Perhaps more than in any other domain of US health policy, private law is central to who pays for health care at what prices. Remarkably, almost the entire structure is built around the privity of contract. With some narrow exceptions, physicians are generally free to choose whether to provide care to any given patient, and thus free to set the terms of those agreements. This means that physicians can choose whether to join any particular insurer’s network, agreeing to their contracts.
State and federal governments provide health insurance coverage for 36 percent of the population directly, and they also pay indirectly for other care through tax subsidies.Footnote 1 But the coverage is often incomplete, leaving individual patients bearing substantial cost exposures, in the form of copays, deductibles, and coinsurance, where any obligation to pay (at the point of service, or later as debt) is also governed by contract. And of course, about 11 percent of Americans remain uninsured, leaving them seeking care in quid pro quo settings, if at all.
It is important to approach these questions not just at the level of the contract, but with a view for the competitiveness of the entire market, which will set the terms of any contract. The federal government is an important bulk purchaser of health care. This market power allows it to secure lower prices than the private payors, and also to set reimbursement rates in ways that spill over to the private market. In building their networks of providers, private payors tend to haggle over the multiplier over the federal reimbursement rates for particular procedures. We have private law in the shadow of a public giant.
In Chapter 14, “Federalism, Private Law, and Medical Debt,” Erin C. Fuse Brown explores the issue of medical debt in the United States, focusing on the interplay between federal and state laws in addressing this problem. Medical debt is a significant burden for millions of Americans, impacting their financial well-being and health outcomes, and it worsens racial and ethnic disparities as well. Federal laws like the Dodd-Frank Act and Affordable Care Act aim to protect consumers from medical debt through the Consumer Financial Protection Bureau (CFPB) and IRS regulations. Yet, these measures are limited in scope and enforcement, leaving gaps in protections for individuals. States have enacted various laws to address medical debt, including setting standards for financial assistance, limiting collection practices, and empowering individuals to sue for violations. Fuse Brown encourages more private enforcement mechanisms like Unfair and Deceptive Acts or Practices (UDAP) laws to increased accountability for health care providers, debt collectors, and government agencies.
In Chapter 15, “Paying for Health Care and Private Law’s Internal Point of View,” James Toomey explicates the internal logic of legal obligations to pay for health care where the prices are not prespecified, and Toomey uses this as a case study for a larger argument against the idea that legal reasoning is merely a mask for policymaking. Toomey advocates for taking the language and concepts of private law seriously, arguing that it’s possible and beneficial to reason about them to address novel situations like opaque health care pricing. Traditional contract law enforces agreed-upon prices, but in cases where no price was agreed upon, courts can determine a “reasonable” price. Toomey argues for a certain conceptual unity behind the various domains of private law, here suggesting that contract law can draw from tort law, which uses “reasonableness” to determine damages. Toomey suggests this approach aligns with the core principles of contract law (enforcing agreements) and promotes consistency with tort law’s treatment of reasonableness. It also avoids policy-driven rules that might conflict with basic legal concepts.
Jackson Williams also picks up the theme of litigating health care costs but from a practical rather than conceptual approach. His chapter title reveals the challenge: “Health Law’s Sheathed Sword: Why Hasn’t Civil Litigation Dented Health Care Costs?” (Chapter 16). Not all excessive prices are legally actionable (since again, they are typically based on freely agreed contracts), but some clear cases exist, like antitrust violations, upcoding, and excessive billed charges.
While some payer-initiated cost containment litigation does happen, it has not been systematic. The payors – private health insurance companies – would be an obvious candidate to pursue this litigation against providers, but they face collective action problems – it’s hard for them to coordinate and share the costs of litigation. Williams identifies tools that may help, including class actions, involvement of state attorneys general, and patron-sponsored litigation (e.g., foundations funding lawsuits). In the search for the right champion to wield this “sword,” unions and other employee-based groups may have better-aligned interests.
Jamie S. King’s Chapter 17 is titled “The Canary in the Coal Mine: Private Antitrust Law and New Dynamics in Health Care Markets.” She argues that antitrust enforcement in health care has not kept pace with market changes, leading to insufficient competition and high prices. Public enforcers struggle to address new consolidation strategies like vertical, cross-market, and cross-industry mergers. Private actors could bring cases challenging restrictive employment contracts or anticompetitive contract terms. Such private cases can illuminate complex market dynamics and gaps in public enforcement, leading to improved guidelines and interventions. For example, in a case involving Sutter Health, private plaintiffs challenged anticompetitive contracting practices, leading to a landmark settlement and influencing public enforcement. Likewise, in a case involving Envision Healthcare, the challenges to restrictive physician contracts brought attention to private equity’s role in market consolidation.
Finally, Jessica Mantel’s Chapter 18 explains, “Health Care Finance Law’s Relational Bias.” One classic challenge for contracting generally, and especially health care contracting in particular, is to align incentives of the provider and the payor (who at least theoretically represents the interests of the patient). A simple fee-for-service system may generate more services and more expensive services than patients need. Various payment reforms have been implemented, but Mantel identifies a particular challenge in the fragmentation of our health care system: If one insurer implements a payment reform, but other insurers implement different or no payment reforms, the providers receive mixed signals and may not change their behavior accordingly. Multi-Payer Alignment Initiatives (MPAIs) encourage voluntary coordination but are limited by low participation. Mantel argues for a public law framework to improve health care delivery, which could take the form of a mandatory cooperative scheme or single-payer system.
Altogether, these chapters evince the challenges of making a private law framework achieve its potential as applied in the real world of the US health care system. Whether examined in the pristine conceptual clarity of a 1:1 contract for services, or at the system-level perspective assessing the market power of providers and payors, the issues cannot be ignored.
14.1 Introduction
Medical debt is the largest form of consumer debt in collections, with US$88 billion recorded on credit reports, affecting roughly one in five US households.Footnote 1 Medical debt pushes millions into financial distress and is exacerbated by harsh collection practices to garnish wages, seize assets, place liens on homes, and reduce creditworthiness. Concerned federal and state policymakers have pursued policies to protect consumers from medical debt.
Medical debt is a creature of private law, resulting from the contractual obligation by patients to pay for items and services provided by health care providers that are not covered by the patient’s health insurance plan.Footnote 2 According to one account, public law is best suited to addressing diffuse problems where the costs are borne by a broad and undifferentiated public, while private law is better used to regulate concentrated costs borne by specific identifiable persons.Footnote 3 Public law’s response is to tax, fine, and penalize conduct, whereas private law assigns liability for wrongful injuries to affected individuals.Footnote 4 Private law remedies can be the product of common law (torts, contracts, property) or legislation (statutory standards and remedies for private individuals).Footnote 5
Consumer protection law writ large is best conceived of as a mixture of public and private laws. Most federal medical debt policies are forms of public law – namely administrative requirements imposed by government on health care and consumer finance entities. Nevertheless, significant gaps in the federal public law of medical debt persist, leaving an important role for states, particularly in the creation of private enforcement actions for violations of state consumer protections against medical debt. States have created both public law and private law protections that alter the patient’s contractual obligation to pay medical debts, including prescribing standards for financial assistance, limiting the amounts providers may charge patients, barring certain collection actions, and empowering individuals to seek private remedies for violations.
The problem of medical debt is best addressed through combining federal and state, as well as public and private law approaches. Stronger national, public law standards to guard against medical debt are critical, but federal policy should retain a vital role for what states do well – policy innovation and filling the gaps in federal underenforcement through private remedies. Preserving a meaningful role for states and private law in consumer protection policy enhances separation of powers and serves as a check against federal regulatory failure.
14.2 The Problem of Medical Debt and Its Racial Inequities
The US burden of medical debt is extensive. Approximately 41 percent of adults, about 100 million individuals, currently carry medical debt totaling an estimated US$195 billion.Footnote 6 Medical debt has driven millions of people into financial distress through drained households’ savings, garnished wages or liens on homes, damaged creditworthiness, delayed college or homebuying, or bankruptcy. Medical debt also worsens health as debtors forego essential health care and necessities, ration medications, or are denied care due to unpaid bills, ultimately leading to worse health outcomes.
The medical debt problem in the United States stems from two issues: unaffordable health care prices and aggressive debt collection practices. Uninsured patients are often charged prices that are significantly higher than the rates charged to government and commercial payers. Even individuals with health coverage are not protected, as many are “underinsured” and unable to pay for their growing share of their health care costs through cost-sharing and deductibles.Footnote 7
Harsh debt collection practices further exacerbate the problem of unmanageable medical bills. These practices include selling debts to collection agencies, suing patients, seeking foreclosure or liens on patients’ homes, garnishing wages, seizing bank accounts and property, charging high interest rates, requiring up-front payment before providing additional care, and even seeking arrest for failing to appear in court for a debt collection hearing. Medical debt collection imposes significant financial, emotional, and health-related hardship for patients.
Unmanageable medical debt is associated with higher levels of stress, anxiety, and poorer health – often called the “financial toxicity” of unaffordable health care.Footnote 8
Consumers who lack legal representation may find themselves ill-equipped to fight debt collection actions, which fill the dockets of state civil courts. According to one report, more than 70 percent of debt collection cases end in default judgment against the debtor, usually because the debtor did not respond to the action or show up in court.Footnote 9 Once a judgment is entered, the debt balloons from added court fees and accrued interest.
Medical debt disproportionately affects Black and Hispanic families, who historically have lower levels of wealth and health insurance coverage.Footnote 10 Medical debt is also more prevalent in Southern states that did not expand Medicaid, where nearly 60 percent of those who fall into the coverage gap are people of color.Footnote 11 Kaiser Family Foundation reports that 56 percent of Black adults and 50 percent of Hispanic adults have medical debt, compared with 37 percent of White adults.Footnote 12 One study found that Black adults were 2.6 times more likely to carry medical debt than their White counterparts, where differential incomes and insurance status explained nearly one-fifth of the gap.Footnote 13 Blacks were more likely than Whites to be contacted by a collection agency or borrow money to pay off medical debt.Footnote 14 Debt collection suits are more prevalent in Black communities, with 40 percent more judgments than in mostly White neighborhoods.Footnote 15 The racial inequities in medical debt create a vicious cycle: Historically marginalized communities carry more debt, avoid care, skip medications, and become sicker as their chronic conditions are poorly managed, which results in higher costs, more debt, and worse health outcomes.Footnote 16
The United States is experiencing a growing medical debt crisis. As a result, many Americans have come to fear medical bills more than the illness itself.Footnote 17 Federal and state policymakers’ efforts to create consumer financial protections against medical debt have been unable to stem the problem.
14.3 Federal and State Protections against Medical Debt
14.3.1 Federal Law and Policy Protecting Consumers from Medical Debt
In 2010, the Dodd-Frank Act (Dodd-Frank) and the Affordable Care Act (ACA) marked a historic inflection point in federal policies to address the problem of medical debt in the United States, through the creation of the Consumer Financial Protection Bureau (CFPB) and new Internal Revenue Service (IRS) requirements for tax-exempt hospitals’ billing and collections policies.Footnote 18 Federal medical debt policies largely take the form of public law. The CFPB can impose administrative requirements on credit reporters and debt collectors to ameliorate the negative impacts of medical debt on US consumers, and the IRS regulates the financial assistance and collection policies of tax-exempt hospitals. Yet the federal public law of medical debt is inadequate in scope and enforcement, leaving consumers without remedies when faced with medical debt or collection actions that violate federal standards.
14.3.1.1 Consumer Financial Protection Bureau Action on Medical Debt
The CFPB oversees consumer financial products and services, including debt collection and credit reporting. Dodd-Frank authorized the CFPB to regulate credit reporting and collection of medical debts under the Fair Debt Collection Practices Act (FDCPA) and Fair Credit Reporting Act (FCRA), but the CFPB lacks authority under the FDCPA to regulate collection activities by health care providers themselves, only those by third-party collection agents.Footnote 19
To date, CFPB’s actions have largely taken the form of studies, reports, and nonbinding guidance to credit reporting agencies on the treatment of medical debt under its FCRA authority.Footnote 20 Driven by these reports and public pressure, credit reporting agencies and industry actors have voluntarily adopted changes to the treatment of medical debt on credit reports. First, the three major credit reporting agencies agreed to remove paid medical debts and those under US$500 from credit reports and to delay reporting of medical debts for one year.Footnote 21 Second, credit-scoring organizations agreed to reduce the weight assigned to medical debts compared to nonmedical debts when calculating credit scores (in the case of Fair Isaac Corporation [FICO]) or exclude medical debts from credit scores altogether (in the case of VantageScore).Footnote 22 Nevertheless, larger and older unpaid medical debts still remain on credit reports, which could be used by employers, mortgage lenders, or landlords to discriminate against consumers with high health costs from chronic conditions or a disability. Moreover, the industry’s voluntary measures are nonbinding, reversible, and virtually unenforceable. Despite CFPB’s regulatory authority, its policy actions on medical debt can hardly be characterized as “law.”
