For a summary of this case that discusses the facts, a short synopsis of the law, and its implications, please see our blog post. This summary goes through the court’s opinion more carefully for those who are interested in the parties’ respective arguments and the court’s analysis.

The Background

This case involved a dispute between Children’s Hospital Central California (the “Hospital”) and Blue Cross California. Hospital and Blue Cross operate under various contracts, but in this instance, the contract had lapsed for a ten-month period. The case concerned services provided to patients enrolled in the Medi-Cal managed care plan, under which the California Department of Health Care Services (“DHCS”) pays a monthly fixed fee per patient to Blue Cross. In turn, when services are rendered, Blue Cross pays the Hospital. Opinion at 3. The services at issue were part of “post-stabilization care,” which, unlike emergency care, is not mandated by state and federal law, and may require pre-authorization by a health plan for reimbursement.

For mandated emergency care, the Hospital is required by law to accept from Blue Cross the amount it would receive directly from DHCS for those services—the average California Medical Assistance Commission (“CMAC”) rate. Opinion at 4. When the Hospital billed Blue Cross for the emergency and post-stabilization services, Blue Cross paid the CMAC rate for both types of services. The Hospital then brought a claim for additional moneys for the post-stabilization services, requesting the difference between the CMAC rate and the “reasonable and customary value” for those services. The Hospital claimed that the reasonable and customary value was equal to the amount billed, which came from its charge master. Opinion at 5.

The appeals court’s ruling sent the case back to the trial court. However, on July 17, Children’s Hospital petitioned the California Supreme Court to hear the case, arguing that the ruling “disrupts the carefully established balance between plans and providers during contract negotiations,” and that it “will have a profound and fundamental impact on the way in which health care is delivered to patients in California.” The hospital warned that the ruling would give plans and providers less incentive to enter into contracts that benefit consumers. It remains to be seen whether the state’s high court will take the case, and, if so, whether it will agree.

The Parties’ Arguments

The Hospital relied on California Code of Regulations 28 § 1300.71(a)(3)(B), which provides a six-prong test for determining reasonable and customary value for non-contracted parties in claims settlements (if there were a contract, payment terms would be governed by that agreement). The reg names the six factors to be considered as: (1) the provider’s training, qualifications, and length of time in practice; (2) the nature of the services provided; (3) the fees usually charged by the provider; (4) prevailing provider rates charged in the general geographic area in which the services were rendered; 5) other aspects of the economics of the medical provider’s practice that are relevant; and (6) any unusual circumstances in the case ….” Opinion at 5-6. Blue Cross argued that the reg supported its position that the billed amounts represented the reasonable and customary values for the services rendered.

In defending the action, and challenging the Hospital’s aphoristic read of the reg, Blue Cross sought through discovery information about payment the Hospital had actually received from other payers for the same services. Based on its agreement with the Hospital that the billed amounts equaled the reasonable and customary value, the trial court denied these discovery requests. Similarly, it denied Blue Cross’ attempts to introduce evidence at trial to the effect that the value of the services was less than the amount billed. Opinion at 7-8. Finally, the court instructed the jury that it could not consider rates paid by other payers, including the government (the CMAC rate), or payments accepted by the Hospital by the hospital for post-stabilization services in rendering its verdict. Accordingly, the jury awarded the Hospital damages equal to the difference between what it had already paid for the post-stabilization services and the full amount of the billed charges. Opinion at 9.

The Court’s Ruling

The appellate court’s analysis looked into the history of CCR § 1300.71(a)(3)(B)’s six factor test and related jurisprudence. The court pointed out that the Department of Managed Health Care (“DMHC”), which had passed the reg, had expressly declined to specifically set reimbursement rates. Moreover, DMHC had specifically rejected suggestions of setting the rates at either the fully billed charges or the government rate. Opinion at 12. Instead, DMHC incorporated the equitable remedy of quantum meruit (the age-old legal concept that one must pay for services not gratuitously rendered) into the statute by requiring reimbursement for the reasonable and customary value of the services. Opinion at 12. The appellate court reasoned that here, as in other quantum meruit cases, the trial court should have accepted a variety of evidence as to the services’ value. Opinion at 14.

The court went on to define the “reasonable value” as the “market value” for the Hospital’s services, and pointed out that a “ ‘medical care provider’s billed price for particular services is not necessarily representative of either the cost of providing those services or their market value.’” (Opinion at 15; citation omitted). In the determination of market value, the actual billed charges are just one factor. Opinion at 16. The court also pointed out that the DMHC had not intended, nor did it have the authority, to change California law on quantum meruit more generally. The appellate court ultimately ruled that the trial court’s misinterpretation of the regulation caused multiple errors, and reversed and remanded the case.