Howell Analysis: Capitated Risk Contracts
The gravamen of the California Supreme Court decision Howell v. Hamilton Meats & Provisions, Inc. (2011) 52 Cal. 4th 541, 555 is: “To be recoverable, a medical expense must be both incurred and reasonable.” A personal injury plaintiff’s recovery is limited to the lesser of what is paid or what is reasonable. When the plaintiff has private health insurance the amount incurred is what was actually paid by the health insurance plan (“Plan”). Thus, a plaintiff with private health insurance is only allowed to recover what was actually paid for the treatment:
We hold, therefore, that an injured plaintiff whose medical expenses are paid through private insurance may recover as economic damages no more than the amounts paid by the plaintiff or his or her insurer for the medical services received or still owing at the time of trial.
Id. at 566, emphasis added.
A. The Negotiated Rate Differential
The Howell decision was predicated on two key findings. First, to be recovered as economic damages, medical expenses (even if paid for by health insurance) must be reasonable and actually incurred by the plaintiff. Howell, 52 Cal. 4th at 551. In other words, the difference between what a medical provider charges and what it accepts as payment pursuant to a negotiated contract with a health insurance provider, what the court refers to as the “negotiated rate differential,” is not an economic loss to the plaintiff because it was never actually paid. The second key finding, which necessarily follows, is the negotiated rate differential which was never paid in the first place cannot therefore be considered a collateral source.
Id. at 565.
The Plan in the Howell case was a Preferred Provider Organization (“PPO”). The provider contracted with the PPO at arm’s length rates for medical services which were discounted from the full billed value (what someone walking in off the street would be charged) in consideration of receiving a network of patients. The provider bills the Plan according to the negotiated contract rates for the services provider and the Plan in turn pays the provider the contract amount. Thus, in a PPO setting the plaintiff’s recovery for past medical expenses is limited to the amount plaintiff paid out of pocket (co-payment) plus what the Plan paid pursuant to the contract.
B. The Capitated Risk Contract
But what happens where a provider, typically a hospital, enters into a capitated risk contract with a Health Maintenance Organization (“HMO”) Plan? A capitated risk contract is a flat fee arrangement where the Provider accepts a flat fee, typically monthly, for each eligible patient in the HMO. The amount of the fee is based on several factors including the Plan population, which is usually significantly larger than a PPO, the age and gender of each patient and the Plan’s co-payment structure. While the size of a Plan’s population varies, it is typically in the thousands and therefore the capitation payment for each payment is nominal in comparison to the full billed value for the services or what a contracted fee for service arrangement with a PPO Plan would be. For example, assume an HMO Plan has a population of 10,000 eligible patients, the per capita monthly fee could be less than $200 per month. Thus, the provider assumes the risk of treatment in consideration of a substantial monthly payment.
The capitated risk contract paradigm presents an interesting and often disputed question under Howell: What is the amount actually paid for the treatment? In the typical scenario, plaintiff and/or the provider will produce a bill which shows the full billed value for the services, the co-payment collected from the patient and the balance adjusted down to zero. For example, let’s assume an emergency surgical procedure with a two-night hospital stay. The billed value is $50,000. The co-payment is $500.00. The bill will typically show a cryptic adjustment of $49,500 with a zero balance. Plaintiff’s attorney will claim the full billed value for past medical expenses even though that amount was never actually paid. The bill itself will not explain the nature of the capitated adjustment or the capitated monthly payment for the patient. The defense in this case must make further inquiry to determine the nature of the contractual adjustment and establish there is an underlying capitated risk contract. This is accomplished by taking the deposition of the Person Most Knowledgeable (“PMK”) from the Plan regarding the HMO Plan contract. The purpose of the deposition is to establish the nature of the capitated risk contract and confirm the provider has been paid in full by the capitation payment and is not pursuing a lien.
C. The “Allowed” Amount
In support of the adjustment, the Plan PMK will likely produce further documentation which may also include an internal Health Insurance Claim Form showing an internal billing from the Provider to the Provider’s finance department in the amount of the capitation adjustment, in our example $49,500. The finance department will then use an internal fee schedule and adjust the full billed amount ($50,000) down to what is referred to as an “Allowed” amount. In our example let’s assume a twenty percent reduction of $10,000 with an Allowed amount of $40,000. The Allowed amount is an internal accounting adjustment the Provider uses to track the performance of the capitated risk contract to ensure it is a profitable endeavor. The finance department will also adjust the Allowed amount down to zero so it does not cut itself a check. For the purposes of determining the Howell number, it is critical to appreciate the Allowed amount is never actually billed to the Plan and never paid by the Plan. So, when Plaintiff attempts to argue the Allowed amount is the reasonable value of the services, the defense response is the Allowed amount was never actually incurred by the plaintiff or the Plan. The Allowed amount is theoretically incurred by the provider as the risk it assumes in receiving a substantial monthly flat fee for agreeing to treat the Plan’s population, but it is not a real number for the purposes of calculating the Howell number.
D. Using Capitated Risk as a Sword
If the billed amount is not the Howell number, and the Allowed amount is not the Howell number, what is the real Howell number in a capitated risk situation? Arguably, under a strict reading of Howell, it is the co-payment plus the monthly capitated fee for the patient, in our example $700.00. Plaintiff’s attorney may argue Howell did not address capitated risk contracts and therefore they are entitled to the reasonable value, arguably the Allowed amount. We believe the Howell holding and rationale should apply because the HMO contract rate is a flat fee rather than a PPO discounted fee for service.
The capitated risk contract issue may eventually make its way to the California Supreme Court. Until then, the defense should aggressively investigate capitation adjustments. The capitated risk contract is a significant defense weapon and the plaintiff will likely be much more reasonable with its demand at the settlement table.
As a compromise, the defense could agree to value past medical damages based on the cumulative capitation payments depending on when plaintiff was first eligible for Plan benefits. Using our example, assume the plaintiff was in the Plan for two years, the cumulative capitation payment would be $4,800 ($200 x 24 months). This is still a significant reduction from the billed value of $50,000 and the Allowed value of $40,000. If plaintiff continues to be unreasonable and the case proceeds to trial, the defense must file a motion in limine to exclude the billed amount and the Allowed amounts under Howell, because they were never incurred or paid by the plaintiff or the Plan.
ABOUT THE AUTHOR: David Kahn specializes in civil litigation in the areas of personal injury, professional liability, general liability, and employment litigation. Contact David at 858.459.4400 or email@example.com.