Consumer advocacy organizations have urged the CFPB to pass rules to codify and expand protections by eliminating medical debts from credit reports and to increase enforcement against medical debt collectors who use unfair practices, such as failing to ensure patients are screened for financial assistance eligibility before pursuing collection.Footnote 23 It would take an act of Congress to expand the scope of the FDCPA to include “first-party” collection actions by health care providers, which means these collectors are not barred from using unfair, abusive, or deceptive collection practices.Footnote 24
14.3.1.2 IRS Rules for Tax-Exempt Hospitals under the Affordable Care Act
The ACA created requirements, implemented by the IRS, restricting the billing and collection practices for tax-exempt hospitals.Footnote 25 One provision mandates hospitals to maintain and publicize their financial assistance policies, including the criteria for free or discounted care.
Nevertheless, the IRS rules do not prescribe the method that hospitals must use to establish eligibility for financial assistance, leaving it up to their discretion. Another requirement is that hospitals must limit charges for eligible patients to the “amounts generally billed” to insured patients for emergency or medically necessary care, and they cannot charge gross charges, which are the hospital’s full, undiscounted rates. Lastly, the IRS rules restrict nonprofit hospitals from engaging in “extraordinary collection actions” unless they have attempted to determine if the patient is eligible for financial assistance.
There are several gaps in IRS rules’ protections against medical debt. First, the rules are underinclusive – they do not apply to the 42 percent of hospitals that are for-profit or government-run or to physician practices.Footnote 26 Second, hospitals have complete discretion in determining eligibility for financial assistance, which can be manipulated using restrictive income or asset requirements or difficult application processes. Third, the IRS rules are under-enforced, with no reported sanctions despite the widespread use of extraordinary collection actions and publicized violations.Footnote 27 These gaps leave patients with medical debt with inadequate protections and no recourse even if hospitals violate federal tax rules in their pursuit of payment. There is no private cause of action for violations of federal tax rules, even when the patient loses their home, life savings, or creditworthiness.
14.3.1.3 Other Federal Actions That Prevent Creation of Medical Debt
More effective than laws targeting the collection and reporting of medical debts are federal efforts that stop the debts from being created in the first place. The most important of these was the ACA’s expansion of Medicaid to nearly all low-income adults earning less than 138 percent of the federal poverty limit (FPL), which has significantly reduced medical debt and racial health coverage disparities.Footnote 28 Yet, following the 2012 Supreme Court ruling decoupling a state’s decision to expand Medicaid from the state’s existing Medicaid funding, many Republican-led states have chosen not to expand Medicaid, leaving about two million low-income and mostly non-White adults uninsured and exposed to medical debt.Footnote 29
Federal public law on medical debt has several key shortcomings: (1) The CFPB’s actions to date are nonbinding nudges that rely on voluntary industry practice; (2) the ACA’s rules for tax-exempt hospitals are underinclusive, underpowered, and under-enforced; (3) the Supreme Court made Medicaid expansion optional for states, leaving millions uncovered;Footnote 30 and (4) none of these federal laws provide consumers with individual remedies in the event their lives are wrongly upended by medical debt.
14.3.2 State Laws
Even with federal action on medical debts, states have not abandoned their traditional roles as consumer protectors and policy generators. States have passed laws expanding upon federal protections, filling gaps, and innovating new approaches to the medical debt problem. States have created both public law and private law protections, creating standards for financial assistance policies, applying them to a broader range of health care providers, barring certain collection actions, and, in some instances, empowering private individuals to sue to remedy violations.
Several states have implemented laws aimed at ensuring fair medical billing and collection across all hospitals, regardless of their tax status or ownership. For instance, states have limited the amount that hospitals can charge patients who fall below specified income levels.Footnote 31 One example is the Hospital Fair Pricing Act in California, which restricts the amount that California hospitals and emergency physicians can charge uninsured patients who earn less than 400 percent of the FPL or insured patients whose medical bills exceed 10 percent of household income.Footnote 32 By defining these income and affordability thresholds, states limit hospitals’ discretion in determining eligibility for financial assistance and standardize these limits across all hospitals. Most state laws do not extend these financial assistance requirements to nonhospital providers, such as physician groups.
Furthermore, many states have put limits on the medical debt collection practices of health care providers and their debt collectors. At least twenty-one states have laws that restrict providers’ medical debt collection practices, including limitations on interest rates, foreclosing or placing a lien on a patient’s home or property, wage garnishment, seeking debtors’ arrest, credit reporting, or assigning the debt to a collection agency.Footnote 33 The scope of these limits varies, with some states applying them broadly to all patients, and others limiting the protections by the patient’s income, uninsured status, or eligibility for financial assistance. For example, New Mexico bars any collection actions against patients earning less than 200 percent of the FPL.Footnote 34 Maryland requires hospitals to refund patients for amounts wrongly sought in collections from patients eligible for free care.Footnote 35 Finally, states can engage in policy innovation, such as Colorado’s law prohibiting hospitals from seeking collection of medical debts if they are not in compliance with federal price transparency rules,Footnote 36 or Maryland’s requirement for hospitals to report on their financial assistance, collection actions by race, ethnicity, and other demographic characteristics.Footnote 37 To be sure, there can be unintended consequences from overly broad free-care requirements for providers, such as exacerbating financial precarity of less profitable hospitals or service lines.Footnote 38 Despite these concerns, states’ fair pricing and collection laws have not caused widespread financial strain on hospitals.Footnote 39 States have gone farther than federal laws to create standards to protect patients from medical debts.
State law requirements for hospital financial assistance and medical debt collection are forms of public law, enforced administratively by the health department or state attorney general. However, states can provide additional enforcement through a private right of action for individuals aggrieved by unlawful medical billing or collection practices and by strengthening patients’ legal defenses in collection actions against them.Footnote 40
Colorado and Connecticut present models for private enforcement of hospital medical debt collection laws. Colorado creates a private right of action for aggrieved patients to sue health care providers that violate the billing and collection requirements individually or via class action for actual damages, statutory damages, and attorneys’ fees.Footnote 41 Connecticut makes it an unfair trade practice for any provider to demand payment from patients or report debts to credit reporting agencies for prohibited medical bills.Footnote 42 Although few patients have prevailed under these laws, in one case, the Connecticut Supreme Court found that a physician’s unlawful billing and collection practices violated state unfair trade practice laws, awarding the patient actual and punitive damages and attorney’s fees.Footnote 43
The designation of medical billing practices as an unfair trade practice is advantageous in two ways: (1) It provides a private remedy to individuals harmed by unlawful medical billing and collection practices, and (2) attorneys’ fees and punitive damages incentivize attorneys to take such cases on behalf of consumers. Nearly all states have an Unfair and Deceptive Acts or Practices (UDAP) law, and state legislatures can reduce legal burdens on patients by classifying medical debt billing and collection practices as unfair trade practices per se under their state UDAP statutes.
14.4 Federalism, Private Law, and Medical Debt
The pervasive problem of medical debt poses a question of regulatory design – whether consumer protections are best instituted at the federal or state level, using the tools of public law or private law. The policy shortcomings cataloged here demonstrate that the problem requires the combined and concerted action of national and state governments, where states can fill gaps and innovate new policies to build on a federal floor and provide private remedies to supplement inadequate administrative enforcement.
14.4.1 The Role of Private Law and Private Remedies in Consumer Protection
The problem of medical debt is a consumer protection problem with both the diffuse harm of unaffordable health care costs borne by the public, employers, and businesses, as well as concentrated harms of medical debts and collection actions borne by individuals and households specifically. Thus, legal solutions for the medical debt problem should combine public and private laws. Nevertheless, extant consumer protections from medical debt tend to focus on public law solutions and neglect private law remedies for individuals. Most of the legal and policy solutions described above focus on regulating conduct of the health care providers, collection agents, and credit reporting bureaus in the creation, collection, and management of medical debt.
Violations of the federal public law on medical debt are enforced, if at all, through administrative penalties, loss of tax-exempt status, or public sanction on the entities, not liability to the affected individuals. In practice, this means that a low-income patient who wrongfully loses their home, is unable to buy food or pay rent, or is unable to fill a necessary prescription due to medical debt has no recourse against the hospital that failed to apply its financial assistance policy or pursued extraordinary collection actions in violation of federal laws. The hospital might lose its tax-exempt status if the IRS were to seek enforcement of the violation, but there is no remedy for the harms suffered by the patient. The combination of inadequate administrative enforcement with the severity of harms inflicted on individual debtors is a prototypical situation for public laws to be supplemented with private enforcement.Footnote 44
Clear and protective standards for consumers could, theoretically, protect the public from unaffordable medical debt if they deterred abusive conduct by creators and collectors of medical debt.Footnote 45 Consumer advocacy organizations have called for stronger public law standards: The IRS could specify clearer eligibility standards and blanket prohibitions on harsh collection actions, and CFPB could issue rules eliminating medical debts from credit reports.Footnote 46 In June 2024, CFPB issued a proposed rule that would, if finalized, remove all medical debts from credit reports and prohibit creditors from considering medical debts in credit eligibility determinations.Footnote 47 Even with stronger rules, the extent of consumer protection depends critically on enforcement, and public enforcement of consumer protection laws against medical debt has been abysmal.Footnote 48
The classic vehicle of consumer protection is the UDAP law, which has been adopted by all fifty states to extend the consumer protections of the Federal Trade Commission through a combination of enforcement by state attorneys general and private parties.Footnote 49 Private enforcement of state UDAP laws plays a critical role in supplementing public enforcement, serving a public benefit of deterrence, and expanding states’ limited resources. Private enforcement of UDAP laws also creates private benefit by creating legal recourse for affected individuals through reduced burdens of proof, minimum damage recoveries, attorneys’ fees, and court costs, which compensate the individual for the harms suffered and enable them to secure legal representation.Footnote 50 Consumers struggle to secure legal representation to defend their individual contract disputes with providers over medical bills because these are typically too small in dollar amount for lawyers to take the case and courts are unwilling to aggregate these cases in class action.Footnote 51 UDAP remedies thus provide both a private cause of action and increased access to justice by incentivizing attorneys to take these cases.Footnote 52
14.4.2 Federalism and Private Law Checks against Regulatory Failure
The biggest challenge for the medical debt policy is not codifying new consumer protections but lack of enforcement. Compared with the federal government, states possess a historic advantage in the creation and enforcement of rights, obligations, and liabilities among private parties, particularly in the areas of health and safety regulation and consumer protection.Footnote 53 Private enforcement can fill gaps and supplement public enforcement of consumer protection laws, as illustrated by state UDAP laws.Footnote 54 State consumer protection laws enhance consumers’ legal protections against medical debt both by supplementing public law with private law remedies and by making the protections more resilient to erosion from federal regulatory failures.
Federal regulatory failure is a growing problem, driven by capture,Footnote 55 abdication by presidential administrations,Footnote 56 budgetary cuts from Congress,Footnote 57 and curtailment of agency authority by the Supreme Court.Footnote 58 The primary regulatory agencies in charge of consumer protections against medical debt – the CFPB and IRS – have been prominent targets of the varied forms of administrative evisceration from all three branches of government.Footnote 59 Given that federal agency decisions not to enforce are generally unreviewable by courts, states can make up for and check federal regulatory inaction.Footnote 60 Concurrent state consumer protection laws with both private and administrative enforcement promote the goals of federalism: policy innovation, diversification of remedies, increased accountability for industry actors and government regulators, responsiveness and superior information of local market conditions and practices, and dynamic regulation.Footnote 61
The recipe for better consumer protections against medical debt combines (1) stronger federal public law standards that operate as a floor for more protective state regulation, and (2) concurrent state consumer protections enforceable by the state attorney general and a private right of action with minimum statutory damages, attorneys’ fees, and costs. This recipe reaps the benefits of federalism, public law standards, and private law remedies to provide a fuller set of tools to protect individuals from medical debt. Importantly, these protections would be further enhanced by efforts to provide better health coverage to more people, particularly Medicaid expansion in all states.
Medical debt policy should preserve a meaningful role for states and private law to check against regulatory failure by federal public law solutions. Federalism’s separation of powers stems not only from the division of authority between the federal government and the states but also between the levers of public law and private law. An overlapping and mutually reinforcing interplay between federal and state as well as public and private law fosters stronger protections against medical debt for individuals and households.
15.1 Introduction
American private law is, paradigmatically, judge-made common law.Footnote 1 In the century since Legal Realism swept the academy, it is generally considered to be, at bottom, the product of judicial policymaking.Footnote 2 From this perspective, the still-persistent conceptual language of common law judging is a façade, obscuring the distributional reasoning beneath. If this is right, we might ask courts to offer comprehensive novel solutions to complex social problems – though wonder why they, beset by well-worn democratic and epistemic limitations, ought to engage in general policymaking.Footnote 3
Against this picture, private law theorists have recently defended an alternative view of private law that takes seriously its language and conceptual structure, from an internal point of view.Footnote 4 According to these theories, it is possible, and sometimes desirable, to take private law’s internal structure seriously, and reason about its basic concepts and commitments.Footnote 5 Common law judging may not be general-interest policymaking, but in applying the basic logic and internal language of private law to novel circumstances, courts can sometimes mitigate difficult social problems.
This chapter offers a case study in applying the internal logic of private law to unanticipated social circumstances, drawn from health care finance. Most Americans have health insurance, and the prices charged for their health care are set in opaque volume negotiations between insurers and providers.Footnote 6 The relatively small percentage of Americans who don’t have insurance, or receive care that their insurer does not cover, don’t benefit from these negotiations. Instead, providers charge wildly inflated “book prices” – the listed prices for services that virtually no one pays.Footnote 7 Patients who fail to pay these prices, however, can be sued for breach of contract. What remedy?
