As lawmakers focus on the social issues underlying the nationwide wave of lawsuits brought by uninsured patients challenging nonprofit hospital billing and collection practices, a class action against a Seattle nonprofit hospital could signify a new breed of lawsuits lurking behind both nonprofit and for-profit hospitals. The landmark case challenges industrywide billing practices for provider-based outpatient services.

Just 11 days into 2005, plaintiffs Lori Mill and DeLois Gibson filed a lawsuit against Seattle’s Virginia Mason Medical Center to no fanfare and with little notice beyond the immediate Washington healthcare community. But hospitals and healthcare lawyers all around the country took notice when nine months later a Washington state court certified a class of all patients “who received medical procedures, treatment, or care at the Virginia Mason outpatient clinic in downtown Seattle who were charged more than they would have been charged for the same procedures, treatment, or care at another Virginia Mason outpatient clinic and who were obligated to pay for any portion of the excess cost.”

According to the plaintiffs’ lawyers, the total damages at issue could be as much as $60 million. And given the complex maze of healthcare regulatory and private sector payor arrangements, it may be just the tip of the proverbial iceberg.

The plaintiffs’ lawsuit complains that thousands of Virginia Mason’s patients unknowingly paid “facility charges” for treatment at the hospital’s downtown outpatient clinic, which is actually connected to the main hospital, when they could have received the same services at satellite clinics owned and operated by the hospital without any such charges.

Seeking to represent those thousands of patients, plaintiff Mill alleges that the $1,133 she was charged to clip a toenail included an excessive facility charge, while plaintiff Gibson claims that such a charge accounted for nearly 60% of her $1,451 bill for removal of a blemish. Their complaint sought class action status and asks the court to stop the billing practice and award them treble damages under the state consumer protection laws.

At the heart of the lawsuit are what Virginia Mason says are perfectly legal and “appropriate” hospital-based facility fees permitted by Medicare, private insurers, and other government payors when an outpatient facility qualifies as a provider-based clinic under Medicare regulations. While the plaintiffs complain that, regardless of Medicare payment policies, the hospital has a duty to affirmatively disclose the alleged pricing disparities, the broader question raised in the class action lawsuit is whether such facility fees are ever appropriate charges to any payors, including the government, private insurers, and managed care organizations, or the uninsured.

Provider-Based Facility Charges — What Are They And Where Did They Come From?
Hospitals all over the United States have long been permitted to own and operate multiple independent facilities and departments at different locations—or even within the hospital’s primary campus—as single, integrated entities for operations purposes. Many states permit such facilities (or departments) to be operated under a hospital’s license as if they were simply an extension of the hospital’s primary facility. Therefore, the hospital and qualifying outpatient facilities share not only licensure, but also provider and tax ID numbers, expenses, liability insurance, monitoring of quality, and administrative functions, among other items.

Underlying the policies permitting such corporate organization and structure is the recognition that, in general, hospitals have significantly greater quality of care and administrative requirements than clinics or other nonhospital providers. That, in turn, makes hospitals more costly to operate. Financial and administrative integration is an important mechanism for controlling hospital costs and allows for the sharing of hospital executive administration, medical staffs, recordkeeping, and overhead expenses.

Medicare has long recognized the administrative efficiencies of such arrangements and, accordingly, has permitted qualifying subordinate facilities to be considered “provider-based” for purposes of Medicare’s administrative requirements. Thus, Medicare effectively treated the facilities as part of the main hospital campus. But, because Medicare historically paid its providers on cost bases, few providers availed themselves of Medicare’s provider-based status where there was little financial incentive to do so and even less federal guidance regarding the criteria for achieving such status.

That all changed, however, after implementation of the hospital inpatient Prospective Payment System (PPS) in 1983. From then on, providers that established provider-based facilities eligible for reimbursement on reasonable cost principles could shift overhead costs to the provider-based facility and obtain increased Medicare reimbursement. Over the next 15 years, hospital outpatient services grew exponentially because they were generally paid on the basis of the hospital’s reasonable cost or customary charges for services, and thus were more profitable than the hospital inpatient PPS. In response, the hospital outpatient PPS was implemented, which ultimately took effect in 2000.

The outpatient PPS was, among other things, intended to level the playing field between hospital-based outpatient reimbursement, where overhead costs were high, and independent or free-standing facilities, where the same services generally were provided with lower costs. However, hospitals still needed reimbursement adjustments to offset their legitimately higher cost structures.

To address that need, the Centers for Medicare & Medicaid Services (CMS) authorized provider-based outpatient departments and facilities to charge Medicare “facility fees” for the services provided at satellite locations or departments. As managed care moved private insurers’ reimbursement policies toward a cost-containment model similar to that used by the Medicare system, hospital-based facility charges became common in the commercial payor context, too.

For the next several years, the CMS worked hard to clarify how outpatient facilities could qualify as provider-based to ensure that they were appropriately compensated for their higher costs and that facility fees were paid properly. In 2002, the CMS ultimately promulgated regulations defining provider-based status as “the relationship between a main provider and a provider-based entity or a department of a provider, remote location of a hospital, or satellite facility.”1

The regulations also set criteria the “main provider” must satisfy before it can bill for services of the provider-based facility or include the facility’s costs in the main provider’s cost report. These criteria generally require that the provider-based facility be legally and operationally integrated with the main provider, including sharing common licensure when appropriate, and be located in relative proximity to the main provider.2 The further a facility is from the main provider campus, the more stringent the requirements for provider-based status.

