An Arizona appeals court yesterday upheld a judgment against Medical Savings Insurance Co. (MSIC) and seven patients, who claimed that Banner Health, a hospital chain, had price-gouged them. MSIC, which insured the patients, did not have a contract with Banner Health. Banner, therefore, required the patients to sign a Conditions of Admission form, whereby they committed to pay the “…usual and customary charges, which are those rates filed annually with the Arizona Department of health services…”

MSIC and the patients claimed that the charges they received were well beyond “reasonable and customary.” Indeed, MSIC produced evidence from Banner Health that real charges were only 20 percent of those billed to its members! This is credible: these patients, because they did not benefit from a network discount, were invoiced directly from the “chargemaster,” the hospital’s list of prices. Recent national evidence shows that hospital chargemaster prices are so absurdly high that hospitals only collect one in six dollars they charge uninsured patients [A. Dobson, et al., “The Cost-Shift Payment ‘Hydraulic’: Foundation, History, And Implications,” Health Affairs 25, 1 (2006):22-33].

I have previously made great hay about hospitals’ refusal to disclose prices before treatment. However, since the moderator of this forum has prodded me to cool my rhetoric, I’ll point out that Arizona is different than most states. The law requires hospitals to make the chargemaster “available for inspection by the public at all times.” MSIC and the patients did not claim that Banner Health failed in this, so it looks like the patients should, indeed, have understood their financial responsibility when they entered the Banner hospitals.

So who’s the culprit? Arizona law requires hospitals to submit their prices to the state bureaucracy, and does not permit a hospital to reduce its rates. Furthermore, these are not prices for “episodes of care”, but mind-numbing itemized figures. Judge Kessler’s dissent noted that the “filed rates” are 576 pages of procedures and prices, including, for example, a charge of $2,140 for a “shaft, femoral, 15.9 cm” but only $1,968 for a “shaft femoral VFEMS70SP”!

How could anyone reasonably be held responsible for paying a “reasonable and customary” charge from such a dog’s breakfast of a price list?

Which way out of this hospital pricing mess? States must quit legislating chargemasters, “reasonable and customary” charges, and other hospital pricing policies. Other things have to change too, especially the Medicare Prospective Payment System, which has created the unwieldy itemized pricing mechanism.

Simply make hospitals (and insurers) subject to the same contract law as everybody else: if you refuse to negotiate the price of a good or service before you deliver it, you’re going to have to negotiate it after.