Contract law is, at bottom, organized around enforcing agreements.Footnote 8 So where parties agree on a price for services, courts will enforce that price as expectation damages.Footnote 9 Where they agree to exchange services for payment but fail to specify a price, a court will supply an alternative that approximates what they would have agreed on, a reasonable price.Footnote 10 And, as common law courts have increasingly recognized, the prices “charged” by health care providers are not reasonable.Footnote 11 Leaving the task of determining a reasonable price to the jury, upon consideration of all relevant evidence, follows from the basic structure of private law and the concepts it deploys.
Of course, this hardly solves the many difficulties of health care finance. But courts can legitimately do this themselves (regardless of whether, for institutional, political economy reasons, they are likely to do so). Beyond, regulating health care costs no doubt requires legislative and regulatory intervention, of which there has been a great deal.Footnote 12 At the margins, however, private law may play a role.
15.2 Conceptual Reasoning and Common Law
Conceptual reasoning is famously, or infamously, part and parcel of the “common law method.”Footnote 13 Judges and juries routinely consider whether novel facts fall within the boundaries of traditional concepts – whether a particular relationship counts as “ownership,” whether a certain party’s statements are an “offer,” etc. They purport to do so by reasoning about the internal structure of the relevant concepts, rather than pursuing the best outcome of the case from an economic or social perspective. To the Legal Realists and conceptual nominalists in Law and Economics and Critical Legal Studies that followed them, this kind of “formalist” reasoning is a façade – a distraction from the policy analysis courts ought to apply in resolving cases, and are anyway.Footnote 14
Recently, this view has come under sustained attack by theorists of the so-called New Private Law school – a disparate group united by a commitment to taking seriously the language of the law from an internal point of view.Footnote 15 These theorists, drawing on different philosophies of language and concepts than legal nominalists, argue that traditional private law conceptual reasoning is possible, often sufficiently determinate, and in principle not coextensive with outcome-oriented policy reasoning.Footnote 16 As a descriptive account of private law, if internal reasoning is possible, and judges act as though it is largely what they do, then perhaps the burden is on those insisting on the external considerations of economics and social power to prove that private law doctrine is inexplicable without them.Footnote 17
Whatever the outcome of this philosophical debate, if an internal, conceptual account of private law is indeed possible, it might have a number of normative advantages. First, the species of conceptual analysis characteristic of private law reasoning might be epistemically preferable for judges.Footnote 18 An individual judge can reason on their own about whether a particular arrangement falls within the concept “contract” but is unlikely to have access to the empirical generalizations required to pursue the best all-things-considered social outcome. Similarly, conclusions about concepts can carry over to cognate domains of law – concluding something is a “corporation,” for instance, tells us about both its contractual capacities and tort responsibilities, saving judges from conducting bespoke policy analysis across contexts.Footnote 19
Moreover, taking the language of the private law seriously helps contribute to its coherence. On a nominalist view, since a core private law concept like reasonableness is just a conclusory term for certain distributional consequences, there is no a priori reason for it to have the same content across legal domains, or even cases. In contrast, internal, conceptual theories take the private law as a coherent system – if the same word is being used in various places in the law, the burden is on the skeptic to show that they are not in fact the same concept, as surely the public would be inclined to interpret them.Footnote 20
Finally, a conceptual theory of private law can help make sense of the legitimacy of courts as expositors of private law in a democratic system. Normative questions ought generally to be resolved by democratically responsible representatives.Footnote 21 As I have argued at greater length elsewhere, judges are not democratically responsible, and if the private law is just policy, it isn’t clear why we ought to follow judicial pronouncements.Footnote 22 But understanding much of private law as the entailments of certain basic concepts or commitments mitigates this problem.Footnote 23 We would need to be convinced only that – at least tacitly, or by acquiescence – the people have endorsed that there ought to be a law enforcing agreements and that we’ve delegated to judges the predominately descriptive work of hashing out what that means.
Importantly, even the strongest defenders of the role of concepts in common law recognize that our private law is not just made up of delegated concepts and their entailments. Many rules are obviously the result of policy, often tied to a particular time and place – say, the Rule Against Perpetuities.Footnote 24 These policy rules are (at least phenomenologically, for many people) qualitatively distinct, often not difficult to distinguish from, and of a less compelling provenance than those derived directly from the basic concepts of the private law.Footnote 25
Finally, although much of the impetus of the Realist critique of conceptualism was motivated by its perceived inability to address modern policy problems, the method has in fact proven quite flexible and adaptable.Footnote 26 Concepts are not delimited by their past application – courts can legitimately apply the basic structure of contract law to entirely unanticipated circumstances.Footnote 27 And because the policy rules of the common law lack both the systematic role and the democratic legitimacy of its more basic principles, courts act legitimately in preferring the latter to the former where they conflict.Footnote 28
Of course, for all its flexibility, common law conceptual reasoning could hardly resolve all contemporary social or economic challenges on its own. Broader, policy-motivated changes to the private law’s basic structure must come from legislatures rather than courts.Footnote 29 But common law reasoning can do something, and health care finance offers a case study in what.
15.3 Health Care Pricing
American health care finance is – perhaps an understatement – odd. Most Americans, some 90 percent, finance their health care in whole or in part with health insurance.Footnote 30 Insurers are, therefore, the primary payors of health care services. Representing many insureds, insurers have substantial bargaining power, and they use it – negotiating volume pricing with health care providers. Thus, most health care is paid for by insurers to providers, on behalf of insureds, based on prices negotiated in the aggregate by the insurer and provider.Footnote 31
But these prices actually paid for most care, nominally volume “discounts” (some portion of which presumably is an actual volume discount), don’t appear in the prices that providers ostensibly charge for services. That is, although it might be that no insurer is paying more than US$X for a colonoscopy, US$X may be, at least, nominally, a volume “discount” from the provider’s “charged” price of US$2X. Or US$5X, why not. If the price to be paid for the vast majority of care has already been negotiated, there’s no reason for providers not to “charge” whatever they want.Footnote 32 “It is a little game we play. [The providers] put it on the bill, [the insurers] tear up the bill.”Footnote 33
The problem is that not all care is paid for by insurers. Some 8 percent of Americans do not have health insurance.Footnote 34 And, even for those with insurance, insurers rarely agree to pay for all of an insured’s health care expenses. Most prominently, insurers may dramatically limit the amount they will pay for so-called “out-of-network” care – care received by providers with whom the insurer does not have a preexisting relationship.Footnote 35
This care (like all care) is billed at the listed prices. But patients receiving these bills cannot take advantage of the negotiated prices paid by insurers – either they don’t have one, or their insurer has not negotiated with this provider. In this example, then, we have an individual patient with a bill for US$2X or US$5X for a colonoscopy – without recourse to any discount – even though overwhelmingly colonoscopies in the United States go only for US$X. Of course, because many people without health insurance are judgment-proof to the tune of US$5X, US$5X rarely ends up getting paid to the provider in these cases either.Footnote 36 But such cases nevertheless impose a tremendous amount of stress and hardship on individuals.Footnote 37
This result is perverse, in the sense that it could not possibly be the product of coherent conscious design. Whether as a negotiating position or as an effort to recoup perceived losses on coercive contracts with insurers (particularly Medicare and Medicaid), providers are incentivized to “charge” arbitrarily high prices for their services, with no relationship to the content of the service and almost never paid. Only the un- or under-insured are ever even purportedly on the hook for these prices.
15.4 Health Care Pricing and Common Law Courts
When health care providers proceed to collections for payment of charged prices against a patient, they sue on a contract – a promise by the provider to care for the patient; a promise by the patient to pay. When a contract is breached, contract law generally requires the promisor to put the promisee in the position they would have been in if the promisor had performed – “expectation damages.”Footnote 38 Where parties have made explicit promises to each other, those promises constitute expectation damages in the event of breach. Following this reasoning, many courts default to enforcing health care contracts as any other contract – holding patients to pay the price charged.Footnote 39
On the other hand, contract law has long held that where parties do not agree on a price but intend to enter into a contract, the court will presume a reasonable measure of expectation damages.Footnote 40 And as George Nation has argued, contracts for care between patients and providers are not characterized by meaningful agreement on price.Footnote 41 Prices in health care contracts are not prominently disclosed to patients – the form contracts that patients sign consenting to care typically just agree to pay the provider’s listed prices, whatever they may be.Footnote 42 Even compared to other form contracts, health care contracts much more clearly lack a real promise on the patients’ part to pay a particular price.Footnote 43
We might, then, expect courts to measure expectation damages in health care cases by seeking a reasonable price, rather than simply the amount charged by the provider. But if the prices charged by health care providers are not presumptively reasonable, how might courts go about determining them?
A growing collection of decisions in tort law where courts have similarly been called on to determine the reasonable cost of health care services offers one method. Tort law generally compensates plaintiffs for negligently caused harms, including medical costs.Footnote 44 Just as in contract cases where the parties did not agree on a concrete price, plaintiffs in tort cases are entitled to recover the reasonable cost of their care as the best measure of their actual harm.Footnote 45
But in a world in which most care is paid for by insurers, calculating the reasonable cost of health care is complicated by the so-called collateral source rule. The collateral source rule has a substantive and an evidentiary component. The substantive component holds that plaintiffs are entitled to recover the cost of the harm the defendant’s conduct caused, even if they have already been paid for it by a third party; a plaintiff can recover their medical costs even if they have already been paid by their insurer.Footnote 46 The evidentiary component of the collateral source rule bars evidence of any payments made on the plaintiff’s behalf by third parties, including insurers.Footnote 47
Strictly following the evidentiary component of the collateral source rule, some courts hold that a tort plaintiff is entitled to recover the billed price of their care, refusing to admit evidence, suggesting that the price was or could have been settled by a lower amount by the insurer.Footnote 48 But there is an alternative. A growing number of courts in this context charge juries to award “the reasonable value of medical services received by a particular plaintiff in a particular case” upon “consideration of all relevant evidence, notably including the amount billed, the amount paid, and any expert testimony and other relevant evidence the parties may offer.”Footnote 49 This approach appears to have been pioneered by the Supreme Court of South Carolina in a brief opinion in 2003,Footnote 50 and outlined more thoroughly by the Supreme Court of Ohio in 2006.Footnote 51 Since then, it has been endorsed by the highest courts of a number of states, and the Eleventh Circuit in maritime law.Footnote 52
This procedural mechanism for arriving at the reasonable value of medical care from tort law might be reasonable for contract law.Footnote 53 In breach of contract actions, courts could point to this collection of tort cases construing reasonableness and hold that expectation damages are not necessarily the amount the provider charged – they are the reasonable value of the services (that, contract already acknowledges), determined by the jury upon consideration of all the evidence (which it currently does not).
15.5 Reasonableness and Private Law Theory
This move would be consistent with and, indeed, illustrative of, the theory of private law as common law sketched above. Indeed, insisting on reasonable rather than pre-written damages demonstrates the possibility and value of taking seriously the internal logic of private law. First, at a basic level, this approach to calculating the reasonableness of medical expenses illustrates the possibility and value of conceptual reasoning. Next, for this reason, it is consistent with separation of powers. And finally, reasoning in the same way about reasonableness in contract and in tort demonstrates the systematic value of legal concepts.
15.5.1 The Concept of Reasonableness
Contract law is, at a basic level, committed to facilitating individuals in ordering their lives according to their aspirations.Footnote 54 It therefore enforces the agreements they actually make with one another. And where an individual has not in fact articulated their preferences, the best the law can do is come close.Footnote 55 That is where the concept of reasonableness comes in – estimating terms the parties might have agreed to, had they really discussed it.Footnote 56 This is the logic of the rule that where parties agreed to a contract but omitted a price term, the law will supply a reasonable one – straightforwardly derived from the basic principles and concepts of contract.
Of course, courts generally presume that the written terms of a contract represent the true agreement of the parties, and enforce them accordingly, prominently under the “parol evidence” and “plain meaning” rules.Footnote 57 From this perspective, we might think (and courts have) that health care contracts do include price terms, at least incorporated by reference.Footnote 58 They are writings; they purport to commit the patient to pay the cross-referenced charged prices of the services to which they consent.
But this rule – taking a writing as the best evidence of the parties’ actual agreement – is grounded in policy.Footnote 59 Contract law has no basic commitment to enforcing writings qua writings.Footnote 60 It has a basic commitment to enforcing agreements, written or unwritten.Footnote 61 There are, of course, good policy reasons to take writings in general as the best evidence of the actual agreement.Footnote 62 But enforcing writings for their own sake is hardly the point.
Thus, if we take seriously the idea that the common law is built on a distinction between its basic concepts and commitments and a great deal of policy-driven prophylaxis, the health care billing cases offer a case study in their clash – we have a writing containing a purported price term presumably higher than any reasonable parties actually bargaining would agree upon, and no actual agreement on that term. This entails a systematic clash between the basic commitment of contract law to enforce actual or estimated agreements between private parties, on the one hand, and the prophylactic policy rule enforcing writings where they exist on the other. Courts ought not let policy presumptions in favor of writing get in the way of finding a reasonable cost where in fact the parties have not agreed on one, because only the latter is consistent with the basic functions and aspirations of contract law.
