On June 10, 2014, the California Court of Appeal for the Fifth District held that a non-contracted health plan’s obligation to reimburse a hospital for the “reasonable and customary value” of services rendered to plan members must be based on the actual value of the services, and not exclusively based on the full billed rates of the hospital.  Children’s Hospital Central California v. Blue Cross of California (Cal. Ct. Appeal No. F065603) (Super. Ct. No. MCV048512).  At issue in Children’s Hospital Central California v. Blue Cross of Californiawas how to  determine the “reasonable and customary value” of post-stabilization emergency services provided by Children’s Hospital to Medi-Cal beneficiaries enrolled under Blue Cross’s Medi-Cal managed care plan. 

Children’s Hospital and Blue Cross had previously had a contract that set rates for such services, but the parties failed to reach agreement on a new contract in 2007, resulting in a 10-month period with no contract in place. Blue Cross, which was obligated under the provisions of Knox-Keene Health Care Service Plan Act of 1975 (Health & Saf. Code § 1340 et seq.) to reimburse Children’s Hospital for certain post-stabilization emergency services provided during the period with no contract, paid approximately $4.2 million for such services based on the Medi-Cal rates paid by the government. 

Children’s Hospital demanded its full billed charges of $10.8 million, contending that under the factors set forth in Section 1300.71(a)(3)(B) of Title 28 of the California Code of Regulations (defining reimbursement as payment of the “reasonable and customary value” of services rendered), the hospital’s chargemaster, or database of billed rates, was the only relevant benchmark for determining such value.  The trial court agreed with Children’s Hospital, and in discovery and evidentiary rulings prevented Blue Cross from seeking or presenting evidence as to what Children’s Hospital accepted in payment for the same services from other health plans or governmental entities.  A jury found that there was an implied contract between Children’s Hospital and Blue Cross and awarded Children’s Hospital the difference between the full billed charges and the amount previously paid, approximately $6.6 million.    

The Court of Appeal reversed the judgment and remanded the case for retrial as to the issue of damages.  The court first noted, in examining the regulatory history of Section 1300.71(a)(3)(B), that the California Department of Managed Care (“DMHC”) did not intend to set exclusive criteria for reimbursement, only a minimum criteria.  The court further found that the DMHC did not intend to (and did not have the authority to) deviate from California law on quantum meruit, which provides generally that  evidence of what a service provider accepts in payment for similar charges, as well as the provider’s customary charges, is relevant to determining the reasonable value of the services. 

The court further noted, citing Howell v. Hamilton Meats & Provisions, Inc. (2011) 52 Cal.4th 541, 564, that a hospital’s billed prices were not necessarily representative of either the cost of the services or their market value.  The court thus concluded that although the hospital’s full billed charges were relevant to the issue of the reasonable and customary value of the services, they were not determinative.  Other information, such as the amounts that Children’s Hospital accepts in payment from other payors, including government entities, are also relevant to the determination.  The Court of Appeal’s ruling is the first interpreting the application of section 1300.71(a)(3)(B) to a hospital claim for reimbursement and represents a further rejection by the California courts of hospital chargemasters as the defining standard for the value of hospital services.