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April 18, 2011 Articles

Preserving Copayments and Deductibles to Contain Healthcare Costs

Courts are allowing providers to effectively defraud insurers by allowing them to shirk their obligation to collect copayments.

By Andrew O. Bunn and Wilson D. Antoine

Whenever a third party is called on to pay costs or benefits on behalf of another—for example, when the government pays for public benefits for a citizen or a private insurer pays for a loss incurred by its insured—there is an opportunity for fraud and collusion between the person providing the benefits and the recipient. Whether submitting fraudulent Medicare invoices for reimbursement or making false claims to a private automobile insurer for personal or property losses that did not actually occur, those who pay benefits and claims utilize mechanisms to ensure bona fide claims and minimize or eliminate increased costs caused by fraudulent submissions.

Efforts to contain healthcare costs—and the fraudulent and other practices that unnecessarily increase those costs—are more prominent than ever. In addition, the new expansive federal healthcare legislation passed in May 2010 increases costs to provide more comprehensive and inclusive coverage to patients. Therefore, health insurers will increasingly have to rely on litigation options to combat fraudulent practices that put additional upward pressure on premium rates.

Traditionally, healthcare insurers have attempted to limit unnecessary or excessive healthcare claims from their individual customers by imposing copayments or deductibles to, among other things, serve as reminders that care has a cost and that each customer has some responsibility to seek cost-effective treatment. The patients’ shares of the cost of the treatment or consultation are material in that the copayment system gives insureds “skin in the game,” allowing them to feel the cost of the benefits they receive and reduce excessive or unnecessary medical services. Unfortunately, these copayments or deductibles are frequently waived or remain purposely uncollected or unenforced by healthcare providers in an effort to increase lucrative office visits and more costly medical procedures. As a result, state legislatures and Congress have lent support to insurers to aid them in enforcing copayment systems, and insurers are attacking these practices in court as fraudulent, with some success. As insurers face pressure to contain premium increases and the federal health reform provisions begin to take effect, we can expect an increase in creative litigation to hold providers accountable for undermining the insurance industry’s efforts to control runaway healthcare costs.

Copayments, Deductibles, and Provider Networks
The principle underlying a patient’s obligation to make medical copayments (also referred to as “co-insurance”) and pay out-of-pocket health insurance deductibles rests on the simple economic theory that when people perceive a limit to their resources, they will use those resources when and in the amounts needed. Conversely, when consumers do not recognize a limit to their resources, they tend to use them inefficiently and without efforts to contain costs. Without a copayment or deductible, the patient may view medical care as being unlimited. In exchange for a set insurance premium, the patient may obtain as many medical services as he or she desires. As a result, many patients do just that, obtaining medical treatment and procedures without concern for whether those services are overpriced or actually necessary. This has a very predictable (and real) effect on costs for all patients: The over-consumption of medical services increases the cost of the premiums for all policyholders as the additional cost is distributed among all premium payers, regardless of usage.

To balance the consumer’s desire for choice against the insurer’s need to contain costs, insurers often offer a choice between health plans providing services “in-network” and those providing “out-of-network” coverage.[1] As part of the participating provider’s written agreement with the insurer, the provider agrees to be subject to certain cost controls, such as requiring precertification before rendering services, billing insureds for and collecting copayments and deductibles, and accepting a lower “allowed amount” as payment in full for services provided to plan members.[2] These plans usually require some type of nominal copayment by the insured and are significantly cheaper than out-of-network coverage. Everyone receives some benefit: In addition to the cost-reduction for insurers, individual patients pay a lower premium, and participating providers get more patients because their services are more affordable than nonparticipating providers.

