Liquidated damages rule shields against excessive medical charges

A quick look at your most recent bill for medical services is all it takes to see that the billed charges for medical services, sometimes called "full billed charges" or "chargemaster" rates, often far exceed the amount actually paid. That fact does not prevent medical providers from trying to find new ways to recover full billed charges. In one imaginative, but misguided, approach, some providers use prompt pay provisions that purport to put payors on the hook for full billed charges if a lower, negotiated amount is not paid in short order. Although creative, such prompt pay provisions run afoul of California's rule against unreasonable liquidated damages clauses.

Many lawyers are likely familiar with the generic liquidated damages provision, which provides for preset damages in the event of a breach. Such provisions are generally enforceable, unless the specified damages bear "no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach." Harbor Island Holdings v. Kim, 107 Cal. App. 4th 790, 796 (2003) (citing Cal. Civ. Code Section 1671; Ridgley v. Topa Thrift & Loan Ass'n, 17 Cal. 4th 970, 977 (1998)). However, application of the liquidated damages rule is not limited to straightforward liquidated damages clauses. Instead, the liquidated damages rule is flexible, and can be used in the health care context to ward off attempts to recover full billed charges.

California courts have repeatedly expressed skepticism towards providers' claims that full billed charges are reasonable. For example, the California Supreme Court held that full billed charges were not recoverable as damages for past medical expenses where the provider accepted a lower amount from a payor as payment in full. Howell v. Hamilton Meats & Provisions, 52 Cal. 4th 541, 548 (2011). The court noted that "hospital bills have been called 'insincere, in the sense that they would yield truly enormous profits if those prices were actually paid.'" (Citation omitted.)

Similarly, one Court of Appeal panel held that a hospital's claim for the "reasonable and customary value" of medical services could not be based solely on full billed charges where the hospital recovered full billed charges from fewer than 5 percent of its payors. Children's Hospital Central California v. Blue Cross of California, 226 Cal. App. 4th 1260, 1268 (2014).

Often, the only payors forced to pay full billed charges are the uninsured, resulting in a situation one court recently described as "the upside-down world of health care billing, where different payers pay different prices for the same services and those least equipped to pay, pay the most." Moore v. Mercer, 4 Cal. App. 5th 424 (2016).

Despite the judicial skepticism and the rarity of recovering full billed charges, some providers are dogged in their pursuit of these charges. For example, in the managed care field, some services are not available in-network and payors have to contract with out-of-network providers. Typically, the payment for out-of-network services will be a negotiated amount that is far lower than the provider's full billed charges. However, some out-of-network providers also include a provision that purports to require payment at the agreed-upon amount within a specified time or the negotiated price vanishes, and the amount due balloons to the provider's full billed charges.

It is true that reasonable (read: small) discounts for prompt payment are a common business practice (think "2/10 net 30"). However, because full billed charges almost always far exceed the agreed-upon price or the amount of interest that would be due if payment were delayed, prompt pay provisions fail the basic liquidated damages test ? providers have no expectation, let alone a reasonable one, that they will recover their full billed charges in the event a payor breaches. Thus, prompt pay provisions threatening imposition of full billed charges bear no rational relationship to a provider's damages for late payment, and would constitute an outrageous penalty if enforced.

In an attempt to avoid the high bar set by the liquidated damages analysis, providers try to draft around the rule by framing their prompt pay provisions as "conditional waivers" or alternative methods of performance. According to this view, the payor has a choice: either pay the negotiated amount within a short timeframe or pay later at the full billed charges amount. Once again, the shocking sticker price of full billed charges undermines the provider's position. Put simply, if faced with the choice of paying an agreed-upon amount within 30 days, or waiting longer than 30 days but being forced to pay six (or more) times that amount in full billed charges, no rational payor would choose the latter. See Harbor Island, 107 Cal. App. 4th at 798 (citing Ridgley, 17 Cal. 4th at 981). Thus, there is no rational choice, and these clauses should not survive judicial scrutiny, no matter how cleverly they are worded.

This result exposes some of the key language used by providers when seeking to protect their claims for full billed charges from the liquidated damages analysis. Providers routinely refer to the price actually paid as a "discount" from full billed charges. But when almost no one pays full billed charges, there is no discount, and the negotiated price is the only "actual" price. Similarly, another common refrain ? that full billed charges are the provider's "usual and customary" rate ? rings hollow when payment of those charges is neither usual nor customary.

Invalidating prompt pay provisions that threaten payment of unreasonable full billed charges is not just a matter of trying to inject some measure of reasonableness into the pricing for medical services. Refusing to enforce such provisions gives payors the benefit of their negotiated contract rates. Moreover, invalidating provisions that put pressure on making quick payments allows payors to consider potential defenses to payment that could take time to investigate. For example, without the threat of full billed charges hanging over their heads, payors can investigate concerns about quality of care or the necessity of services rendered.

Payors faced with a claim for full billed charges should utilize the prohibition on unreasonable liquidated damages and the judiciary's distrust of full billed charges as a shield against unreasonable demands.