Reference-based Pricing Gets Put to the Test in Virginia

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Make no assumptions about reference-based pricing! Not yet, anyway…

Reference-based pricing in healthcare is an interesting concept.

What it is and how it works:

Reference-based pricing is a relatively new healthcare reimbursement model where employers contract with a company to negotiate payment rates outside a traditional HMO or PPO contractual relationship and pay hospitals a negotiated amount based on a multiple of Medicare’s reimbursement rate rather than being based on a discount negotiated and contracted in writing.  We often encounter this with an out of network provider’s bill for unplanned, emergency admissions and emergency surgeries. But we’ve seen it in cases where a contract is in force and the employer is convinced by these high-pressure consulting firms that they can save the company money despite the contractual rates they’ve already accepted.

One drawback of not having a written single case agreement or continuous discount arrangement is that without a negotiated contract that prohibits balance billing to the patient, the provider is able to bill the health plan participant (employee)

I was recently contacted by an individual in Mexico living as an expat. He had no managed care contracting experience whatsoever. He wanted me to provide a complimentary copy of my Managed Care Contracting Handbook to learn about how to contract with hospitals for out of network bills.  He stated he could not afford to pay for the book because he alleged he was paid only $120 a month in salary and could be fired if he could not successfully negotiate these reference-based prices with out of network providers on 5 cases per month, minimum. I declined and told him that the book was not going to be helpful. I further explained that my clients in the USA (close to 4000 hospitals) are trained not to accept these deals without a written agreement in place, and to never even accept these calls and engage in dialogue with people doing his job.  I also stated to him that I train my clients that if the discount is not negotiated in advance of admission they owe no duty to accept this “hired bullying tactic” from any self-funded employer or insurer after the discharge.

The conventional wisdom in the past has been that balance billing through traditional insurance plans is rare and on occasion if it happens, since there is a written agreement that states that balance billing to the patient is not permitted, it is easily resolved between the hospital and the third-party administrator or employer.  But that seems to be changing.

The people who call hospitals after the bill has been presented to bully them into taking this reference-based pricing deal is that hospitals “fear” a media circus that could result from suing or bankrupting a former patient over a balance bill. That’s a big assumption on the part of the maverick negotiator working for the reference-based pricing “consultant” working for the self-funded employer or insurer.  Typically, these companies work on a percentage commission for the amount saved on the out-of-network plan. As a healthcare provider, every penny you concede comes from your balance sheet with little to no return or mutual consideration.

In Martinsville, Virginia, there is a reference-based pricing lawsuit pending that industry insiders are watching closely, because it could set a precedent for these types of lawsuits moving forward. In this case, a Virginia hospital has been pursuing an $84,000 balance bill from a former patient for nearly four years and through two separate courts.

The first balance billing suit is about to go to full trial. It’s a study in how this assumption and cost containment strategy can go sideways for the patient and the self-funded employer or labor union or insurance company if there is no single case agreement (SCA) or continuous discount arrangement (CDA) in place to back up the worthless oral agreement that may have been made by a person without the authority to bind the hospital or healthcare provider.  This is one of the areas of focus in my Managed Care Masterclass workshops offered throughout the year. I also offer the MasterClass workshop and at many  hospitals and healthcare provider organizations as a private onsite workshop for staff training and development.  Just one mistake avoided in reference-based pricing pays for the onsite training about 10 times over.

Why is this first test case going to trial?

In short, to try to set precedent in the court of public opinion, or so it appears to me.
In May 2014, Carter Bank & Trust employee Glenn Dennis had a heart attack and was admitted to what was then Martinsville Memorial Hospital and is now Sovah Health Martinsville, owned by LifePoint Health.

Dennis’ insurance did not have a negotiated contract for reduced rates, and he received a bill for the hospital’s chargemaster price of $111,115. Together, the patient and the insurer paid $27,254 to the hospital, and Carter Bank & Trust’s TPA encouraged the hospital to accept the payment in full. Sometimes the issuer of the check places a memo on the remittance summary that if the provider deposits the check, the hospital is assumed to accept the payment in full.  Every attorney I’ve ever spoken with says that the memo on the check can be challenged, but not to deposit it – just in case. After all, why would the $27, 254 amount be the right number? Why not $3 and call it paid in full?

While waiting for treatment in his hospital bed, Dennis had signed a “Consent for Services and Financial Responsibility” contract that purported to make him liable for the full chargemaster price.  The hospital declined to accept 24.5% of what was owed and balanced billed Dennis for the remaining $83,861 relying on the contract he signed. LifePoint Health responded to the declaratory judgement filing with a breach of contract counterclaim. 

Here’s where the case gets complicated. Attorneys for Carter Bank & Trust filed for a declaratory judgement that, because 25 percent of the chargemaster rate is accepted as full payment from uninsured patients, the hospital should not pursue any additional payment from Dennis. That’s where the number arose. They didn’t just throw a dart at a balloon on the wall with a slip of paper in it. That’s the “reference basis.”  But Mr Dennis was insured by his employer-sponsored health benefit plan. So why did they believe this was okay to do?

Well, Carter Bank & Trust attorneys are now arguing that because Dennis was allegedly incapacitated at the time of signing the Consent for Services and Financial Responsibility, he and the hospital had not mutually entered into the contract. There had been no “meeting of the minds.”  That seems to be the pot calling the kettle black.  There was no meeting of the minds on the 24.5% payment, either.  

But the judge agreed with Carter Bank & Trust! In his opinion, for the declaratory judgment, he wrote “‘Few of us…would, like Jack Benny, pause and respond, ‘I’m thinking, I’m thinking.’ Most of us would empty our wallets.’ Does that act of acquiescence demonstrate acceptance of an offer and create a contract?” Finding that it did not, the judge determined that 25 percent of the chargemaster was reasonable and sufficient payment. 

LifePoint appealed, and in 2016, the Supreme Court of Virginia agreed to hear the case. The Supreme Court disagreed with the lower court’s ruling, and determined the evidence showed that Dennis did assent to the terms of the contract and sent the case back to the Circuit Court to consider Dennis’s affirmative defenses. The case is now pending at the Circuit Court. Carter Bank & Trust attorneys will likely now argue that the contract between Dennis and the hospital was unconscionable. A ruling is expected this spring. If the attorneys successfully defend Dennis against LifePoint’s breach of contract claim, the hospital system will almost certainly appeal again.

The case gives us all pause and could set precedent on reference-based pricing decisions in court.

But let’s examine this a little more closely:

  • Carter Bank & Trust, a 950-employee company with assets of $4.5 billion is located outside a major metropolitan area.
  • Carter Bank & Trust implemented this cost containment strategy prior to 2014 when hardly anyone was aware of this tactical approach and how it works.
  • The hospital has no obligation to accept or recognize these plans, grant discounts, or talk to plan representatives and defend prices charged.
  • If the patient was not under the influence of incapacitating drugs and was not coerced to sign the contract, and had benefit of coverage under an employer-sponsored health benefit program, he was not insured and probably not otherwise “entitled” to the discounted rate reserved for uninsured persons and extraordinary circumstances.

If you one of my clients and need a template Single Case Agreement or Continuous Discount Arrangement to have reviewed and refined by your in-house or general counsel, just ask. I’ll provide the one I use as a courtesy.

Follow this case by looking up Glenn Dennis vs. Memorial Hospital of Martinsville & Henry County

Click to access 161019.pdf

Want to know when my next contracting workshop or Master Class will take place? Visit my website at to check the calendar.


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