Moreover, the concept of reasonableness – everywhere it appears in private law – is not an algorithmic rule of calculation. It is a standard encompassing a range of fair and conceivable outcomes consistent with some mélange of basic morality, community norms, and intuitions.Footnote 63 Whether something falls within the concept of reasonableness is generally a question of fact, paradigmatically the domain of the jury.Footnote 64 Having concluded that contract damages in health care cases ought to be governed by reasonable prices, then, points toward their being a jury question – to be adjudicated within the jury’s prerogative drawing community standards of what is reasonable. This is consistent with how reasonableness is understood throughout private law, rather than, say, courts’ adopting an arbitrary mechanical rule that damages reflect some fixed percentage of prices charged or paid, or a penalty default rule designed to incentivize better drafting.Footnote 65
This analysis is perhaps even clearer in the tort context. Whatever the logic of the substantive component of the collateral source rule, its evidentiary component is policy-grounded prophylaxis – based on the generalization that evidence of third-party payments is more likely to cause greater harm in unreasonably low damages awards than its usefulness in determining reasonableness.Footnote 66 Whether or not this calculus and the empirical premises on which it is based are true generally, it is flatly and systematically false in the health care damages context.
The basic purpose of tort law is to redress wrongs.Footnote 67 The concept of reasonableness in tort damages plays a similar role as in the contract context – approximating a rough measure of actual damages for injuries that are not algorithmically measurable.Footnote 68 And just as there, a theory of private law distinguishing between its basic conceptual commitments and its policy prophylaxis explains why courts in these tort cases legitimately do not permit a strict reading of the evidentiary role of the collateral source rule to systematically frustrate ascertaining reasonable damages.
15.5.2 Juries, Reasonableness, and Separation of Powers
Moreover, this kind of conceptual reasoning is consistent with separation of powers. There are, of course, countless policy proposals for limiting the social harm of outrageous medical billing. George Nation, for example, has argued that the cost of medical services should be measured by the “average amount the hospital would be paid by private insurers” plus “between 10% to 15%.”Footnote 69 Others argue that providers ought to accept the same payment for all patients,Footnote 70 or, perhaps, as Wendy Netter Epstein argues, courts should impose penalty default of US$0 in these contracts to incentivize providers to engage in actual bargaining.Footnote 71 Of course, maybe health care ought entirely to be paid for by the government.Footnote 72 But whether or not any of these are good ideas, they have no basis in the concepts of private law. Contract law’s commitment to enforce freely made agreements could not possibly justify capping prices at X percent of some contractually exogenous price. No principle of tort law socializes medicine.
In contrast, holding that the basic commitments of private law supersede judge-made policy prophylaxis of already-dubious democratic provenance is an entirely legitimate judicial prerogative. And the same goes for recognizing that one of those basic concepts with the same name is in fact getting at the same idea in two distinct areas of private law.
Common law reasoning is a legitimate exercise of judicial prerogative because we have impliedly delegated to the judiciary the authority to apply the basic commitments of private law – we’ve decided that we want judges to enforce promises, and leave it to them to tell us what that means in particular cases.Footnote 73 In contrast, policy rules like the evidentiary role of the collateral source rule are best considered by democratically accountable legislatures.Footnote 74 If we reluctantly accept the existence and maybe the necessity of judicial prophylaxis based on policy experience, we can nevertheless insist that those rules be subsidiary to concepts more clearly given to judges.
15.5.3 Conceptual Reasoning and Common Law Systematicity
Finally, this move demonstrates the benefits of the systematicity of concepts in a broadly coherent common law.Footnote 75 The concept of reasonableness in contract and tort contexts is at least very similar – in both cases, it refers to a range of acceptable rough approximations of something that private law requires the court to measure but which it cannot do easily. If this is right, and the courts giving the question of tort damages to juries are right that theirs is the way to measure the reasonableness of health care prices, it makes sense for the courts to apply the same method of reasoning about the same basic concept in contract cases – admitting all relevant evidence.
After all, it looks like the concept is the same in both cases, and what is reasonable in tort is at least presumptively reasonable in contract.
In contrast, if we were to adopt the Realist view that all this just obscures policy reasoning with conceptual words, contract law’s drawing on tort law holdings would be epistemically much more demanding – indeed, there is no a priori reason to assume that the policy considerations in both contexts are the same, and the court would have to prove to our satisfaction that measuring contract damages in this way would be as good idea as a policy matter as it is in tort.Footnote 76 Maybe it could, but any analogy between the contexts would be an empirically contingent coincidence.
Instead, if the concept of reasonableness is, at a basic level, the same in both places, courts can import conclusions about that concept across contexts without relitigating policy considerations from the ground up.Footnote 77 Of course, there may be circumstances in which the concept of reasonableness might need to be understood differently in different situations, but recognizing the identity of the concept lowers the information costs of reasoning about those kinds of exceptions.Footnote 78
15.6 Conclusion
The judicial response to the social challenges of contemporary health care pricing illustrates the mechanisms of taking seriously on its face the conceptual internal logic of private law – both its plausibility and its benefits. Nothing here, again, is offered as a comprehensive solution to the idiosyncrasies of American health care finance. Indeed, for more broader solutions, this understanding of common law tells us to look to legislatures and regulators – as we have.Footnote 79
But the case study also illustrates that a conceptual theory of the common law – often caricatured as rigid and insensitive to complex contemporary problems – is not in fact powerless in responding to modern problems, captive to its own precedents. Where the policy rules adopted by those precedents contradict the basic concepts and principles of the private law – especially where courts can draw on similar reasoning about those concepts in related areas – they can respond to a variety of social developments and problems, giving us, at least, a private law that is rational, coherent, and democratically explicable.
16.1 Introduction
It is generally agreed that health care costs in the United States are unreasonably high and unsustainably growing, and that these problems are attributable to prices that are excessive, relative to those in peer industrialized nations.Footnote 1 High prices, in turn, are frequently attributed to consolidated markets for provider servicesFootnote 2 and other aggressive, extractive practices by providers.Footnote 3
Generally, one might say that three categories of action are available for stakeholders to push back on prices. Health care purchasers – primarily, employers and insurers, can use the carrot of inclusion in a health plan’s network to negotiate lower prices.
A second course is seeking legislative or regulatory action to tamp down prices. This can include options such as state-imposed rate setting,Footnote 4 or less onerous measures aimed at bolstering purchasers’ negotiating leverage.Footnote 5
A third course to pursue is litigation – either initiated by a purchaser or through defense of provider collection suits when a purchaser is willing to challenge bills because it believes the prevailing law is favorable to it.
What might be called “cost containment litigation” is not unusual but has been fairly infrequent. One of the most audacious provider overreaches was addressed in an antitrust lawsuit, UEBT v. Sutter Health,Footnote 6 which was settled in 2019 resulting in a US$575 million disgorgement and injunctive relief to curb the underlying anticompetitive conduct. But this outcome remains an outlier, and the circumstances that make it unique exemplify the dynamics surrounding this type of litigation.
Another practice that provoked an outsize amount of outrage and attention in the second decade of this century was balance billing and other machinations by out-of-network (OON) providers. In particular, hospital-based physicians were able to opt out of all insurance plans because they serve captive clientele within in-network facilities.Footnote 7 In 2020, Congress enacted the No Surprises Act in an attempt to finally resolve the problem. But during this period, some modest efforts to invoke private law against rogue providers also proceeded in the courts. As I will explain below, conditions seemed favorable for a litigated solution to the surprise billing problem, yet the coalition of payers and consumer advocates formed to end the abuses chose to concentrate on securing a legislative solution.
Why might it be that this coalition would not, or could not, pursue a coordinated litigation strategy? An impracticability or unwillingness to invoke private-law remedies would give providers and suppliers an edge over purchasers in the struggle to contain the excessive costs of the US health care system. This research project surveyed private-law approaches that have been applied to challenge provider opportunism. The overview of the litigation studied will be presented elsewhere. This article confronts the question of missing-in-action litigation, from political science and economic perspectives.
16.2 Why Take Health Care Cost Containment to Court?
Two types of provider opportunism seem amenable to court-adjudicated resolution: attempts to collect exorbitant “billed charges,” and anticompetitive conduct.
16.2.1 Background on Billed Charges versus Market Prices
As a basic framework for understanding legal disputes over healthcare prices, it is helpful to consider the distinction between billed charges and market prices. Billed charges can be thought of as a provider’s optimal price for a service free from market constraints, a provider’s default “asking price” or “list price.” Market prices can be thought of as those prevailing in a competitive market for health care services, emerging from network contracts negotiated by insurers or cash payments by consumers.
While the author strongly believes that patient liability for billed charges has little legal support under the common law, there is admittedly enough legal ambiguity about their status, as well as logistical difficulty in challenging them, that they have had compelling power over payers and consumers.Footnote 8 Further, some providers have been able to obtain fees close to their idealized maximum price through consolidation or other anticompetitive practices, reaping amounts that resemble billed charges more than prices that would result from vigorous competition. The following two sections summarize the rationales for challenging these practices in the courts.
16.2.2 The “Common Law Solution” to Billed Charges
The substantive law case for litigating billed charges has been articulated by Prof. Barak Richman, who argues that “consumers are already protected by current law – bedrock, rudimentary contract law – and require only its proper application to end harmful chargemaster practices.”Footnote 9 According to Richman and colleagues, “providers have no legal authority to collect chargemaster charges that exceed market prices for OON services, and thus neither patients nor payers are under any obligation to pay such chargemaster prices.”Footnote 10
Richman and colleagues are referring to the doctrine of implied contract, or quantum meruit. The Pennsylvania Superior Court applied this doctrine in its decision in Temple University Hospital, Inc. v. Healthcare Management Alternatives, Inc.Footnote 11 The case involved services provided by a hospital to a health plan’s enrollees following expiration of the parties’ network contract. The hospital sought its chargemaster rates from the insurer. The court noted testimony from the hospital’s CFO that the hospital seldom received its published rates.
The court held that when “there is no express agreement to pay, the law implies a promise to pay a reasonable fee for a health provider’s services. Thus, in a situation such as this, the defendant should pay for what the services are ordinarily worth in the community. Services are worth what people ordinarily pay for them.”Footnote 12 Because the controlling question is “what healthcare providers actually receive for those services,” the chargemaster “cannot be considered the value of the benefit conferred because that is not what people in the community ordinarily pay for medical services.”Footnote 13
16.2.3 Private Antitrust Enforcement
The case for increased private antitrust enforcement in the health care sphere is articulated by Anne Marie Helm, who argues that it “can restore competition, deter antitrust violations, and compensate victims in the markets for health care services and insurance … accordingly, the United States should be looking for ways to optimize it.”Footnote 14
Helm acknowledges that plaintiffs face a challenging legal environment. Nevertheless, some supportive case law indicates judicial appreciation of the importance of private enforcement.
Messner v. Northshore Univ. HealthSystemFootnote 15 involved a putative damages class action following up on the FTC’s unwinding of a hospital merger. The District Court denied class certification on predominance grounds.Footnote 16 Observing that “it is important not to let a quest for perfect evidence become the enemy of good evidence,” the Seventh Circuit reversed.Footnote 17
Another decision, Palmyra Park Hospital, Inc. v. Phoebe Putney Memorial Hospital,Footnote 18 permitted a challenge by a competing hospital shut out by a large hospital system’s market power. Palmyra had been an in-network provider for Blue Cross Blue Shield of Georgia but lost its in-network status allegedly because Phoebe Putney leveraged its power as sole Certificate of Need permittee for three medical services “to force Blue Cross (and other insurers) to exclude Palmyra from their provider networks. Specifically, Phoebe Putney threatened to demand significantly higher reimbursement rates for those services in its contracts with Blue Cross if Blue Cross included Palmyra in its provider network. Palmyra attempted to contract with Blue Cross on several occasions” but was turned down due to Blue Cross’s contract with Phoebe Putney.Footnote 19
The issue in the case was whether a competing hospital is an efficient enforcer of the antitrust laws for purposes of antitrust standing. The district judge believed that the health insurers or consumers were the appropriate plaintiffs. The Eleventh Circuit reversed, observing that such scenarios were unlikely, particularly the former:
[T]he insurance companies are likely able to pass a large percentage of the higher reimbursement rates on to their policy holders in the form of higher premiums. Thus, they bear relatively little of the cost imposed by the tying scheme. Moreover, an insurance company would risk losing its goodwill with Phoebe Putney if it sued; given that an insurer must include Phoebe Putney in its network to be competitive in southwest Georgia, insurers would be understandably reluctant to anger Phoebe Putney by suing it.Footnote 20
The denouement of this saga, however, shows the weakness of relying on competitors to challenge market power. Phoebe Putney acquired and absorbed Palmyra Hospital over Federal Trade Commission (FTC) objections.Footnote 21
16.3 The Promise and Limits of Cost Containment Litigation
Victory in litigation over an opportunistic provider can have two types of benefits: a private benefit for the party that brought the suit, and a collective benefit for consumers and payers – that is, the public at large – if the wins change business practices. When a case involves a unique, unusual, or payer-specific practice, the private benefit predominates, and success in the suit, such as a damages award or an injunction, suffices to satisfy the plaintiff’s goals.
