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The friction between medical providers and motor vehicle/automobile insurers over appropriate reimbursement for billed medical services is not new, but a startling ruling from the U.S. Court of Appeals for the Third Circuit allows “usual and customary” rates to be significantly different from the prices charged by the vendors that regularly seek reimbursement from insurers. The Supreme Court of Pennsylvania affirmed that the insurer was not limited to determining “usual and customary” charges based on the provider’s bill or data collected by the carrier or intermediaries.

This ruling stems from a lawsuit arising in Pennsylvania, where “usual, customary and reasonable” cost of necessary medical service that insurers must pay is governed by the Motor Vehicle Financial Responsibility Law (MVFRL). The MVFRL permits a provider to accept up to 110% of the schedule price for products or services listed in the federal government’s Medicare Fee Schedule. If not listed on the schedule, the amount of payment may not exceed 80% of the provider’s usual and customary charge. 75 Pa. Cons. Stat. §1797(a). The MVFRL defines “usual and customary” as the charge most often made by providers of similar training, experience and licensure for a specific treatment, accommodation, product or service in the geographic area where the treatment, accommodation, product or service is provided. 31 Pa. Code § 69.3.*

The Plaintiff in the case, Freedom Medical Supply Inc., is a medical equipment supplier who was upcharging the Defendant insurance company by one thousand percent, who was paying the appropriate 80% of this “usual and customary” charge. A skeptical adjuster performed an independent investigation that revealed the magnitude of the inflation based on prices from local retailers such as Bed Bath & Beyond. The Defendant reduced its payments to 80% of the actual price of the products as discovered in the local retail stores where the Plaintiff was purchasing the supplies.

The Plaintiff presented an “either/or” argument that, under the MVFRL, there are only two ways to calculate “usual and customary charge”, first, by paying the requested amount on the provider’s bill or, second, by analyzing the data collected by the carrier. “Carrier” is defined as the entity that processes claims on behalf of the government, so the Plaintiff argued that the insurer’s investigation of local prices could not satisfy these standards. (The carrier is not an insurance carrier, but rather an organization that contracts with the federal Health Care Financing Administration to process Medicare Part B claims, and the “intermediaries” are organizations that contract with the FICFA to process Medicare Part A claims. These federal contractors collect data on Medicare procedure codes and Medicare payments, which insurers may obtain at cost. See 31 Pa. Code § 69.41.)

Although, the language of “may” as opposed to “shall” clearly imparts discretion, the parties’ dispute concerns the object of that discretion. The Plaintiff argues that the discretion applies to ability to choose one of the options given, while the Defendant argues that it applies to the discretion to choose those methods or others. The Defendant simply argued that the plain language of § 69.41 was permissive, not mandatory.

The District Court of Pennsylvania granted summary judgment to the Defendant. Specifically, the District Court found that the use of “may,” instead of “shall,” clearly imparted discretion on an insurer to determine how to make its calculation of usual and customary charges predicated on the bases provided therein. It found that these methods were “illustrative not mandatory”, and that the insurer’s method was reasonable. The vendor appealed.

The Supreme Court of Pennsylvania found that the statute was ambiguous and that the District Court ruling is the one that is most in keeping with the MVFRL’s goals of providing coverage for injured persons and providing it at a reasonable cost to the purchaser. It further explained that the vendor’s approach would “lead to unjustified inflation of charges…exhausting accident victims’ coverage limits, and potentially depriving them of benefits for further necessary medical expenses, as well as increasing automobile insurance rates.” Freedom Medical Supply, Inc. v. State Farm Fire and Cas. Co., 131 A.3d 977 (Pa. 2016) The Supreme Court answered the question of permissive or mandatory methods, but it did not address whether the alternative approach satisfied the requirements of the MVFRL.

The Plaintiff then argued that the retailers that were part of the insurer’s investigation (i.e. Bed Bath & Beyond) did not qualify as “providers” under the language of the MVFRL, and that they are were not part of the industry. The Plaintiff claimed to be at the mid-point of prices charged by competing vendors in the insurance market, and that the “usual and customary charge” was determined without reference to the prices charge by any of those vendors. The Court of Appeals disagreed, and concluded that “in order to conduct unbiased research of average prices not subject to inflation, it was necessary to examine providers not involved in the insurance reimbursement process.” Id.

The opinion of this case is not precedent setting on a national level. Regardless, it is important to understand because insurers will have strong incentive to cite this case in the future as the Third Circuit implicitly found that the durable medical equipment game had been rigged against insurers.  Please contact our firm if you have any questions about how to maximize reimbursement to your hospital or practice from auto insurance carriers.

*Please note that the attorneys of Jorge M. Abril, P.A. are only licensed to practice law in the state of Florida.  Those seeking advice or counsel on topics relating to this Pennsylvania statute should consult with an attorney licensed in Pennsylvania.
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