitled to be treated as if she were insured.
Suits challenging charges to uninsured patients
In the last several years, a host of suits across the country have been filed against hospitals that maintain a published rate for services while accepting lower fees from private and public insurers.  These suits contend that it is unfair for hospitals to charge uninsured patients more than the rate insurance companies, Medicare and Medicaid pay.  Nearly universally, they have failed.  The lack of judicial receptivity to these suits is well summarized by Judge Preska of the Southern District of New York.  Labeling the claims “bootless,” the court explained that plaintiffs were seeking a political solution in a judicial forum:

Plaintiffs here have lost their way; they need to consult a map or a compass or a Constitution because Plaintiffs have come to the judicial branch for relief that may only be granted by the legislative branch.  …Plaintiffs claim that the rates charged by the defendant hospital to uninsured patients are unreasonable merely because various insurers have negotiated with the hospital to pay lower rates – an economically efficient outcome for both sides that is fully sanctioned by New York law.

Kolari v. New York-Presbyterian Hospital, supra, 382 F. Supp. 2d 562 at 565 (S.D.N.Y. 2005) (vacated on other grounds, 455 F.3d 118 (2d Cir. 2006)).  See also Burton v. William Beaumont Hospital, 373 F. Supp. 2d 707, 712 (E.D. Mich. 2005) (“None of the courts across the country that have been presented with cases containing allegations similar to those plaintiffs present here has ruled for the plaintiffs on any substantive legal issue.”); Grant v. Trinity Health-Michigan, 390 F. Supp. 2d 643, 647-48, n. 6 (E.D. Mich. 2005)(collecting 29 similar cases dismissed by district courts; “no court has yet to find in favor of the plaintiffs on any substantive legal issue”); Valencia v. Mississippi Baptist Medical Center, Inc., 363 F. Supp. 2d 867, 870 (S.D. Miss. 2005)(“claims are similar or identical to the claims put forth by other plaintiffs in a host of cases across the country. Every single federal court that has analyzed claims such as those put forth by Plaintiffs has dismissed them.”); Nygaard v. Sioux Valley Hospital, supra, 731 N.W. 2d 184, 190 (S.D. Supreme Court Apr. 4, 2007)(to legitimize such claims “would put the court in the role of a policy maker and ‘usurp the traditional role of the Legislature’ in regulating hospitals.”).
California Decisions with Different Outcomes
Until April 2010, no published California appellate court had upheld such a challenge.  In two decisions issued on the same day and involving the same hospital, the Court of Appeal for the Fourth Appellate District (Div. One) denied such a claim in one case, but allowed it in another.  The facts of the two cases are similar, but an allegation concerning the patient’s “expectation” proved decisive in permitting one of the cases to proceed beyond the pleadings.
In Durell v. Sharp Healthcare (2010) 183 Cal. App. 4th 1350 (“Durell”), the Court of Appeal affirmed the trial court’s sustaining of a demurrer to a patient’s claim that it is unfair for a hospital to charge an uninsured patient more than an insured patient pays.  On the same day, in Hale v. Sharp Healthcare (2010) 183 Cal. App. 4th 1373 (“Hale”), the same panel partially reversed the same trial court’s sustaining of a demurrer to the identical claim against the same defendant.  Hale v. Sharp Healthcare is the first reported appellate decision, certainly in California and perhaps anywhere, to endorse a theory that uninsured patients must be treated as if they had insurance – provided they plead that this is what they “expected” when they enter the hospital.
Durell:  Dismissal affirmed for failure to allege causation
Durell was treated in the hospital emergency room five times over four and one-half years; he was uninsured.  The hospital had Durell sign an agreement to pay the hospital’s “usual and customary charges for . . . services.”  The hospital billed Durell over $21,000 for the five visits; Durell did not pay the bills.  Durell, 183 Cal. App. 4th at 1356.
Durell sued the hospital alleging a class action.  After a demurrer was sustained with leave to amend, Durell’s second amended complaint (“SAC”) pleaded, among other claims, California’s unfair competition act (“UCL” or “Section 17200”) at Bus. & Prof. Code § 17200 et seq.
The trial court sustained the demurrer to the second amended complaint without leave to amend finding that Durell’s complaint failed to plead both “injury in fact” and causation.  The Court of Appeal summarized the ruling below:  “As to causation, the court explained the SAC fails to allege Durell was harmed ‘as a result of’ Sharp’s conduct. For instance, the SAC does not allege he ‘relied on Sharp charging its “usual and customary rates” in receiving treatment.’”  Durell, 183 Cal. App. 4th at 1362.  In determining whether Durell’s complaint pleaded “actual reliance,” the appellate court found that he had not alleged that he relied on the agreement for services in going to the hospital.  Accordingly, the Durrell court concluded that the plaintiff had failed to plead causation; it affirmed the trial court’s decision sustaining the demurrer.
Hale:  Claim deemed sufficient because of allegation about expectation
The allegations in Hale v. Sharp Healthcare were very similar to those in Durell.  When Hale was admitted to the hospital she was uninsured. She was asked to sign an admission agreement that provided, “you hereby individually obligate yourself to pay the account of the hospital in accordance with the regular rates and terms of the hospital.”  Hale was discharged the next day and was billed over $14,000 for the medical services she received.  Hale paid the hospital $500.  Hale v. Sharp Healthcare (2010) 183 Cal. App. 4th 1373 at 1377-1378.
