California Court Gives a Big Win to Reference-Based Pricing

The Regents of the University of California v. The Chefs’ Warehouse Employee Benefit Plan

This case centers on a challenge to reference-based pricing (RBP) within a self-funded employer health plan. UC Davis Medical Center sought additional payments for services provided to a plan beneficiary, claiming the plan’s use of RBP violated federal laws under the Employee Retirement Income Security Act (ERISA) and the Affordable Care Act (ACA). The court dismissed the claims, firmly upholding the legality of reference-based pricing when applied in accordance with plan terms and federal law.

Detailed Case Background

1. The Facts:

   • Patient A, a beneficiary under The Chefs’ Warehouse Employee Benefit Plan, underwent inpatient cancer surgery and related treatments at UC Davis Medical Center.

   • The hospital billed $397,519.31 for the treatment. The plan, employing an RBP model, reimbursed $74,512.84 based on its methodology of paying the higher of either 112% of the hospital’s reported costs or 120% of Medicare rates.

   • UC Davis contended this left the patient with an excessive financial burden ($323,006.47) and sought to hold the plan liable for the remaining balance.

2. UC Davis’ Argument:

   • The hospital claimed the plan failed to adhere to the ACA’s requirement to limit patients’ out-of-pocket expenses and argued that reference-based pricing violated federal guidelines meant to ensure access to affordable care.

   • It further alleged that the plan’s network was inadequately structured, rendering it unlawful to exclude balance billing amounts from out-of-pocket limits.

3. The Court’s Decision:

   • The court dismissed UC Davis’ claims without leave to amend, finding that the plan acted in compliance with its terms and federal law.

   • The ruling reaffirms that balance billing amounts for out-of-network providers, such as UC Davis, are explicitly excluded from the ACA’s cost-sharing limits. Federal law permits health plans to exclude these amounts, even when they result from reference-based pricing.

Key Legal Findings

1. Legality of Reference-Based Pricing:

   • The court strongly upheld the legality of RBP as a valid cost-containment mechanism for self-funded health plans. RBP allows employers to control healthcare spending while ensuring reimbursement at reasonable levels tied to objective benchmarks, such as Medicare rates or reported costs.

   • Federal law, including ERISA and the ACA, does not prohibit RBP, nor does it require self-funded plans to adhere to network adequacy standards. Employers are within their rights to design plans that exclude certain providers or limit payments for non-network services.

2. No Ambiguity in Federal Law:

   • The ACA explicitly excludes balance billing amounts for non-network providers from its definition of “cost-sharing.” The court noted that UC Davis’ attempts to argue otherwise lacked legal basis and contradicted established interpretations of federal statutes and regulations.

   • The court dismissed the notion that plans using RBP must meet network adequacy standards. Congress has chosen not to impose such requirements on self-funded health plans, and courts cannot impose obligations that the law does not provide.

3. Fair Application of Plan Terms:

   • The court recognized that The Chefs’ Warehouse plan clearly defined its reimbursement limits and applied those limits consistently. The plan terms were transparent in setting payments at either 112% of the hospital’s costs or 120% of Medicare rates.

   • UC Davis’ argument that it never agreed to these terms was irrelevant, as the hospital was an out-of-network provider and not bound by the plan’s conditions.

Broader Implications and Affirmation of Reference-Based Pricing

This ruling is a strong affirmation of reference-based pricing as a reasonable and lawful strategy for managing healthcare costs in employer-sponsored plans. Federal courts across the country have repeatedly upheld RBP models, recognizing their ability to balance cost containment with fair provider reimbursement. Employers offering self-funded plans are not required to contract with every hospital or guarantee reimbursement levels that align with the hospitals’ desired rates.

The court’s decision underscores three critical principles:

1. Plan Flexibility: Employers have significant discretion in designing health plans, provided they adhere to federal laws. Reference-based pricing remains a key tool for achieving predictable and sustainable healthcare costs.

2. Statutory Clarity: Courts must interpret and apply the law as written. The ACA, as currently structured, explicitly allows plans to exclude balance billing amounts from cost-sharing limits and does not impose network adequacy requirements on self-funded plans.

3. Transparency Matters: This case highlights the importance of clear plan terms and member communications. When health plans define their reimbursement methodologies transparently, courts are reluctant to second-guess their fairness or legality.

A Rebuttal to Opposition

While some providers and critics argue that reference-based pricing exposes patients to undue financial risk, courts have consistently found these claims unpersuasive when plan terms are clear and compliant with federal law. The financial challenges faced by patients under RBP systems are not the result of unlawful practices but a reflection of systemic tensions between healthcare providers and payers. Self-funded plans are not required to adopt payment models that prioritize provider preferences over cost control.

The decision in The Regents of the University of California v. The Chefs’ Warehouse sends a clear message: reference-based pricing is here to stay, and courts will continue to uphold its legality. Employers adopting these models can confidently rely on their ability to curb rising healthcare costs while maintaining compliance with federal laws. For hospitals and providers, this ruling reaffirms the need to adapt to evolving payment models or negotiate contracts proactively with health plans.

This case serves as yet another endorsement of reference-based pricing as a lawful and effective means of managing healthcare costs in today’s complex system.