Use of litigation to achieve a collective benefit is more complex, and when it comes to health care costs that are increasing for every employer, worker, and consumer, due to the same common and pervasive practices, it is the collective good that is implicated. Ideally, success would involve discrete entities subject to controlling legal authority that prohibits an abusive business practice (e.g., the outcome of the recent BCBS antitrust litigation).Footnote 22 Realistically, it would more likely result in a few impactful judgments, creating a body of law that convinces the losing litigant that continuing the practice would be economically futile (e.g., the litigation that ended production of the Ford Pinto automobile).Footnote 23 To be sure, through the availability of punitive damages in tort suits, treble damages in antitrust suits, and Rule 11 sanctions in civil suits, private law has tools to confront social costs and address collective relief in addition to individual relief; however, no attorney would suggest that these tools are easy for litigants to access.
In the case of the out-of-network hospital-based physician or air ambulance business models, true victory would have meant a sequence of victories spelling out the rights of consumers so explicitly as to make further assertions of balance billing claims frivolous and subject to sanctions. It would have required an orchestrated effort to defend consumers in collection cases (as the author proposed prior to passage of the No Surprises Act).Footnote 24
16.3.1 The Collective Action Problem in Cost Containment Litigation
But who, exactly, would bear the costs to achieve this widespread, dispersed collective benefit? A health care system that functions properly in spite of efforts by rogue actors is truly a public good that would be enjoyed by scores of insurers, many thousands of employers, and hundreds of millions of individuals. Some sort of cooperative effort would be needed to achieve it.Footnote 25
Mancur Olson articulated what is known as the Collective Action Problem.Footnote 26 While conventional wisdom expects that groups of individuals with common interests would act on behalf of those interests, since they would gain from such cooperation, “they will not act to advance their common or group objectives unless there is coercion to force them to do so,” or some separate, distinct incentive is offered to group members individually, conditioned on their help in pursuing the collective aim.Footnote 27 Olson’s argument is that individual group members, while having common interests, also retain purely individual interests such as saving money, so if it is possible to drop out of paying dues toward a cooperative effort, “the loss of one dues payer will not noticeably increase the burden for any other one dues payer, and so a rational person would not believe that if he were to withdraw from an organization he would drive others to do so.”Footnote 28
Consider the sprawling variety of entities that encompass the latent “group” concerned with surprise bills: consumers, who, as patients receive balance bills and as workers experience a significant, but usually invisible, reduction in take-home pay as health benefit costs rise; employers, who in the short run must pay the bills (if self-insured) or higher premiums (if fully insured) but who, over the long run, may be indifferent as to the proportion of employee compensation paid in cash versus health benefits; and insurers, who are most directly on the hook for increased payments but also have interests that may diverge from those of enrollees and clients.
Creating a body of law that would render impotent the out-of-network business model for physician staffing companies would be a public good – a benefit from which no payer or consumer could be excluded.
Nevertheless, these diverse interests came together in a Coalition Against Surprise Medical Billing that successfully lobbied Congress to curb balance billing, but they did not jointly pursue a litigation strategy. A fair amount of political science theory and research is available to analyze why groups choose to, or choose not to, seek redress from the courts, which will be discussed infra.
16.3.2 Are Payers Effective Agents of Their Enrollees?
It is apparent that, unlike other rivalrous dyads in the US economy, providers and payers generally lack an aggressive, two-sided contentiousness. When one compares their network contracting and other interactions to other famously antagonistic dyads – labor versus management, the Association of Trial Lawyers of America and its members versus the US Chamber of Commerce and its members, bulk purchasers for resale versus suppliers – the relationship looks rather amicable. To Dennis Scanlon, “it is somewhat of a mystery as to why insurers and third party administrators (TPAs) have not been able to achieve price reductions through contracting” and “not serving as better agents for their customers.”Footnote 29
Surely, a large influence is payers’ desire to offer broad provider networks. According to the Kaiser Family Foundation’s 2019 Employer Health Benefits Survey,Footnote 30 employers were asked what they considered the most important factor in constructing their provider networks. Thirty percent of employers identified the number and convenience of providers as most important.Footnote 31 Thirty-nine percent of employers said that they would not reduce network size for cost savings, with 36 percent saying that they would need to realize savings of at least 20 percent to narrow their network.Footnote 32 Only 2 percent of firms reported that they or their insurer eliminated a hospital or health system from their provider network during the past year to reduce costs.Footnote 33
Clearly, payers worry about imposing inconvenience on enrollees and see broad networks as attractive to workers. Notably, private insurers have not embraced the role of challenging questionable or fraudulent claims the way that federal health programs have.Footnote 34 In Washington, DC, during federal employees’ open enrollment period in 2022, city buses were emblazoned with advertisements from Blue Cross Blue Shield boasting that 96 percent of hospitals and 95 percent of doctors were included in their network. But Amazon and Walmart emphasize broad arrays of products, and this does not deter them from bargaining hard with suppliers. As Scanlon notes, payers should be able to negotiate away unwarranted variations in provider prices until they converge at an appropriate level,Footnote 35 as do prices for paper towels negotiated by Walmart.
What incentive do payers have to emphasize provider price reductions over other considerations?
Employers are the largest category of payers in the United States, and many participate in organizations such as Catalyst for Payment Reform and Purchaser Business Group on Health that emphasize cost containment. But one prominent school of thought predicts employers will be largely indifferent to whether compensation is paid in the form of cash wages or health benefits.
Under traditional economic theory, employer contributions to health insurance premiums are one of many parts of workers’ total compensation, and employers offer the combination of wages and benefits that will best help them attract and retain employees … When health care costs rise, employers can respond … by increasing worker premium contributions, increasing deductibles or copayment amounts, reducing employment, or increasing their own premium contributions while reducing or limiting wage growth accordingly.Footnote 36
As such, health care costs “come out of workers’ wages or other compensation over the long-run,” rather than out of employers’ profits.Footnote 37
Insurers, meanwhile, may have even less incentive to contain medical costs. Recall the Eleventh Circuit’s observations about insurance companies’ ability to pass along higher reimbursement rates through higher premiums. Further, insurers are subject to the Affordable Care Act’s medical loss ratio (MLR) floor. This regulation requires insurers to issue rebates if claim expenses are less than 80 to 85 percent of premiums. The intention of the law, of course, was to reduce premiums by reducing administrative costs and profits; but the requirement can also be met by holding those elements constant and increasing claim payouts. One study found an increase in claim costs after the MLR law took effect, concluding it was “likely that insurers raised their claims costs from a combination of more comprehensive coverage and reduced cost-containment effort, such as negotiations with providers or claims utilization management practices.”Footnote 38
At the other end of the continuum, union health plans established under the Taft-Hartley Act surely have the greatest incentive to curb provider costs since they bargain for the complete compensation package and can quantify the wage/health benefit trade-off literally to the penny per hour worked.Footnote 39 Funds that go to high-cost providers can be directly reallocated to wages if the union plan is willing to sacrifice access to some providers.Footnote 40 Unlike the situation when the employer alone stewards the health benefit, union leaders can promise definite monetary benefits to be reaped in exchange for dropping, or threatening to drop, a high-cost provider.Footnote 41
And so we see that in the Messner antitrust litigation, the Painters District Council No. 30 Health & Welfare Fund was a named plaintiff, while Blue Cross Blue Shield of Illinois filed an affidavit stating that it “did not pay artificially inflated prices” and did not suffer “any injury or damage.”Footnote 42 This continuum of incentives is concerning, because the payer category with the least incentive has the greatest resources, while the payer category with maximum incentives serves only a small proportion of health insurance enrollees. Payer participation in cost containment activities may rely more on insurers’ and employers’ executives’ sense of unfairness or outrage at excesses than on economic incentives.
The Eleventh Circuit, in the Phoebe Putnam decision, also mentioned insurers’ incentive to retain goodwill with provider partners.Footnote 43 Outside of extreme and exploitative circumstances, insurers surely feel inhibited from confronting providers they need to maintain adequate networks, especially in an era when insurers are asking providers to take on risk. Conversely, unions’ mission encompasses vigilance against oppressive business practices, and confrontation is central to their modus operandi.
Finally, federal antitrust law prefers plaintiffs to be the direct purchaser of the overpriced service.Footnote 44 The victorious cocounsel in UEBT v. Sutter Health argues that one reason they secured a settlement in their state-court litigation while a similar federal case yielded a verdict for the defendant was that they sought “direct damages for amounts that self-insured entities allegedly overpaid Sutter for health care services; in the federal case, by contrast, the insured class members sought indirect damages for the increased insurance premiums resulting from Sutter’s alleged overcharges. Such indirect damages can be harder to prove.”Footnote 45
16.3.3 Examples of Potentially Effective Collective Efforts
Economic and political science doctrines offer insights into how collective action problems can be solved, and these insights illuminate three categories of litigation, which we might expect to better facilitate challenges to excessive health care costs.
16.3.3.1 Class Actions
Olson argued that one solution to the collective action problem is compulsory participation. Olson cites the tremendous growth of labor unions following enactment of the Wagner Act, which requires that once a majority of workers in a bargaining unit vote for union representation, employers must bargain collectively with the union and that the contract will bind all the workers in the unit.Footnote 46
A certified class action is analogous to a certified bargaining unit – both involve representation of a community of interest, on a mandatory basis, by an entity that will be compensated on a mandatory basis. As with collective bargaining, representation depends upon entrepreneurial activity by that entity, which in turn is conditioned on the union organizer’s or plaintiff’s attorney’s confidence in prevailing.
16.3.3.2 State Attorneys General as Advocates of Lower Costs
Standard neoclassical welfare economic analysis holds that collective benefits, which are non-rivalrous and non-excludable, are public goods that can’t be provided by the market and must be provided through government. Successful cost containment litigation that prospectively ends abusive practices fits this description. As such, the most logical plaintiff is not an insurer or a class representative, but the government agencies such as attorney general’s offices.Footnote 47
But there are drawbacks to relying on political officeholders to enforce cost containment, including the complexity of health care issues which may intimidate lawyers, the broad range of responsibilities that an Attorney General (AG) must meet with limited resources, and the possibility of regulatory capture of AGs by health care interest groups.
16.3.3.3 Patron-Sponsored Litigation
Political scientist Jack Walker charted and analyzed the growth of US interest groups that Olson’s theory predicts should not have happened.Footnote 48 He found that 60 percent of nonprofit groups and 89 percent of citizen sector groups received startup funding from an outside source.Footnote 49 Among nonprofit sector groups, 30 percent reported receiving support from foundations and 29 percent reported support from individual patrons.Footnote 50 Among citizen sector groups, 48 percent reported receiving support from foundations and 78 percent reported support from wealthy individuals.Footnote 51 Walker concluded: “Patrons stand at the center of a common solution to Olson’s collective goods dilemma.”Footnote 52
As such, it is not surprising that philanthropies have emerged as a supporter of cost containment litigation in the absence of other collective efforts. The Wall Street Journal reported that Arnold Ventures, a foundation with health care costs as a key focus area, is among patrons supporting a number of lawsuits spearheaded by Fairmark Partners LLP.Footnote 53
Note that these collective efforts, with consumers, employers, or the state as plaintiffs, do not implicate the partnership inhibition that seems to neutralize insurers as effective plaintiffs.
At several points supra, this article referenced the UEBT v. Sutter Health case. This case stands alone as the most – perhaps only – significant victory for payers and consumers over providers. Three notable traits of this case illustrate some of the bolstering elements of cost containment litigation discussed above: (1) a union health plan as plaintiff; (2) structured as a class action; and (3) the AG as a coplaintiff which, according to Bird and Varanini, “may have been significant to the settlement of the state case. Jury research has shown that some jurors are more likely to credit assertions that are backed by an attorney general or similar official.”Footnote 54
16.3.4 Political Science Insights into Collective Litigation
Walker’s study of interest groups included a chapter on their litigation strategies. Interest groups do, said Walker, “file lawsuits to safeguard the interests of their members, promote test cases or class action suits … and file amicus briefs …,” but litigation is generally ad hoc and a departure from organizational routines and repertoires.Footnote 55
Over the years, political science scholars have propounded theories explaining why some groups use the courts more than others.Footnote 56 Two of these theories suggest that coalitions of payers are unlikely candidates for litigants. The political disadvantage hypothesis holds that groups seek remedies through the courts primarily when they see no way forward via the political branches. Employers and insurers are hardly “out-groups” and their judgment that they could succeed in persuading Congress to curb surprise billing was vindicated. The rights consciousness theory predicts that groups “see[ing] themselves in terms of uncompromising rights” are more likely to seek recourse in the courts.Footnote 57 Payers are not citizen groups with this mindset, though some of their coalition partners on surprise billing are.
Meanwhile, two other theories predict that payer groups, having considerable organizational resources and having claims (common law and antitrust) that are quite compatible with and conducive to judicial resolution, would choose to bring litigation.Footnote 58
Walker’s own research conclusions suggest several reasons why the payer coalition did not prioritize private-law remedies. First, Walker concluded, litigation is “one of the least popular forms of advocacy pursued by interest groups.”Footnote 59 Second, “groups engaged in policy areas characterized by intense disputes” – groups with “recurring opponents” or “natural enemies” – are more likely to carry those disputes to court.Footnote 60 As noted, payers and providers are opponents only intermittently; more often they are partners. Finally, Walker says, “[G]roups that operate in policy areas that are sensitive to changes in outcomes of national elections are also more likely to resort to litigation.”Footnote 61 The parties to the “Network Wars” were not aligned with any particular political party or ideology that would complicate passage of a surprise billing law.