Hale filed a class action against the hospital for among other claims, violation of Section 17200.  The trial court sustained a demurrer to all causes of action.  The Court of Appeal echoed its conclusions in Durell that reliance must be alleged, but here concluded that Hale had pleaded reliance merely by stating her expectation:  “The [complaint] alleges Hale signed the Admission Agreement, and ‘at the time of signing the contract, she was expecting to be charged “regular rates.”’” Hale, 183 Cal. App. 4th at 1385 (italics supplied in court’s opinion).  The court concluded that Hale’s alleged expectation was virtually identical to reliance, and thus the causation element was properly alleged.  Id. at 1386.  The court, however, neither explored the factual basis for this expectation, nor discussed why the expectation was reasonable.
The hospital argued that Hale could not have relied on any alleged misrepresentations because the patient would not have seen the Admission Agreement before coming to the hospital.  The Court of Appeal was unreceptive. Although Hale pleaded no facts to this effect, the appellate court theorized:  “It is possible, however, for a person who has arrived at the hospital to rely on the Admission Agreement in deciding whether to proceed with treatment.”  Ibid. Accordingly, based on the plaintiff’s alleged “expectation” and the court’s assumption about what was “possible,” the Hale court concluded that the unfair competition law claim was adequately pleaded.
Inconsistent results
The Hale court’s conclusion that the complaint adequately pleads reliance is neither consistent with Durell nor based on realistic assumptions.  Hale endorses talismanic pleading, in which invocation of charmed words are deemed sufficient to allege the required elements.
The point missed by the Hale court is that these suits are not about hospital misrepresentations at all.  Plaintiffs’ quarrel is not that they were misled, but that they were charged an amount different from what insurers negotiated for insured patients.  No one can believe that had the plaintiffs been handed the chargemaster as they walked in the hospital door they would have turned around and left.  These cases are not about adequate notice or truthful advertising; they are about a medical insurance system that plaintiffs think is substantively unfair.
And of course it is.  Not even Sen. Mitch McConnell thinks the American health insurance system is wholly equitable or efficient.  But under plaintiffs’ theory, airlines should not be able to charge passengers different prices for their seats and stores should not be permitted to offer volume discounts.
Hospitals are willing to offer lower costs to insured patients because the insurer will pay the bill, which Hale and Durell cannot.  If a patient like Hale is permitted to pay the same amount as one who has paid insurance premiums, why pay the premiums?  According to the Hale decision, anyone who can claim she “expected” to pay less than what she was billed can file a class action to stop the hospital from treating differently patients with insurance and patients without insurance.  The Hale decision requires a hospital (and why stop with that business?) to treat persons who are not similarly situated as if they were.
Authorizing judges to determine case by case fundamental issues that affect the entire health insurance industry is an invitation to chaos.  What price would the Hale court deem appropriate for the hospital care the plaintiff received?  How would it even know?
This is why nearly all of the other decisions that have addressed these claims have been decided based on the doctrine of separation of powers:  that the desire to reform a complex system with intertwined financial and policy issues is properly a matter for the legislature, not the courts.  But in both Durell and Hale, the Court of Appeal declined even to consider that argument, deeming it irrelevant.  Durell, 183 Cal. App. 4th at 1358, n. 3; Hale, 183 Cal. App. 4th at 1380.
In refusing to abstain from areas of legislative authority and regulatory expertise, the Hale court disregarded well established California precedent.  Alvarado v. Selma Conval. Hosp. (2007) 153 Cal. App. 4th 1292, 1303-04  (affirming demurrer because, “adjudicating this class action controversy would require the trial court to assume general regulatory powers over the health care industry through the guise of enforcing the UCL, a task for which the courts are not well equipped”); Desert Healthcare Dist. v. PacifiCare, FHP, Inc. (2001) 94 Cal. App. 4th 781, 795-96  (court should abstain when inquiry “would pull the court into the thicket of the health care finance industry”); Congress of California Seniors v. Catholic Healthcare West (2001) 87 Cal. App. 4th 491, 496-511 (detailing immensely complex Medicare and Medi-Cal reimbursement system and cautioning that “no state court ought to venture into such a minefield.”)
In addition to ignoring the broader consequences of its ruling and usurping the Legislature’s domain, Hale offers no guidance to hospitals on how to comply with the law.  It merely provides a cheat sheet for plaintiffs to escape a challenge to the pleadings.  Moreover, the inconsistency between Hale and Durell cannot be reconciled.  Bus. & Prof. Code section 17204 requires that plaintiff’s injury be “a result of” defendant’s unfair competition.  In Durell the plaintiff pleaded that he suffered economic damages “as a proximate result of Sharp’s unlawful business practices.”  The court held that he had not pleaded causation.  In Hale the plaintiff pleaded that “‘she was expecting to be charged “regular rates…”’”  The court concluded this did sufficiently plead causation.
Conclusion
One may sympathize with the impulse to help uninsured patients caught in a system that often forces a choice between medical injury and financial ruin.  But these cases show why courts are ill-suited to fashion a remedy that undermines a concededly flawed system supporting millions of insurance agreements, each of which defines and protects expectations far more justified, not to mention bargained for, than the supposed expectancy pleaded by Hale in her complaint.  The Hale decision is an anomaly among scores of similar cases across the country.  Though a well-meaning attempt to ameliorate a harsh medical care system, the Hale case advances a superficial rule for pleading reliance and fails to recognize the limits of judicial competence.
By Bruce G. Iwasaki Partner

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