Is Virginia Mason So Different?
Mill and Gibson’s lawsuit, which claims that both are privately insured, raises the question of whether such fees should be charged to non-Medicare payors. The stakes are high.

As a threshold matter, the lawsuit does not dispute that the Virginia Mason clinic is a valid, qualifying “hospital-based” facility as permitted by Washington’s licensure laws and the Medicare regulations. Indeed, the relationship between Virginia Mason and its satellite outpatient clinics is not out of the ordinary.

The structure will be familiar to administrators of hundreds of hospitals around the country: The acute care hospital is an 85-year-old, private, nonprofit organization licensed for 336 beds that includes a large, multispecialty group practice of more than 390 physicians; a nursing residence and day health center for people with AIDS; and “a regional network of neighborhood [outpatient] clinics.”3 The hospital was recently ranked by U.S. News & World Report as one of the top gastroenterological care centers in the country.

So if Virginia Mason is in compliance with its state license, and billing in conformity with both government and private payors’ policies, where could it have gone wrong?

Danger Lurking in the Water
Unfortunately for Virginia Mason, the broader context of the lawsuit filed against it is a nationwide examination of the conflict between healthcare providers’ need to be competitive and profitable in a market in which healthcare is treated as a commodity, and the evolving social expectation that healthcare should be a financially accessible benefit to all who need it and that patients should not be treated as other consumers. The lawsuit against Virginia Mason may provide a glimpse of the future battleground in this ongoing struggle to shape healthcare policy for the next generation. Unfortunately for hospitals, there is cause for concern.

The president’s 2006 State of the Union address revealed that the issue of hospital pricing and the need for heightened transparency therein has percolated to the top of the agenda in Washington, D.C. But the issue’s slow rise to political prominence and the torpid pace of any expected congressional response to the president’s call to action mean that the front lines of the policy debate will continue to be played out where hospitals least prefer it—in court.

Much of the recent national focus of hospital billing practices stems from Congress’s examination of the charity care policies of the hundreds of tax-exempt hospitals around the country and, perhaps more significant, the scores of subsequent lawsuits brought by uninsured patients seeking to challenge hospital billing and collection practices.

While the vast majority of those lawsuits has gained little traction, a handful of state courts has allowed the lawsuits to proceed as class actions, calling into question whether hospitals may charge one class of payors differently than another, particularly if the difference in charges is not disclosed.4 Those issues, unresolved by legislatures, are awaiting final resolution in the courts.

The Virginia Mason lawsuit may just represent the next litigation frontier for hospitals. In contrast to the uninsured patient cases, the class of plaintiffs certified by the court in Virginia Mason’s case is significantly broader and includes both commercial and public insureds, as well as self-pay patients—in other words, nearly every segment of hospitals’ payor mix.

But perhaps what makes the Virginia Mason case even more remarkable is that, unlike cases involving uninsured patients, at issue are the payment policies expressly sanctioned by government payors as a matter of law or agreed to by patients’ private insurers in negotiations with the hospital. By certifying such a broad plaintiff class, the Washington state court suggested that transparency with government and third-party payors is not sufficient, and failure to share pricing information with those payors’ beneficiaries potentially could be deemed a deceptive trade practice.

At least in the context of Medicare, the American Medical Association apparently agrees, having publicly condemned the practice of charging Medicare beneficiaries variable charges for the same procedure depending on where it is performed.5 And while it is too soon to tell whether the trial court’s decision to certify the class will withstand scrutiny in Washington’s higher courts, one thing is clear: Barring congressional action to address inconsistencies in healthcare pricing, the courtroom doors will continue to open for plaintiffs challenging hospital pricings.

While the legal arguments in such cases may be framed in terms of “disclosures” and “consumer confusion,” plaintiffs’ attorneys are well aware of how to capture headlines and influence potential jurors. In the uninsured cases, they publicly questioned how a patient could be charged $10 for a single dose of Tylenol. In the Virginia Mason case, they publicly questioned how a patient can be charged more than a thousand dollars for the “30-second nail clipping” or the “less-than-five-minute bump removal.”

As a result, healthcare providers will continue to be called on by the press and, if the cases survive until trial, potential jurors will need to explain their fees and charge structures. This will be a difficult task as members of the public and jurors cannot help but view themselves as potential paying patients, especially as copay and deductible amounts continue to increase and the number of uninsured and partially insured patients continues to rise.

— Kathlynn Butler Polvino is a partner with the law firm Powell Goldstein LLP and a member of the firm’s healthcare practice group.

— S. Derek Bauer is an associate with the law firm Powell Goldstein LLP and a member of the firm’s healthcare practice group.

References
1. 42 C.F.R. 413.65(b)(2).
2. 42 C.F.R. 413.65(d).
3. About Virginia Mason. Available at: http://www.virginiamason.org/about/default.htm
4. Haynes et al. v. Baptist health (Circuit Court of Pulaski County, Arkansas) and Turner v. Legacy Health System (Circuit Court of the State of Oregon, Multnomah County).
5. AMA House of Delegates Policy H-330-927.

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