California Department Of Managed Care Sues To Prevent Balance Billing By Prime Healthcare

Specializing in the acquisition of distressed and under-performing facilities, Prime Healthcare Services, Inc. is one of California’s fastest growing hospital networks. After acquiring a hospital, Prime looks for ways to save costs and often restructures a newly-acquired hospital’s existing agreements with health plans. This process, which often includes the wholesale cancellation of agreements between Prime hospitals and insurers, has led to major disruptions in California’s managed care network.

In addition to canceling agreements with insurers, Prime hospitals have engaged in widespread collection efforts against patients whose insurers have, according to Prime, failed to adequately pay for medical care provided by Prime hospitals.  Kaiser members have been particularly impacted by Prime’s collection efforts.

Under the Knox-Keene Health Plan Service Act of 1975, California’s statutory scheme regulating health plans and managed care providers, hospitals that are contracted with health plans are prohibited by law from billing health plan members for the difference between the amount billed by the hospital and the amount of reimbursement received by the hospital from the health plan. However, this practice, known as "balance billing," is only illegal if the hospital and the health plan are contracted with one another. In cases where the hospital is not contracted with a health plan, existing California law does not clearly prohibit balance billing by hospitals.

Earlier this month, California’s Department of Managed Care ("DMHC") filed suit against Prime in Orange County Superior Court in an effort to stop Prime from balance billing California health plan members. (See, http://www.hmohelp.ca.gov/library/reports/news/prime.pdf) This suit, along with similar suits brought by other insurers, asserts that while Prime may not have written contracts with the insurers of the patients being balance billed, the health plans are obligated by contract (with their members) and by law (in the case of emergency services) to pay for treatment provided to health plan members. Because of these obligations, the DMHC suit alleges the existence of implied-in-fact and/or implied-in-law contracts between Prime and the insurers sufficient to trigger the Knox-Keene prohibitions against balance billing.

It is difficult to predict how the courts will resolve these important issues. Excessive balance billing is a threat to the economic welfare of many Californians who paid for and expected health coverage through their insurers. On the other hand, Prime will undoubtedly argue that its hospitals are not limited to reimbursement offered by non-contracted health plans and that balance billing is not illegal in the absence of written agreements with insurers. 

While the outcome of the DMHC’s suit is uncertain at this point, in this election year we can certainly expect new legislative initiatives aimed at this issue. Further, new regulations concerning balance billing of patients receiving emergency treatment in hospitals may go into effect this fall. While the new regulations may clarify part of this puzzle, a more complete solution is unlikely to arrive before 2009.