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Be sure that your rates make sense – lest they go before a judge, or on a television.

Irrational numbers are a problem.

Mathphiles know that an irrational number is a number that cannot be expressed as the ratio of two integers. But in this case, rather than using the phrase as a mathematician would, I am referring to irrational pricing decisions. 

In the last few weeks, I have had oodles of conversations with clients that go something like this: “we want to have low prices for patients who either don’t have insurance or have a high-deductible plan. But we want to be able to charge insurance plans that don’t contract a higher price with us. So, we’d like to charge cash-paying patients the Medicare rate, or maybe 1.25 times Medicare, but we’ll charge non-contracted insurance companies two or three times the Medicare rate. Can we do it?” 

First, I want to note that “can” is a complicated word, in this context. In most situations, there will not be an explicit law that categorically prohibits the practice. However, there may be significant consequences to such a decision. So, I will reframe the “can we do this” into “what happens if we do this?” And while I can’t give a dispositive answer, because I know of organizations that have done this without facing any consequences, I want to clearly state that I don’t much care for this practice. Let me explain why.

When a patient or an insurance company purchases a service from you in the absence of a contract, the law creates an implied contract. Basically, you agree to charge, and the purchaser agrees to pay, a reasonable amount for the service. If the two parties are unable to agree on what a reasonable rate is, a court will make the decision. 

So, how would a judge determine what rate is reasonable? Obviously, the judge could consider things like pricing surveys or other data, but one obvious fact I would expect the judge to consider would be the amount of money a patient would pay walking in off the street to obtain the service. If I can walk in with a high-deductible plan and pay 150 percent of Medicare to get a service, why should a different patient pay twice that, simply because they have a different insurance program? It seems completely unfair – or, dare I say, irrational. 

Having inconsistent pricing like that is unlikely to be a criminal violation, but it very well might get you on TV. Moreover, if the insurance company being charged the higher rate opts to challenge your policy, I think that there are high odds they succeed. 

The bottom line is that I strongly encourage my clients to have a rational pricing structure. There is one practical step that can make that more likely: do your best to avoid contracts that feature deep discounts off of billed charges. The fact that so many contracts feature 30, 40, or even 50 percent discounts off of billed charges creates a system in which the amount on a bill is functionally meaningless. That will play into the hands of any insurance company seeking to challenge your billed amount as unreasonable.   

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David M. Glaser, Esq.

David M. Glaser is a shareholder in Fredrikson & Byron's Health Law Group. David assists clinics, hospitals, and other health care entities negotiate the maze of healthcare regulations, providing advice about risk management, reimbursement, and business planning issues. He has considerable experience in healthcare regulation and litigation, including compliance, criminal and civil fraud investigations, and reimbursement disputes. David's goal is to explain the government's enforcement position, and to analyze whether this position is supported by the law or represents government overreaching. David is a member of the RACmonitor editorial board and is a popular guest on Monitor Mondays.

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