16.4 Conclusion
It should be noted that, in spite of the foregoing considerations, payer-initiated cost containment litigation does take place, albeit not systematically.Footnote 62 There seems to be a point at which insurers’ frustration can boil over, and a decision is made to invoke private law to remedy overreaching. Could these urges be harnessed and institutionalized in some way? Ideally, private law would be a tool to tamp down on provider opportunism that purchaser-side stakeholders utilize as readily as, and complementary to, legislative advocacy or hardball contract negotiations. The author’s view, as a lawyer who has advocated before all three branches of government, is that litigation can (though not necessarily does) produce change more quickly than lobbying Congress.
We would also want insurers and employers deputized as unambiguously committed agents of consumers and workers, and to establish structures to investigate, conceptualize, and prosecute common-law and statutory violations by providers. And we would want employers and insurers to hold themselves to a duty to enrollees similar to that embraced by union health plans.
Not all excessive prices will rise to the level of legal violations, of course, but some instances will merit scrutiny: where provider prices are attributable to antitrust violations, upcoding, claims for excessive billed charges that TPAs paid without regard to prevailing prices, and, perhaps, facility fees and similar mark-ups and upcharges.
One option would be for payers to contribute to a joint legal fund. This could take the form of a small assessment (or “check-off” as it is sometimes called) analogous to those levied on agricultural producers of commodities to support the promotion of their product. Such a fund might be operated under the auspices of existing employer coalitions, which would relieve individual payers from poisoning relationships with providers. It could hire staff to investigate and develop cases or provide grant funding for dedicated positions in state AG’s offices. It could ensure that damage awards or settlements are returned to enrollees, and operate as, and be perceived as, a more public-minded litigant than insurers. Seed money from a foundation might help build momentum for such an effort.
Private law could be a powerful sword to wield against health care costs, if an appropriate champion comes forward.
17.1 Introduction
All is not well in America’s health care system. The United States consistently spends significantly more than any other nation on health care goods and services, reaching US$4.3 trillion and nearly US$11,000 per capita in 2021.Footnote 1 Despite being an outlier in health care spending, American quality of care metrics and health outcomes lag behind those of other comparator nations.Footnote 2 A 2023 report by the Commonwealth Fund found that Americans have the lowest life expectancy at birth, the highest death rates for avoidable or treatable conditions, the highest maternal and infant mortality rates, the highest rates of people with multiple chronic conditions, and among the highest suicide rates of thirteen peer nations.Footnote 3
While numerous factors contribute to American health care woes, a primary cause is the failure of the market-based health care system to protect competition in the ways needed to control prices, promote innovation, and improve quality. Health care markets at all levels are more consolidated and complex than ever before, involving new market structures and actors that often confound and complicate traditional norms of antitrust enforcement. As health care prices continue to increase and quality stagnates, academics and health policy analysts have repeatedly called for stronger enforcement of antitrust laws in health care as well as stronger regulation to control prices.Footnote 4 This chapter argues that private antitrust law, the law governing market behavior by and between private actors, has a unique and essential role to play in protecting consumers and competitive markets by identifying and challenging anticompetitive behaviors arising from new dynamics in health care. Private law has an ability to extend, inform, and enhance public law initiatives by state and federal antitrust enforcers.
17.2 The Current State of Health Care Markets
American health care entities have evolved dramatically over the last fifty years, creating several new dynamics in health care markets, including the rise of health systems and health monoliths, the use of new negotiation and contracting practices, and the introduction of new market actors and business models. The consolidation of American health care markets has occurred through just about any means possible – horizontal, vertical, cross-market, and cross-industry. A recent study found that approximately 95 percent of metropolitan areas had highly concentrated hospital markets, 78 percent had highly concentrated specialist physician markets, and 58 percent had highly concentrated insurer markets.Footnote 5 This consolidation has led to the rise of health care systems – jointly owned or managed health care entities, such as physician practices, hospitals, and skilled nursing facilitiesFootnote 6 – and health monoliths – massive health care entities that extend beyond providers to include some combination of payors or insurers, pharmaceutical services, and data management services. Research has repeatedly demonstrated that consolidation drives health care price increases,Footnote 7 has minimal quality impacts,Footnote 8 and tends to reduce patient satisfaction rates.Footnote 9
While public antitrust enforcers have had recent success in blocking horizontal health care mergers,Footnote 10 they have had significantly more difficulty in preventing consolidation arising in less traditional ways, such as vertical, cross-market, and cross-industry transactions. From 1970 to 2019, the percentage of hospitals that were part of a multi-hospital health system grew from 10 to 67 percent.Footnote 11 Many of these multi-hospital systems merged to become multi-market systems spanning sub-state regions (e.g., northern California), states, multi-state regions (e.g. mid-West, South), and the nation. Between 2009 and 2019, 55 percent of the 1,500 hospitals targeted for acquisition were in a different geographic market than the acquiring health system.Footnote 12 Historically, public antitrust enforcers have held that such cross-market mergers cannot cause anticompetitive harm, and as such they garnered little to no attention from federal or state officials, allowing rapid growth of multi-market systems. Recent studies now suggest that cross-market mergers can enable hospital systems to raise prices systemwide due to increased market power in contract negotiations with multi-market insurers, a phenomenon known as system power.Footnote 13 Despite this evidence, public antitrust enforcers have brought few challenges to cross-market hospital mergers.
Vertical transactions have also unified market actors at different levels of the supply chain, such as payors, hospitals, physicians, pharmacy benefit managers, and health data informatics companies, raising significant questions about foreclosure of competitors throughout the markets.Footnote 14 A national study of over 40,000 physicians found that between 2010 and 2018, the percentage of physicians who worked in a practice owned by a hospital increased from 24.1 percent to 45.6 percent.Footnote 15 Health system ownership of physician groups typically results in changes in referral patterns and hospital choice, increased prices for both the physicians and hospitals involved, and marginal quality effects.Footnote 16
Beyond providers, health care entities have begun to engage in vertical, cross-industry transactions resulting in health care monoliths, like United Health Group (United), which has acquired thirty-five health care companies in the past decade alone. United owns and operates the largest health insurance company in the United States, a network of 53,000 physicians in 15 states, a pharmacy benefits manager (PBM) that processes over a billion prescriptions each year, a health care data analytics company, and a health care claims-editing company. The Department of Justice’s (DOJ’s) recent unsuccessful vertical challenge of United’s acquisition of Change Healthcare, Inc., the leading supplier of claims processing software that serviced many of United’s competitors, demonstrates some of the challenges of antitrust enforcement in this area.Footnote 17 Overall, the provider, payor, pharmaceutical, and insurance markets in health care demonstrate “textbook conditions” for harm from vertical mergers – high levels of concentration, high and durable barriers to entry, and poor market function – and open the door for merged firms to exclude their upstream or downstream rivals, either by raising their costs or cutting off access to resources.Footnote 18 Private market actors, either as consumers, payors, or competitors, can provide insights into the effects of vertical and cross-market consolidation on market function that can inform both future negotiations with health care providers and public antitrust enforcement.
Another major shift in health care markets in recent decades arises from the influx of investment from private equity firms, which have largely been able to consolidate market power in ways that avoid interference from public antitrust enforcers. Private equity investment in the health care industry has increased dramatically in the past twenty years, increasing from US$5 billion in 2000 to US$100 billion in 2018.Footnote 19 As of December 2022, one-quarter of all emergency departments nationwide were staffed by private equity-owned emergency medicine staffing companies.Footnote 20 While private equity firms have invested broadly across health care markets, they have increasingly acquired specialist physician practices.Footnote 21 As a result of their growing market power, private equity-owned health care entities have been able to demand restrictive employment covenants from contracting providersFootnote 22 and payment increases between 8 percent and 18 percent for certain specialist services.Footnote 23
While any entity consolidating market power and demanding anticompetitive contract terms would raise antitrust concerns, private law provides an essential mechanism for consumers and competitors to demonstrate the anticompetitive harms arising from private equity business models and contracting practices, which are relatively new in the health care markets and have typically avoided federal antitrust attention. Private equity firms invest money from wealthy individuals and institutional investors into businesses in hopes of quickly increasing profitability and then returning a large profit to investors before exiting the business.Footnote 24 Private equity firms often follow a “buy and build” model that grows an asset through a series of “add on” acquisitions in the same industry.Footnote 25 Thomas Wollman termed the practice of building market power through a series of sequential smaller acquisitions that fly under federal antitrust enforcement radar “stealth consolidation.”Footnote 26 Stealth consolidation is possible in part due to loopholes in the Hart-Scott-Rodino Act (HSR), which requires merging entities to notify the federal government of a proposed merger if the total value of the merger is higher than the HSR reporting threshold, set at US$114.4M for 2023.Footnote 27 When a deal does not reach the HSR threshold, the likelihood of a federal investigation drops precipitously.Footnote 28 Interestingly, private equity health care acquisitions are often secured for just under the HSR reporting threshold.Footnote 29 As a result, private equity firms, as well as other market actors, have been able to make sequential smaller acquisitions and amass market power without public antitrust intervention.Footnote 30 In addition, private equity firms have been able to use their market power to engage in other anticompetitive behavior, such as demanding exclusive employment contracts and noncompete clauses that hinder competition.Footnote 31 As stated in a 2021 report by the American Antitrust Institute and the Petris Center at UC Berkeley, “when the fundamental characteristics of the private equity business model are combined with the unique structure of the US health care market, the results are potentially catastrophic for patients, payors, and the long-term stability of the health care supply chain.”Footnote 32
17.3 The Role of Private Law in Governing Health Care Markets
Private law offers a complementary pathway to public antitrust enforcement to identify competitive harms arising from new health care market dynamics and test a variety of legal strategies for challenging them. Private law incorporates social norms, national values, and business customs into its purview.Footnote 33 From an antitrust perspective, it establishes the market norms and conditions necessary to protect competition and consumers in contracts and other business dealings between market actors. Being adaptable to the ever-changing norms of business, private law grants market participants the ability to enforce those conditions through contractual agreements and challenge breaches of those norms and conditions when violated. As such, it is often the market actors who directly experience the leveraging of market power or the anticompetitive effects of certain contract terms that are in the best position to identify the potential competitive harms arising from new market dynamics and bring an antitrust challenge.
Private antitrust enforcement was always intended to support, inform, and supplement public antitrust enforcement led by the Federal Trade Commission (FTC), DOJ, and state attorneys general. The Clayton Act established a private right of action for individuals who are injured or threatened with injury by the anticompetitive actions of other market actors.Footnote 34 Congress further encouraged private antitrust enforcement by awarding treble damages, or three times the damages incurred, to successful private litigants. Having noted that the award of treble damages reflected Congress’ intent that consumers and other injured market actors serve as “private attorneys general,”Footnote 35 the Supreme Court stated that “[t]he treble-damages provision wielded by the private litigant is a chief tool in the antitrust enforcement scheme, posing a crucial deterrent to potential violators.”Footnote 36
Despite this intent, private antitrust enforcement and private law solutions more broadly, however, have been largely omitted from policy debates and recommendations about how to preserve competitive markets in health care.Footnote 37 Scholars and policymakers almost uniformly propose public law solutions to health care market challenges, including transaction notification, review, and approval processes; enhanced public antitrust enforcement; revisions to federal merger guidelines; provider rate caps; and state health care affordability regulations.Footnote 38 But public antitrust enforcers and regulatory bodies can only implement those solutions if they have a clear line of sight into market function.
In health care, market dynamics, such as contracting, pricing, employment negotiations, and corporate alliances, are murky at best. Nondisclosure agreements and trade secret protections have become ubiquitous throughout health care agreements, shielding prices and contract terms from view.Footnote 39 By witnessing firsthand the impact on consumers and competition, private market actors have the best vantage point by which to identify when new combinations, contract terms, and behaviors can be anticompetitive.
17.4 Private Law as an Antitrust Enforcement Mechanism
In the rapidly evolving health care landscape, private antitrust enforcement can draw attention to the kinds of combinations (mergers, acquisitions, and joint ventures) and behaviors that can harm consumers or competition but might otherwise escape public antitrust enforcement scrutiny. Significant strides have been made through antitrust actions from private litigants both in isolation and in partnership with public authorities.Footnote 40
One of the most pivotal health care merger challenges for the FTC was initiated by a private plaintiff and rival, Saint Alphonsus Med. Center – Nampa, Inc., against St. Luke’s Health Systems, Ltd., for its attempt to acquire Saltzer Medical Group, P.A., the largest independent multi-specialist physician group in Idaho.Footnote 41 The FTC and the Idaho attorney general later joined the case, which resulted in the full divestiture of Saltzer’s physicians and assets.Footnote 42 Although the case was decided on horizontal grounds arising from estimated post-merger concentration levels and price increases in the primary care physician market, St. Alphonsus, as a private litigant, illuminated the risks associated with both the horizontal and vertical aspects of the merger – noting the risk of increases in PCP rates and the foreclosure risks to other hospitals due to the potential for the acquired PCPs to shift referrals to St. Luke’s.
