Legal Analysis of Hospital Pricing Disputes and Reference-Based Pricing Health Plans
The Legal Viability of Reference-Based Pricing (RBP) Plans
I. Introduction
This memo examines the legal framework governing hospital pricing disputes in California and other states where a patient has agreed to pay for medical services but was not provided with a specific price beforehand. Often, patients are admitted to a hospital and sign a lengthy document stating the patient agrees to pay whatever charges the plan does not pay. No further details are given, as the hospital argues they don’t know precisely what they will be billing for until after the procedure is completed. The primary focus here is how courts evaluate hospital charges' enforceability and whether patients or insurers may be compelled to pay the full chargemaster rate.
The analysis extends to the role of Reference-Based Pricing (RBP) health plans, particularly those governed by ERISA, which cap reimbursement at 120% of the hospital’s actual cost or 125% of Medicare (whichever is greater), with flexibility to negotiate up to 200% of Medicare for certain services, such as anesthesiology or other specialty care where market conditions warrant a higher payment rate. This memo assesses the legal standing of such plans in disputes over hospital pricing.
II. Legal Theories Governing Hospital Pricing Disputes in California
A. Express and Implied Contracts
Hospital financial agreements often require patients to sign blanket acknowledgments agreeing to pay for services without specifying an actual price. When disputes arise over the reasonableness of hospital charges, courts assess whether the contract can be enforced as written or if the patient is only obligated to pay a reasonable price for services received.
Under Cal. Civ. Code § 1611, when a contract does not specify a price, the patient is only required to pay a "reasonable value" for the services rendered. This provision prevents hospitals from enforcing excessive, unilateral pricing structures when no clear agreement on price was established at the outset.
B. Quantum Meruit and Unjust Enrichment
Hospitals may attempt to recover full billed charges under the doctrine of Quantum Meruit ("as much as he deserves") when no express contract exists or if the contract is deemed unenforceable. However, courts generally apply contract principles to pricing disputes rather than relying on Quantum Meruit.
To prevail under Quantum Meruit, a hospital must demonstrate:
That it provided services to the patient;
That the patient knowingly accepted the services;
That the hospital expected to be compensated; and
That the reasonable value of services remains unpaid.
If a patient or insurer has already reimbursed the hospital at a reasonable rate (such as an RBP plan’s expressly stated benchmark), a hospital’s claim for full chargemaster rates may be viewed as an attempt at unjust enrichment rather than a valid legal claim.
C. Judicial Determination of "Reasonable Value"
Recent case law in California strongly favors market-based valuation over hospital chargemaster rates, particularly when patients or insurers challenge excessive billing. Courts consider the following factors:
Medicare reimbursement rates as a baseline;
The average rates private insurers negotiate with hospitals;
Customary charges for similar services in the same geographic region.
III. Relevant California Case Law and Legislative Standards
Children’s Hospital Central California v. Blue Cross of California (2014)
The court ruled that hospitals must justify their billed charges by considering actual payments they receive, including Medicare rates; not simply the often bloated chargemaster pricing.
Sanjiv Goel, M.D., Inc. v. Regal Medical Group, Inc. (2017)
Expert testimony established that reasonable reimbursement rates in California range between 135% and 140% of Medicare. The court found that charges above 150% of Medicare exceeded market reasonableness.
California’s "No Surprise" Billing Law (2017)
This legislation requires providers to accept the greater of the average contracted rate or 125% of Medicare when no pre-existing contract exists between the insurer and provider.
Taken together, these cases and legislative measures demonstrate that 125% to 150% of Medicare rates is widely regarded as a fair and enforceable reimbursement standard in California.
IV. Legal Viability of Reference-Based Pricing (RBP) Plans
RBP plans that reimburse 120% of actual hospital costs or 125% of Medicare (with the ability to negotiate higher for specific services like anesthesiology at 200%) have a strong likelihood of prevailing in pricing disputes based on the following legal principles:
Market-Based Justification: Courts have consistently ruled that excessive hospital pricing cannot be enforced when market standards suggest lower reimbursement levels.
ERISA Preemption: Employer-sponsored RBP plans often operate under ERISA, which supersedes state insurance laws and provides additional legal protections against excessive billing.
Judicial Precedent: As demonstrated in Children’s Hospital Central California v. Blue Cross and Sanjiv Goel, M.D., Inc. v. Regal Medical Group, courts recognize 120% to 150% of Medicare as a reasonable rate.
Flexibility for Negotiation: The ability to negotiate rates up to 200% of Medicare for certain services strengthens the plan’s legal defensibility, ensuring compliance with fairness standards in billing practices.
Hospitals challenging RBP reimbursements may attempt to assert breach-of-contract claims or argue that they are entitled to full chargemaster rates. However, given California’s evolving legal standards and case law emphasizing reasonable market-based rates, an RBP plan operating within 120% to 200% of Medicare is well-positioned to succeed in litigation.
V. The Role of Price Transparency in Strengthening RBP Plans
Recent hospital price transparency laws have increased access to cost data, making Reference-Based Pricing (RBP) more effective. However, while these disclosures provide useful pricing benchmarks, they cannot be relied upon exclusively at this time for the following reasons:
Artificially Inflated Cash Prices: Some hospitals continue to publish "cash" prices at levels comparable to chargemaster rates, rendering them unreliable for determining fair market reimbursement.
Failure to Leverage Judicially Settled Medicare-Based Rates: Courts have consistently recognized Medicare-based multiples as a fair benchmark for reimbursement. Relying solely on published hospital prices ignores the extensive legal precedent establishing 120% to 150% of Medicare as an enforceable and reasonable standard.
While transparency laws make RBP negotiations more effective, it is foolhardy to structure a plan based solely on disclosed hospital pricing data. The most defensible approach remains an RBP framework using Medicare-based multiples with flexibility for negotiated exceptions, while weaving in our access to cash pricing now offered by transparency laws. There could be a day, when cash pricing alone can guide our reference point, but we are not yet there in American healthcare.
VI. Conclusion
California law has increasingly shifted away from allowing hospitals to enforce chargemaster rates without a clear, pre-agreed pricing arrangement. Courts favor market-based rates, typically falling within 125% to 150% of Medicare, as reasonable and enforceable standards.
Reference-Based Pricing (RBP) plans that reimburse 120% of actual hospital costs or 125% of Medicare (with flexibility for specialized services at higher rates) are imminently legally defensible, particularly under ERISA preemption. As litigation trends continue to reject excessive hospital billing, RBP structures stand as an effective and legally viable mechanism for controlling healthcare costs while ensuring fair reimbursement.