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Hospital Liens and the Reasonable Value of Care

June 9, 2022 

Michael Walrath, Esq.

The “reasonable value” of healthcare is an issue that weaves throughout our entire system. Even so, there’s no concrete definition of what exactly is “reasonable value”. Dr. Gerard Anderson of Johns Hopkins University School of Public Health has defined it as 40% to 45% above the cost of care[1]. No-fault insurance statutes in many states define reasonable value in their fee schedules for accident care.[2] Certain TPA’s managing employer-based health plans peg reimbursement at a “reasonable value” defined as a stated percentage above Medicare rates in their plans (often called “Reference Based Pricing” or “RBP Plans”).[3]  Meanwhile, hospital systems and the largest insurers enter into complex Provider Agreements, agreeing in advance to what both parties agree is reasonable reimbursement for hundreds of millions of covered lives in the United States.

Reasonable value of health care also appears, in personal injury actions as evidence of medical special damages caused by a tortfeasor, but under a slightly different definition. The definition of “reasonable medical damages” (the amount owed by a tortfeasor for the medical specials incurred by his or her victim) is arguably distinguishable from the amount owed to a hospital, by a patient. While a certain nexus does obviously exist, other evidentiary issues and considerations exist in tort cases, which do not exist in the simpler, more direct “payer-provider disputes” which are more akin to the hospital lien scenario.   

All States and even Hospitals, are Different

The legal framework around hospital liens is set by statutes and case law interpreting them and varies widely from state to state. Forty states, and the District of Columbia, have enacted hospital lien statues.[4] Because all states are so very different, you must follow the law and the facts of your case, when determining whether a hospital lien is attached to an injury settlement, and in developing the best strategy for reducing hospital liens and debts.

For example, California hospitals enjoy liens against injury recoveries by statute (§3045), which are limited to the lesser of “reasonable hospital charges” or 50% of a limited recovery. The burden is on the hospital to prove the “reasonableness” of its charges when seeking interpleaded funds. Not surprisingly, California law is largely consumer-friendly, in this regard, holding “[t]he full amount billed by medical providers is not an accurate measure of the value of medical services because many patients pay discounted rates, and standard rates for a given service can vary tremendously, sometimes by a factor of five or more, from hospital to hospital in California.” Therefore, the statute requires “that the charges for such services were reasonable.” State Farm Mut. Auto. Ins. Co. v. Huff, 216 Cal. App. 4th 1463, 1464 (2013). Conversely, Ohio is one of the nine states with no statewide lien statute, but the common law is similarly friendly, holding that “[i]t is a settled general rule that a physician or surgeon is, in the absence of an agreement as to the amount of his compensation, entitled to recover the reasonable value of his services. Miami Valley Hosp. v. Middleton, 2011-Ohio-5069, ¶ 1 (Ct. App.); however, the case goes on to cite Supreme Court authority suggesting “customary charges” (i.e., full billed charges) are prima facia evidence of reasonable value absent evidence to the contrary.  

Another example of state law diversity can be found in Florida. Florida hospital liens are a creature of County Ordinance, with only nine of the state’s sixty-seven counties enjoying valid, ordinal lien rights. This is after many counties lost their rights pursuant to the Supreme Court of Florida’s opinion in Shands v Mercury[5] which struck down as unconstitutional, all county lien laws created by Special Act of the Florida Legislature, . Consequently, many Florida hospitals (and indeed hospitals in many other states) have elected to simply create hospital liens against third party recoveries, by contract.

Another state with no statewide lien statute is Pennsylvania. The Superior Court of Pennsylvania has held:

Where, as here, there is no express agreement to pay, the law implies a promise to pay a reasonable fee for a health provider’s services. Eagle v. Snyder, 412 Pa. Super. 557, 604 A.2d 253 (Pa. Super. 1992). Thus, in a situation such as this, the defendant should pay for what the services are ordinarily worth in the community. Id. Services are worth what people ordinarily pay for them… Under the law, the Hospital is entitled to the reasonable value of its services, i.e., what people pay for those services, not what the Hospital receives in one to three percent of its cases. Accordingly, the damage award in this unjust enrichment action simply is unwarranted. In light of the applicable law, the Hospital should be awarded its average collection rate for each year in question. This value would be reasonable. 

Temple Univ. Hosp., Inc. v. Healthcare Mgmt. Alts., Inc., 2003 PA Super 332, ¶¶ 26-27, 832 A.2d 501, 508 – 509.