Private litigants have also successfully challenged anticompetitive monopolistic behaviors between providers and insurers. In West Penn Allegheny Health System, Inc. v. UPMC; Highmark, Inc., Pittsburgh’s second-largest health system sued the dominant health system and insurer for violations of the Sherman Act §§1 and 2.Footnote 43 The case highlighted both the opportunities for collusion and competitive harms, such as artificially depressed rates and exclusion of a rival, that can arise from agreements between dominant providers and insurers to protect one another’s interests.
Private plaintiffs have generally been more willing than public enforcers to bring novel challenges to anticompetitive behaviors. For example, in Sidibe v. Sutter Health, a group of private patients brought the first antitrust challenge to a health care system for using contract terms that leveraged market power across geographic markets.Footnote 44 Sutter Health had been strategically acquiring “must have” hospitals and other provider organizations throughout Northern California for many years. The Sidibe plaintiffs were the first to certify a class of patients suing for harms arising from a multi-market health system’s use of anticompetitive contract clauses and tying behaviors to link providers across geographic and product markets to demand systemwide price increases from multi-market insurers.Footnote 45 While the plaintiffs have still not seen resolution of their claims,Footnote 46 their arguments laid the foundation for UFCW and Employers Benefit Trust v. Sutter Health, which resulted in a ground-breaking settlement for the plaintiffs and the California Attorney General, setting up a wave of follow-on cases.Footnote 47
In 2014, the United Food and Commercial Workers (UFCW) union and the United Employers Benefit Trust (UEBT) filed a similar action against Sutter Health for using anticompetitive contract terms and other practices to demand supracompetitive rates.Footnote 48 The plaintiffs alleged that Sutter leveraged its presence as the dominant hospital provider in some markets to increase prices for all of its providers and facilities. Sutter accomplished this largely through the use of anticompetitive contract clauses, including “all or nothing” clauses that require insurers and employers to contract with all of Sutter’s facilities at elevated rates, or none at all; anti-tiering and anti-steering clauses that prevent insurers from signaling or incentivizing enrollees to seek care from higher value providers; and nondisclosure clauses that prevent health plans from disclosing negotiated rates with employers, patients, or the public.Footnote 49 The plaintiffs further argued that these contract terms were mutually reinforcing in ways that strengthened Sutter’s market leverage. For example, the all-or-nothing clauses leveraged market power to demand supercompetitive rates, while the nondisclosure clauses and anti-tiering/anti-steering clauses prevented consumers from being able to price discriminate, effectively shielding Sutter from price competition.Footnote 50 The plaintiff’s claims, which largely mirrored the arguments made in Sidibe, brought significant attention to the ability of health systems to leverage market power across product and geographic markets, which had not been previously thought possible.Footnote 51
The case gained even more momentum when the California Attorney General joined, uniting public and private antitrust enforcement and giving credence to the novel arguments made in the case. The Attorney General also contributed new arguments, such as alleging that Sutter also engaged in punitive pricing practices through “de facto all-or-nothing” behaviors.Footnote 52 Instead of placing the all-or-nothing provision directly into the contract, a system engaging in de facto all-or-nothing behaviors would impose conditions on an insurer that wants to exclude a newly acquired provider, such as: (1) raising the rates for already contracted providers in future negotiations or (2) preventing the insurer from excluding system providers from the plan by using excessive out-of-network pricing of “must have providers” to essentially force the health plan to accept the system’s price and network inclusion demands. In the end, Sutter settled with the plaintiffs for (1) US$575 million, (2) prohibitions on the system’s ability to condition pricing on network inclusion of providers and facilities and use of other anticompetitive contract clauses, and (3) the imposition of cap on out-of-network rates.Footnote 53 News of the settlement sent shockwaves through the health care industry, as some of the contracting practices initiated by Sutter had served as a model for other health systems.Footnote 54
The magnitude of the settlement, the novelty of the claims involved, and the eventual alignment of public and private antitrust enforcement in the Sutter case demonstrate the importance of private antitrust actions as a mechanism for identifying and challenging anticompetitive behaviors as they develop in the ever-changing health care landscape. In the wake of the Sutter settlement, private litigants brought several similar actions against multi-market health systems engaging in similar behavior throughout the country, sending out warning signals and changing behavior across the country.Footnote 55
Private litigants have also brought attention to and challenged the market behaviors of private equity investors in health care. For example, in December 2021, the American Academy of Emergency Physician Group (AAEM-PG), a professional association of emergency medicine physicians, sued Envision Healthcare, a multispecialty physician group and health care management team that includes over 25,000 physicians and 1,600 employees at over 780 hospitals nationwide, for violation of California’s Unfair Competition Law and its prohibition of the corporate practice of medicine.Footnote 56 Kohlberg Kravis Roberts & Company (KKR), a leading global private equity firm that manages over US$100 billion in assets and has a strategic interest in health care, owns Envision.
The suit alleged significant competitive harm arising from Envision’s use of restrictive covenants in physician employment contracts that bar physicians from joining or forming another group of emergency medicine physicians to compete in medical or management services markets serviced by Envision.Footnote 57 Such provisions can harm consumers and competition by hindering the growth of existing competitors, limiting market entry, reducing the supply of available emergency physicians, and facilitating price increases. Interestingly, the doctors challenging the case did not ask for financial damages; instead, they asked the court to enjoin Envision from engaging in the corporate practice of medicine, inducing medical groups to include restrictive covenants in their contracts, and providing incentives in exchange for patient referrals. In addition, plaintiffs asked the court to make declarations that the private equity business model in health care, as implemented by Envision and other private equity-owned health care groups in the state, violates competition laws, interferes with providers’ clinical decision-making authority and referral patterns, and harms patients.Footnote 58 While the case garnered significant media attention and survived Envision’s Motion to Dismiss, it has recently stalled following Envision’s filing for bankruptcy. The plaintiffs state that they will persist in the suit because of their desire for injunctive and declarative relief.
In modern health care markets, private litigants have a critical role to play in identifying and challenging anticompetitive effects arising from new consolidation strategies, contracting models, market entrants, and investment schemes. Private antitrust enforcement serves as the first line of defense protecting health care market participants, reinforces the business norms of the health care market, and provides insight for the evolution of public antitrust enforcement.
17.5 Informing Public Antitrust Enforcement
Public antitrust enforcers have struggled to keep up with changes in the health care markets for decades. Although they have experienced numerous recent successes in challenging horizontal hospital and insurer mergers, this success has not been replicated with non-horizontal combinations, such as vertical, cross-market, or cross-industry acquisitions. The enforcement challenges have arisen largely from a misalignment between the current realities of health care market dynamics and the norms and assumptions of traditional antitrust enforcement, such as distinct geographic and product markets, direct buyer and seller relationships, price and quality transparency, and a lack of price shielding from third parties. In addition, the relationships between actors in health care markets have become significantly more complex and less transparent.
Private law allows for greater acknowledgment of this complexity by exposing the nature of the relationships between market actors, such as providers and payors, physicians and hospitals, and between health systems and their employees, in ways that reflect use of market power. Furthermore, private health care litigants have proven more willing than public antitrust enforcers to bring cases based on less traditional antitrust claims that have more uncertain outcomes, which is potentially due to less public oversight and fewer resource constraints. As such, the relationships between private actors and the claims brought in private antitrust litigation can illuminate both changing dynamics in health care markets, as well as gaps in public antitrust enforcement.
17.6 Recommendations and Conclusion
Paying closer attention to the private law aspects of health care can improve antitrust enforcement and market function. When private law arrangements fail or exhibit evidence of market power abuses, antitrust law should intervene. Antitrust scholars, enforcers, and policymakers should analyze private law contracts, transactions, and relationships between health care entities to better predict the evolution of market function. For example, the FTC and DOJ could replicate its recent listening sessions on the effects of mergers on the health care industry by inviting discussions on the impacts of private contracts and agreements arising from the new dynamics in health care, such as vertical, cross-market, cross-industry, and private equity-based combinations.Footnote 59 Policymakers and antitrust enforcers should use this information to improve public and private antitrust enforcement. Several of the insights raised in private antitrust suits or through private contractual relationships between health care entities were recently incorporated into the 2023 Merger Guidelines, which blended guidance for all forms of consolidation (horizontal, vertical, cross-market, and cross-industry) for the first time in decades.Footnote 60 For instance, Guideline 5 specifically addresses concerns arising from vertical acquisitions, Guideline 6 addresses concerns potentially arising from cross-market acquisitions that can extend multi-market power, and Guideline 8 permits antitrust enforcers to review a proposed acquisition in the context of being one part of a series of related acquisitions.
As health care markets continue to consolidate across geographic, product, and industry lines, new participants enter the market with goals beyond providing quality health care, and prices continue to increase, both public and private antitrust enforcement must adapt and evolve to address these new market dynamics. Private antitrust enforcement can serve as the canary in the coal mine by identifying anticompetitive behaviors and developing and testing novel strategies and arguments in court in isolation or in partnership with public antitrust authorities.
18.1 Introduction
Private health insurers have long played a vital role in financing the US health care system. Yet private insurers’ modern role transcends simply paying providers for patient care. Growing recognition of how payment methodologies shape care delivery has generated tremendous interest in leveraging payment reform to address longstanding inefficiencies and quality issues in health care. These problems include health inflation that outpaces general inflation, excessive utilization, fragmented patient care, and preventable medical errors and complications.Footnote 1 In response, private insurers increasingly are embracing value-based payment models (VBPMs)Footnote 2 that incentivize providers to increase efficiency and better manage patients’ health care needs.Footnote 3
VBPMs reward providers who both improve the quality of care delivered to patients and lower health care spending.Footnote 4 For example, pay-for-performance models link providers’ payments to their performance on select quality and efficiency measures, rewarding high performers with bonuses or higher payment rates and penalizing poor performers with downward payment adjustments or other penalties.Footnote 5 Shared savings and bundled payments reward providers who effectively manage a set of procedures, an episode of care, or all health care services by sharing with the providers all or a portion of any cost savings they generate, coupled with upward or downward adjustments for high or poor performance on quality measures.Footnote 6 More advanced population-based payment models, such as per-member-per-month payments or capitation, replace fee-for-service’s volume-based payments with fixed prospective payments that cover all or a range of services, with potential adjustments for a provider’s quality-related performance.Footnote 7
VBPMs have prompted some providers to pivot to care delivery models that emphasize evidence-based protocols, care coordination, and preventive care, such as accountable care organizations and medical homes.Footnote 8 Providers are also exploring care delivery models that take a holistic view of patients’ health and consider not only patients’ physical needs but also social, economic, and behavioral health needs that impact well-being.Footnote 9
Numerous examples of VBPMs successfully incentivizing quality improvements and efficiency gains have generated confidence that VBPMs can drive providers toward more effective care delivery models.Footnote 10 Consequently, private insurers’ utilization of VBPMs can increase society’s general welfare by improving the overall performance of the health care delivery system. So although private insurers are private actors, they arguably undertake a quasi-public role when they employ VBPMs to achieve health care delivery reform.
Yet unlike elected officials and regulators, private insurers perform this role outside the policymaking apparatus of democratically accountable institutions. This state of affairs raises a fundamental question – do the laws overseeing private insurers facilitate their successfully steering the health care system toward improved patient outcomes and reduced spending? This chapter contends that the answer to this question is no. Specifically, it explains that health care finance laws are shaped by private law norms that narrowly focus on relational concerns between marketplace participants and that this results in misaligned payment approaches that hinder providers’ adoption of new patient care models. Consequently, policymakers should shift to a public law framework that would mandate coordinated action across payers when acting as value-based purchasers. Alternatively, payment alignment could be achieved through a single-payer health care system.
18.2 The Private Law Underpinnings of Health Care Finance
Although the line separating private and public law can be blurred, generally speaking private law governs relationships between private individuals or entities while public law pertains to relations between the state and individuals. Private law thus focuses on the horizontal associations among individuals within familial, commercial, or communal contexts, defining the rights, powers, and duties of private parties vis-a-vis one another.Footnote 11 It encompasses not only common law subjects such as tort, contract, and property law but also statutes and regulations that similarly delineate rights and obligations in interpersonal interactions.Footnote 12 Conversely, public law’s object is vertical, addressing individuals as subjects of the state with individual rights and shared responsibilities. It therefore both defines the state’s powers and obligations and individuals’ rights against the state, and promotes collective action by obliging individuals to act in concert with one another.Footnote 13
Despite operating in a web of private contracts with patients, providers, employers, and others, private insurers’ actions have broad social impact by shaping the contours of the health care delivery system. Consequently, we might expect that the laws governing private insurers would encompass both public and private law principles. The laws of health care finance, however, largely reflect private law norms, namely facilitating cooperative endeavors while securing relational justice.
