Health Care's Actual Costs Versus Their Reasonable Costs: Insights From the New England Journal

You can't fight City Hall, the State Capital or Washington. Not when it's not 'reasonable.'

Right after an embarrassingly self-promoting and one-sided political treatise by Senator Max Baucus (the link is undeserved, that's how awful this is), there is a far more telling November 5 New England Journal of Medicine article by Wendy Parmet titled 'Litigation Amidst Reform - The Boston Medical Center Case.' It reviews how BMC elected to go to court even as Massachusetts' ballyhooed health reforms were being implemented.

BMC, unlike its more profitable neighbor hospitals, has a mission of treating the poor, the uninsured and, by extension, those with Medicaid. When the State altered the safety net hospitals' payment methodology as part of its reform, BMC decided to sue. It used several arguments: 1) safety net funds that had been previously authorized were still owed, 2) demanding services without just compensation is akin to the taking of property and 3) there is legal precedent that requires that the State meet the hospitals' financial requirements.

Not so says Massachusetts. Its filings in response to the suit indicate that the funds that have been authorized have been paid in full. What's more, they argue that BMC has long agreed to accept Medicaid payment rates - period. What really caught the Disease Management Care Blog's eye, however was another novel arugment from the State: the law only requires that hospitals be paid their reasonable costs, not their actual costs.

Ms. Parmet suggests BMC has an uphill fight on its hands. State courts have been generally deferential to their health agencies in these matters. Many scholars have pointed out that the Constitutional prohibition against the unreasonable seizure of property does not extend to 'services.' Finally, while there was a part of Federal law that required 'reasonable and adequate' payment rates under the 'Boren Admendment,' that inconvenience was repealed years ago.

The distinction between reasonable and actual has been enough to give the DMCB a head cramp. If a course of treatment for cancer 'costs' $100,000, should the reasonable cost or the actual cost be covered? While commerical insurers and their slim 3.3% profit margins may pay a negotiated payment for $100,000 services (which essentially boils down to an actual cost), should a government with sovereign immunity be allowed to define reasonable payment levels? If the government deems a hospital bill as 'unreasonable,' should commerical insurers have the same option? What precisely is the definition of 'reasonable' anyway? Cost of capital and labor plus a small profit margin (like 3.3%)? Or, anything that results in an extension of life at a price equal to or less than consensus opinion? If many insurer-provider contracts are based on a percent of prevailing Medicare rates, what happens if the AMA Relative Value Scale Update Committee turns from being 'fair and accurate' to being 'reasonable?' While the current legislation before Congress has the proposed Public Plan negotiating rates with providers, is there any chance that elements of that will be repealed like the Boren Amendment?

While the DMCB was struggling with this, it turned again to the DMCB spouse for her always unique insights. Pointing out that the DMCB has needs, it asked if its actual or reasonable needs should be met.

Her unhelpful response: there is an important difference between 'needs' and 'wants' and both are only sometimes reasonable.