New Frontiers in Patient-Gouging: Balance-Billing Edition

(MoneyWatch)  Prime Healthcare Services, a fast-growing Southern California hospital chain, has come up with a neat trick to boost its bottom line.

Shortly after acquiring a new hospital, the chain typically cancels its insurance contracts, after which its patients are typically considered "out of network" for insurance purposes -- meaning Prime can charge more for treatment. So when a patient is taken to the emergency room, for instance, his or her insurer is still required to reimburse the hospital, but only up to a "reasonable and customary amount" that's typically lower than the hospital's fees. Since it can't collect the remainder from insurers, Prime has taken to billing patients directly for what can be a fairly huge medical bill -- sometimes as high as $50,000.

This practice, known as "balance billing," is outlawed in some states and banned by Medicare and many health plans, although its legal status in California is unclear. That hasn't stopped the state's Department of Managed Health Care from suing Prime (PDF link):

"Prime Healthcare's ongoing practice of putting consumers in the middle of billing disputes between providers and health plans is the largest example of this egregious practice we've seen to date and it must be stopped," said DMHC Director Cindy Ehnes. "Consumers who have purchased health coverage in good faith deserve to know that it will cover them in a medical emergency and not result in crushing medical debt."

Recent litigation between Prime and California health plans has revealed in excess of 3,500 instances of consumers receiving balance bills from Prime. Many have received letters from a debt collection agency, controlled by Prime, demanding payment.

Prime, unsurprisingly, insists that its practices are legal and accuses the state of siding with HMOs against hospitals and patients. And it may be right, at least in the first part -- a quick read of the LA Times story linked above, the DMHC's filing and Prime's response suggests that the department could be on shaky legal ground. While the DMHC argues that an existing state law prohibits balance billing, it also makes the odd argument in its press release that a recently failed healthcare-reform bill proposed by Gov. Arnold Schwarzenegger "would have banned this practice by hospitals."

In any case, we've seen variations on the patient-gouging theme before. Prime's almost certainly won't be the last.