In a nod to the influential law-and-economics movement, many twentieth-century scholars argued that private law should structure interpersonal interactions in a manner that maximizes efficiency.Footnote 14 Consistent with this aim, numerous laws are designed to support a robust health insurance market. Specifically, they generate market confidence in insurers’ willingness and capacity to both provide financial protection for insureds and compensate providers. This is exemplified by strict financial standards for insurers that prevent insolvency, such as minimum capital and reserve requirements. Contract law similarly ensures that health insurers deliver covered benefits to insureds and pay providers promised payments, while consumer protection laws address insurers’ unfair trade and claims practices. Health care finance laws also target market failures hampering the efficient functioning of the health insurance sector. For example, various state and federal laws address information asymmetries between private insurers and consumers by requiring clear disclosure of insurance policies’ terms and conditions.Footnote 15
The emergence of managed care provoked a public backlash that ushered in a new era of health care finance laws. This backlash coincided with various legal commentators questioning private law’s narrow focus on efficiency aims. Scholars such as Hanoch Dagan and Avihay Dorfman argued that private law’s interpersonal focus includes structuring private actors’ duties, rights, and obligations so that parties relate to one another as equals.Footnote 16 Accordingly, private law should remedy significant power imbalances between parties to a transaction and prohibit discriminatory conduct.Footnote 17 This in turn ensures that both parties to an interaction can be “self-determining individuals” who “realize their respective freedoms.”Footnote 18
The “patient rights” mantra similarly framed managed care debates in relational terms.Footnote 19 Proponents emphasized protecting patients from managed care practices deemed unfair, a violation of patient dignity, or an unwarranted interference with the physician–patient relationship. States responded by enacting laws targeting managed care practices that limit patients’ access to needed care. These laws include coverage mandates, standards for utilization review, appeal and grievance processes, and network adequacy requirements. Some state laws also protect the physician–patient relationship from interruption or outside influence by requiring that private insurers contract with “any willing” provider or prohibiting insurers use of contractual “gag orders” that restrict the treatment options physicians can discuss with patients. Various state laws also protect providers from unfair insurer practices, such as laws requiring prompt claims payment.
The Affordable Care Act (ACA)Footnote 20 took further steps in support of relational justice goals. Notably, the ACA targeted practices that stemmed from private insurers’ power advantage over consumers, practices that left many individuals uninsured or underinsured. For example, the ACA prohibits private insurers from rejecting insurance applicants based on their health status, varying premiums based on health status or gender, or excluding preexisting conditions.Footnote 21 The ACA also mandates that individual and small group policies cover a comprehensive bundle of “essential health benefits.”Footnote 22
The laws addressing private insurers’ role as value-based purchasers likewise prioritize relational considerations, namely promoting insureds receiving their promised financial protection against high medical expenses. For example, some states restrict insurers from shifting insurance risk to providers that cannot meet minimum financial viability or solvency standards.Footnote 23 Other state laws dictate that private insurers retain ultimate financial risk for covered benefits, thereby protecting insureds from failed risk-sharing arrangements.Footnote 24
This review of health care finance laws reveals a legal regime primarily shaped by private law norms. Its chief aims are relational – keep the economic wheels turning by generating market confidence in health insurers and ensure that their interactions with consumers and providers are fair and just. The law thus regulates private insurers in their individual capacity and focuses on their discrete, one-on-one interactions with consumers and providers. Private insurers are not regulated as a several engaged in a joint endeavor to reform the health care delivery system through VBPMs.
This narrow focus results in a legal regime that affords private insurers tremendous autonomy in their role as value-based purchasers, as the components of VBPMs – the specific financial incentives and performance measures, patient attribution and benchmarking methodologies, data sharing requirements, and other factors – rarely implicate relational considerations. This leaves the specific terms of VBPMs to private insurers’ independent judgment and the voluntary processes of the marketplace. Consequently, while US payment policy is based in part on publicly adopted Medicare and Medicaid payment rules, it also encompasses thousands of decentralized decisions made by private insurers.
In theory, a legal regime that grants private insurers the freedom to develop their own payment policies promotes the public good through market competition. After all, a free-market economy encourages producers of products and services to achieve a competitive advantage through quality improvements, cost reductions, and innovation. Section 18.3, however, shows that in practice, market competition among private insurers undermines the health reform goals of VBPMs.
18.3 Variation among Payment Models and Its Adverse Effects
In a competitive marketplace, a private insurer’s success depends on it differentiating its health plans from competitors’ plans, particularly on factors related to price and quality of care. Payment methodologies are an important source of this competitive differentiation. Individual payers regularly experiment with new and innovative payment approaches as part of their competitive strategies, aiming to achieve for their insureds both lower health care spending and superior quality care relative to their rivals.Footnote 25 In theory, then, competition among payers and their experimentation with VBPMs should, over time, propel the health care system toward cost savings and better patient outcomes. In reality, however, VBPMs have yielded mixed results,Footnote 26 as few health care providers have fundamentally changed how they care for patients.Footnote 27
Paradoxically, a legal regime that allows private insurers to pursue different payment approaches creates obstacles to VBPMs advancing provider-level reforms. As explained below, a competitive, multi-payer health insurance market results in providers operating in a sea of confusing and conflicting payment rules and incentives. This imposes significant administrative burdens on providers and weakens the business case for their investing in new patient care models.
18.3.1 Administrative Complexity
With the US population insured by numerous public and private insurers, health care providers routinely contract with multiple payers. Providers therefore must manage a range of disparate rules, performance measures, and reporting requirements across numerous payment arrangements. As explained below, this creates a heavy administrative burden for providers that complicates their operations under VBPMs.Footnote 28
Understanding VBPMs and devising strategies for success requires significant staff time and other resources.Footnote 29 Payers’ VBPM specifications often are lengthy and require a provider to adjust their workflow and infrastructure.Footnote 30 For example, providers may need to redesign their patient care models to incorporate evidence-based protocols, emphasize more preventive care, and integrate behavioral health or social determinants of health interventions. Providers also may be expected to develop new care teams of both licensed and nonlicenced care providers.Footnote 31 In addition, providers must redesign their electronic health records systems to accommodate new workflows and build the internal capacity to both analyze their performance under multiple VBPMs and track their numerous requirements.Footnote 32 Finally, providers must develop coherent strategies that promote success across VBPM arrangements. Not surprisingly, many providers report confusion and uncertainty over how best to modify their operations.Footnote 33
Providers cite managing an expanding array of performance measures as a particular source of frustration.Footnote 34 With each payer adopting distinct performance measures, providers must comply with hundreds of metrics.Footnote 35 Doing so complicates providers’ data collection and management efforts, including having to configure electronic health records systems to capture all relevant data.Footnote 36 In addition, because providers cannot simultaneously tackle numerous metrics, they must decide which ones to focus on and which to ignore.Footnote 37 Many providers report struggling with these requirements.Footnote 38
These administrative challenges have slowed providers’ adoption of value-based care models.Footnote 39 For some providers, the time, effort, and expertise needed to manage disparate payment requirements and performance measures is simply beyond their capacity.Footnote 40 For others, the associated administrative costs can outweigh VBPMs’ potential financial rewards.Footnote 41 These challenges have dissuaded many providers from participating in VBPMs.Footnote 42
For providers who do enter into VBPMs, the administrative challenges can complicate efforts to fundamentally transform their operations. As explained by a practice administrator:
We’re so constrained on staff that the time to investigate [each new payment program], the time to do the thinking, the time to ask questions is hard to come by. And so because of that, I don’t think we’re doing it as efficiently as we could A) we’re not getting everything done that we could get done, and B) we don’t have the time to really think about how to do it better.Footnote 43
Relatedly, the administrative cost of participating in VBPMs weakens the business case for providers making significant investments in practice transformation.Footnote 44
18.3.2 Diluted and Conflicting Financial Incentives
When providers participate in multiple VBPMs, interactions among payment models can weaken each model’s effectiveness in two ways. First, covering only a portion of a provider’s patient panel dilutes the financial incentives under each payer’s VBPM.Footnote 45 For example, if a payment arrangement only covers 15 percent of a provider’s patient panel, the arrangement’s prospective financial rewards may be of insufficient magnitude to prompt the provider to transform their practice. Now, in theory, alignment across multiple VBPMs could yield sufficiently large financial incentives in the aggregate to motivate practice transformation. Unfortunately, in markets with “many competing payers all going it alone, these conditions are seldom met,”Footnote 46 as payers vary in their own readiness to implement specific VBPMs.Footnote 47
Second, when providers treat a combination of patients attributed to VBPMs and fee-for-service arrangements, they face conflicting financial incentives that complicate their transitioning to value-based care models.Footnote 48 Fee-for-service incentives that encourage higher volume and care intensity can blunt VBPM incentives to reduce costs, utilization, and intensity.Footnote 49 For example, VBPMs that reward a health system’s physicians for reducing hospital admissions and ER visits can harm the financial well-being of the system’s hospital.Footnote 50 Fee-for-service and VBPM arrangements also encourage different clinical care approaches. Specifically, fee-for-service’s volume-driven incentives encourage seeing patients quickly,Footnote 51 whereas advanced VBPMs require longer patient visits that allow for fully exploring patients’ needs and providing in-depth patient education.Footnote 52 These considerations can greatly weaken the financial rewards of transitioning to new patient care models, as providers who do so may incur declining revenue under their fee-for-service arrangements. Finally, rather than investing in practice transformation, providers with both fee-for-service and VBPM contracts can simply make up any lower VBPM revenue by increasing care volume or intensity for fee-for-service patients.Footnote 53
In sum, while a decentralized approach to health care finance has facilitated payment innovation, this experimentation has not spurred meaningful health care delivery reform. True change instead requires a coordinated approach that harmonizes payment models across payers.
18.4 Efforts to Harmonize Payment Approaches through Voluntary Alignment
Policymakers increasingly recognize the need for payment alignment. Yet this recognition has not produced a public law paradigm for health care finance, with legal mandates used as a tool for coordinating payers’ payment approaches. Federal and state agencies instead have developed multi-payment alignment initiatives (MPAIs) that facilitate payers voluntarily aligning their VBPMs.Footnote 54 For example, payers participating in MPAIs could adopt a common set of performance measures or a uniform patient attribution methodology. Regulators believe that MPAIs can increase the percentage of patients covered by similar payment rules and incentives, thereby lowering providers’ administrative burden and improving the business case for participating in VBPMs.Footnote 55 Unfortunately, MPAIs are unlikely to achieve these objectives.Footnote 56
MPAIs may appeal to payers seeking to amplify their individual efforts to reform the health care delivery system.Footnote 57 Successfully doing so could lead to lower health care spending and higher quality care, boosting participating insurers’ profit margins and giving them a competitive advantage over nonparticipating insurers. However, because providers generally treat their patients similarly, any patient care improvements stemming from greater payment alignment would benefit all payers, including those not participating in an MPAI. Private insurers participating in MPAIs therefore may derive little if any competitive advantage over other insurers.Footnote 58
Additional considerations may dissuade private insurers from joining MPAIs. The benefits of MPAIs are limited when the participating payers collectively cover too few patients to nudge providers toward practice transformation. This concern can deter potential MPAI participants, creating a vicious cycle. A private insurer also may doubt whether MPAI participants can reach consensus, given marketplace rivalries and likely disagreement over payment strategies.Footnote 59 Finally, logistical and financial constraints, such as the burden of switching to new payment methodologies, can further erode the case for MPAI participation.Footnote 60 Consequently, MPAIs have had limited success in lowering the barriers to providers adopting value-based care models due to limited payer participation in MPAIs.
18.5 Conclusion
Health care finance law, with its private law foundation, largely centers on ensuring that private insurers honor their financial commitments and treat insureds and providers fairly. This narrow relational focus leaves insurers free to develop divergent payment policies based on their own individual priorities and self-interest. In particular, private insurers have embraced a range of value-based payment approaches designed to nudge providers toward more effective patient care models. Unfortunately, these efforts have failed to produce meaningful health care delivery reform, as payers’ misaligned payment strategies create obstacles to practice transformation at the provider level. Moreover, various competitive and logistical considerations have impeded attempts to harmonize payment approaches through voluntary payer collaborations.
Efforts to improve the quality and efficiency of patient care through payment reform will prove futile absent greater alignment across VBPMs. Yet a private law approach, with its emphasis on individual rights and bilateral relationships, falls short of eliciting the necessary coordinated action among payers. Public law, however, can transcend this collective action problem by using the law to coordinate payment policies across the health care sector. In addition, a public law paradigm would take a holistic view of the health care system and promote payment policies rooted in collective goals rather than private insurers’ self-interest.
A public law approach to health care finance could be achieved in one of two ways. First, regulators could follow the lead of Rhode Island and implement a mandatory cooperative scheme that requires private insurers to operate in concert with one another and with public payers. For example, in order “to ensure consistency in the use of quality measures” across payer-provider contracts, Rhode Island limits insurers to a common set of performance measures.Footnote 61 Rhode Island similarly mandates that all insurers pay primary care practices that meet regulatory guidelines for patient-centered medical homes a per-member-per-month fee for care management services and infrastructure.Footnote 62 Alternatively, a single-payer system built around a government insurance plan would, by definition, apply uniform payment rules and processes across a provider’s patient panel.Footnote 63 Choosing between these two options raises complex issues beyond the scope of this chapter, such as questions about comparative institutional competence, value trade-offs, federalism concerns, and political and economic feasibility. Nevertheless, reforming the health care delivery system demands a paradigm shift in our regulatory approach to private insurers, one that moves beyond traditional private law norms. It is thus imperative that future policy conversations about health care finance occur within a public law framework.
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