By contrast, out-of-network coverage allows patients to have unlimited choice and select a provider of their choosing. The insurer has no direct way—i.e., through a contract—to control the nonparticipating provider’s collection of copayments or deductibles or limit the amount a provider can charge for healthcare services. A copayment is still required of the patient, and insurers tend to require a deductible, ranging from $500 to $2,000, which must be paid before the insurer will reimburse the insured for the remaining costs of services received outside the approved network. Providers are encouraged to join an insurer’s network or “healthcare plan” to obtain direct payment from the insurer in lieu of waiting for payment directly from patients. The insurer’s plan gives the provider a reliable source of payment without having to chase the patient for money or argue with the patient over the amount that the provider charges for services. Joining a network also gives the provider access to a larger pool of potential patients. Nevertheless, many providers have undermined this system by waiving copayments and deductibles to increase their economic productivity and improve the relationship with their patients.

Contractual Waiver of Copayments and Deductibles
For almost 20 years, insurers have attempted in courts to combat the waiver of copayments, arguing that the providers are perpetrating a fraud on insurance companies.[3] The standard and precedent most often referred to in such cases is Kennedy v. Connecticut General Life Insurance Co.[4] In Kennedy, the U.S. Court of Appeals for the Seventh Circuit affirmed the utility of copayments in that they “sensitize employees to the costs of health care, leading them not only to use less but also to seek out providers with lower fees.”[5] The Seventh Circuit also recognized that providers can pass the cost of waiver onto insurers by fraudulently inflating the price of their services. In these scenarios, the patient essentially pays nothing, which gives the out-of-network provider, and in some cases the in-network provider, an unfair economic advantage.

In terms of in-network providers, routine waiver is an express violation of the contract between the provider and insurer. For out-of-network providers, routine waiver is a violation of the rules of assignment of claims. When insurers pay providers outside an approved network directly, it is usually through an assignment of a patient’s claim pursuant to the insurance policy, meaning that the provider steps into the shoes of the patient and has no greater right to reimbursement than the patient has.[6] That being said, the insurer agrees to pay a percentage of the fee that the insured actually has to pay, not a percentage of the market value or listed cost of the services.[7] Consequently, if the amount actually paid by the patient is reduced, the amount to be paid by the insurer should also be reduced. For example, if the patient pays a total fee of $100 with a 20 percent copayment, the insurer agrees to reimburse the patient for the balance of $80. However, where the provider agrees to waive the copayment of $20 and only charges $80, the insurer is not required to pay the entire $80 balance; rather, the insurer is only required to reimburse the patient for what was charged ($80) minus the 20 percent copayment, for a total of $65. Under the second scenario, if the patient assigns the provider the right to reimbursement, and the provider requests the full $80 from the insurer, the provider’s request has exceeded the amount contractually owed by the insurer, which insurers contend is fraudulent under state law.

It is generally accepted that the routine waiver of copayments required by insurance contracts is illegal and fraudulent. The American Medical Association (AMA), American Dental Association (ADA), and American Psychological Association (APA) have all held in ethical opinions or articles that the routine waiver of copayments or deductibles is unethical, illegal, or both.[8] Likewise, the U.S. Department of Health & Human Services has issued fraud alerts, clarifying that the routine waiver of copayments and deductibles under Medicare and Medicaid constitutes fraud and may violate the federal anti-kickback statute.[9] Even local medical associations have recognized that systematic waivers can result in federal and state legal penalties.[10]

Just as the federal government has taken steps to protect against the persistent waiver of copayments and deductibles, a number of states have statutes that implicitly or explicitly prohibit the practice. In fact, five states have adopted the Insurance Fraud Prevention Model Act, which implicitly makes the routine waiver of copayment illegal. A total of 47 states and the District of Columbia—excluding only Wyoming, Vermont, and Mississippi—have taken at least some measures to explicitly or implicitly make routine waiver illegal.[11] New York has addressed this issue through the state Insurance Department’s general counsel, who issued an opinion letter stating that if waiver of copayments is employed as a “common business practice, the health care provider may be found guilty of insurance fraud in violation of Article 4 of the N.Y. Ins. Law.”[12]

