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ABA Health eSource
 May 2005 Volume 1 Number 9

California Supreme Court Limits Preferred Provider Hospitals' Ability to Assert Statutory Liens For Medical Services
by James A. Toto, Esq., Sedgwick, Detert, Moran & Arnold LLP, Los Angeles, CA

James A. TotoIn a recent decision, the California Supreme Court limited the ability of California hospitals to recover for services rendered to their patients in connection with injuries caused by third-party tortfeasors. In Parnell v. Adventist Health System/West, 2005 Cal. LEXIS 3487 (April 4, 2005), the Court unanimously held that a hospital may not assert a statutory lien to recoup the difference between the amount of the hospital’s “reasonable and necessary charges” for medical services and the amount which it has agreed to accept from a patient and his or her health plan as “payment in full” for those services.

Hospital Lien Act

Under California’s Hospital Lien Act (“HLA”), Civ. Code §§ 3045.1-3045.6, a hospital that provides medical services to a person injured by an accident or wrongful act may place a lien on the damages recovered from the tortfeasor “to the extent of the amount of the reasonable and necessary charges of the hospital.” Civ. Code § 3045.1. Such a lien is limited to 50% of the potential recovery that the injured person may recover from a tortfeasor. Under the statutory scheme, a hospital must provide notice of the lien to the tortfeasor. Civ. Code § 3045.3. If the tortfeasor then makes payment to the injured person without satisfying the lien, the tortfeasor is rendered liable to the hospital for the medical care and services rendered to the injured person. Civ. Code § 3045.4.

Parnell Decision

In Parnell, the Court considered the applicability of the HLA where an injured patient is an enrollee of a health plan which has negotiated a discounted rate for services provided by a hospital. The plaintiff in Parnell (“Plaintiff”) was an enrollee of a health plan which had contracted with a preferred provider organization (“PPO”) to receive discounts on medical services provided to its members. Plaintiff was injured in an automobile accident and treated at a hospital which was a preferred provider within the PPO network. The hospital’s contract with the PPO provided that the hospital would accept a stated amount “as payment in full” for treatment rendered to PPO beneficiaries. This amount included payments by the health plan and co-payments and deductibles to be paid by the beneficiaries themselves.

After Plaintiff’s accident, Plaintiff’s health plan reimbursed the hospital for his medical services and Plaintiff paid all applicable deductibles and co-payments. The hospital then filed a notice of lien against any judgment or settlement made between Plaintiff and the tortfeasor responsible for his injuries. The hospital sought to recover the difference between the “actual” cost of the medical treatment and the discounted amount it received from Plaintiff and his health plan pursuant to the hospital’s contract with the PPO.

The Court held that the hospital could not recover on its HLA lien because, under the circumstances presented, no underlying debt existed between Plaintiff and the hospital. In reaching this decision, the Court concluded that the relationship between a patient and a hospital for the purposes of the HLA is essentially that of “creditor-debtor.” It further determined that a lien under the HLA is “simply a legal claim upon the property of another in satisfaction of a debt owed by a patient for medical services provided by the lien claimant.” Id. at *26. The Court concluded that a hospital cannot recover on a HLA lien absent an underlying debt between a patient and a hospital. Because the payments made by Plaintiff and his health plan discharged Plaintiff’s debt to the hospital, the hospital could not assert a lien for the additional amount sought.

Although the Court ruled against the hospital in Parnell, it nevertheless took notice of the “mounting financial pressures” that many hospitals face. Id. at *34. Moreover, the Court expressly recognized that its decision would likely result in further financial hardship for these hospitals. In an attempt to limit this undesirable consequence – and in what is arguably dicta – the Court emphasized the limited scope of its decision. In fact, it stated that neither its decision, nor relevant portions of the Insurance Code (Ins. Code § 10133.2) and Health and Safety Code (Health & Saf. Code § 1373.18) preclude hospitals from contractually preserving their right to recover “reasonable and necessary charges” through a HLA lien. Id. at *35, n. 15.

Practical Effect

The Parnell decision effectively caps a hospital’s recovery under a HLA lien at the amount negotiated by their patient’s health plan or PPO—at least where the hospital’s provider contracts state that they will treat this amount as “payment in full” for the medical services rendered. Given the Court’s indication that hospitals may be able to preserve their ability to recover “reasonable and necessary charges” through a HLA lien by contract, one can expect that many hospitals will attempt to amend their existing provider agreements. By eliminating or modifying the “payment in full” language at issue in Parnell hospitals may be able to demonstrate that a debt exists between a hospital and a patient despite the hospital’s receipt of a discounted payment for services by a patient and his or her health plan. Hospitals and health plans should carefully consider this issue as they negotiate and enter into the next generation of discounted rate agreements.