Similarly, the New Jersey Insurance Fraud Prevention Act (NJIFPA), like many other insurance fraud prevention statutes, implicitly outlaws the routine waiver of copayments and deductibles. Under the NJIFPA, it is a violation to make a false or misleading statement or fail to disclose the occurrence of an event that is material to a claim for payment or benefits.[13] Because the waiver of a copayment or deductible affects the collection and payment of benefits, insurers can and have argued in court that waiver is an event that needs to be disclosed. Similarly, an insurer can require a provider or an assignee to furnish a written statement that the copayment has been collected. In either case, if waiver has occurred, the misrepresentation or nondisclosure is a violation of the NJIFPA. If waiver is disclosed, the insurer is now in a position to deny or reduce the payment of benefits based on the phrasing of the insurance policy or contract. Notably, the New Jersey legislature is currently considering an amendment to the NJIFPA that would make routine waiver an express violation of the statute’s civil and criminal liability provisions.[14]

Possible Loopholes and Potential Solutions
Unfortunately, recent judicial decisions are threatening to unwind much of the previous headway made in deterring fraudulent waiver. Interestingly, the Seventh Circuit—the first appellate court to identify the importance of enforcing the copayment system in the Kennedycase—more recently held in Trustmark Life Insurance Co. v. University of Chicago Hospitalsthat a provider’s mere noncollection of a copayment or deductible may not be actionable.[15]

This “collection exception” created by the Seventh Circuit is illustrated by a recent unpublished case from New Jersey, Garcia v. Health Net of New Jersey, Inc.[16] Garciainvolved a nonparticipating provider that asked patients to assign their right to be reimbursed for the cost of services. The assignment contract also made clear that the patients remained liable for whatever portion of the bill was not reimbursed by the insurer. However, after assignment, the provider would not pursue collection of the copayment at all. In fact, the provider only pursued the copayment if the insured did not assign the right to be paid directly by the insurer.[17] The New Jersey Chancery Division and Appellate Division both held that the insurer could not withhold benefits because the patient remained legally liable and the provider merely failed to exercise its right to collect the amounts due.[18]

The problem presented by the decision in Garcia is that it allows a provider to engage in de factowaiver through willful noncollection in lieu of contractual or de jurewaiver. The provider can still obtain all the benefits of contractual waiver and cause all of its negative effects by merely writing on a piece of paper that the patient is legally responsible for payment. Meanwhile, the unspoken agreement between the patient and provider is that the patient need not pay any deductible or copayment. The New Jersey courts have failed to protect against this kind of fraud.

As this issue is litigated in future cases, insurers will likely focus on patterns of waiver to show that the written contract is a sham or that the provider is trying to perpetrate a fraud by effecting de facto waiver. At the appellate level, insurers will need to draw attention to the fact that overly broad “collection” exceptions undermine the copayment system, and insurers should suggest good-faith tests or push for the narrowing of any such exception to preserve the copayment system. Insurers may also seek to modify the terms of policies and provider agreements by tightening the language used. For example, many insurance companies currently phrase their obligation to pay benefits as a percentage of what the insured is “legally obligated to pay.” A more effective approach may be to define the insurer’s obligation as a percentage of what the insured actually pays, unless genuine financial hardship is shown to justify waiver of the copayment.

Notwithstanding the setback posed by the collection exception, the general consensus appears to be that the routine waiver of copayments and deductibles is harmful to the healthcare system in the form of less patient responsibility and increased costs. The suppression of such fraud is necessary if healthcare costs are to be contained without government-imposed price controls.

Courts are increasingly allowing providers to effectively defraud insurers by allowing those providers to shirk their obligation to collect copayments and unofficially or implicitly waive them. More steps should be taken to make waiver, both de jure and de facto, explicitly illegal, except in the case of financial hardship, so as to further reduce the administrative costs that insurers incur in trying to police such behavior.

In the interim, insurers must continue to deal with these issues through the courts. To make these efforts more effective, insurers need to strengthen their position by taking steps such as including nonassignment clauses, expressly forbidding the payment of benefits to those who display a pattern of waiver, and requiring some type of proof of compliance with the “nonwaiver of copayment” provisions of the policy.

Keywords: litigation, business torts, copayment, deductible, healthcare

Andrew O. Bunn and Wilson D. Antoine – April 18, 2011

Copyright © 2011, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).