As a final example of lien law diversity, I turn to Maryland and Virginia. Maryland does have a lien statute which limits liens to reasonable charges, but Maryland is the last of the “all payer” states. Accordingly, in simplified terms, all Maryland patients pay essentially the same amount whether insured, on Medicare, or self-pay Hospital charges in Maryland are vetted and approved by a State Commission, making “reasonable value” arguments nearly impossible. Virginia actually has two different hospital lien statues; one for hospitals operated by the Commonwealth, and a second for all other hospitals. Commonwealth hospital liens are not limited to “reasonable charges” in the main section of the statute, but enforcement provisions limit collection to “reasonable charges.” So arguably, reasonableness is required. Unfortunately, the Attorney General’s Office, who collects upon Commonwealth liens in Virginia, does not agree and insists on full billed charges unless an equitable distribution of a limited settlement is required.

As these diverse examples illustrate, it is critically important to follow the law and facts of your case, in the hospital’s jurisdiction, when it comes to determining the validity of a lien against a given recovery, and the legal definition/interpretation of “reasonable value.”

Reduction Strategies – What IS “Reasonable Value,” Anyway?

Over the past fifteen years, I have worked with and presented to hundreds of lawyers and law firms, in Florida and more recently, nationwide. Despite the previously explored legal diversity regarding the validity of liens and the common-law interpretation of reasonable value, lawyers tend to approach hospital lien negotiations in a surprisingly similar way.  This is basically, a “blind” negotiation of the amount allegedly due, seeking a “discount” from full billed charges. Both sides, unfortunately, frame reductions as “discounts,” as if full billed charges are owed merely because the hospital wrote them on the lien. If nothing else, this semantic misstep sets the wrong tone, and hands all the negotiation leverage to the hospital. Under the statutes, ordinances, and the common law of all but a few states, the true power paradigm is the exact opposite. Patients and their attorneys have the money, and the law expressly limits hospitals to “reasonable charges” and saddles the hospital with the burden of proof. The only proof of reasonableness a hospital can ever muster is that they charge everyone the same rates. However, as we know, less than a few percent of patients pay those amounts and overcharging everyone equally isn’t evidence of reasonableness, anyway. Shockingly, personal injury attorneys allow themselves to be lumped in with those few percent and request “discounts” as if the hospitals are granting favors. Simply put, reframe the negotiation; put you and your client properly in the driver’s seat where you belong.

I start most presentations by asking injury firms what their average reductions are. The typical, average responses are, 1) we never accept less than a 20% discount, 2) a thirty percent discount is about average, and 3) a forty percent discount is a homerun, and we’ll recommend accepting it. Understandably, many clients are indeed happy with a 40% reduction in the amount initially shown on the Closing Statement, especially on large billsas that reduction can be a substantial amount of money. And for the avoidance of doubt, these are average results from years of questions, this is normal so if they sound familiar, that is not a bad thing. However, I do want to share why and how there are deeper reductions available.

“Inverting the Argument”

The answer is simple in theory, a bit more complex in practice. Theoretically, reduction results (notice I do not call them “discounts”) are better when you negotiate “up” from reasonable value of care that is due and owing under most state law, rather than down from the unilateral, arbitrary, and unreasonable full billed charges which nobody ever pays.  

In practice, this theoretical shift requires definition and calculation of the reasonable value of the care rendered. While more complex than simply proceeding with negotiations without any data at all, defining reasonable value and calculating it are not impossible. Case law in most states, and leading hospital billing experts suggest that the “cost” of treating patients, is a reasonable benchmark. Accordingly, a workable definition of reasonable value, and in my opinion the easiest definition of “reasonable value” for Judges and lay-people alike to understand, is “cost of care plus a reasonable profit.” And thankfully, cost of care in the hospital setting is calculable.

Every hospital which accepts Medicare patients (which, because hospitals must treat everyone seeking emergency care, effectively means every hospital in the US) submits, annually, a Hospital Cost Report (CMS Form 2552-210). These Reports contain data detailing the costs incurred and charges billed by every department and can be used to estimate the “cost of care” of any given line item of service on any hospital bill. What is the reasonable value of a CT Scan at Jackson Memorial Hospital in Miami? If the total revenue data and total cost data from JMH’s annual Hospital Cost Report are merged for the CT Scan department, a “cost to charge” ratio can be derived and applied to the charges for any single scan, yielding an estimated and defensible “cost of care,” and then, “reasonable value.” This methodology is used by experts not only in testimony before Congress, but also in studies published in highly respected healthcare journals like HEALTH AFFAIRS[6]. Reports can be obtained:

  • From CMS via FOIA Request (or searched via various online cms.gov websites/portals)
  • From hospitals directly by subpoena or in discovery (if litigating the hospital lien)
  • From various data vendors online (just google “hospital cost report”)

SYNERGY SETTLEMENT SERVICES uses its proprietary database and algorithm to quickly calculate “cost of care” and “reasonable value” of any hospital bill and uses that analysis to negotiate up from reasonable value, nationwide.

The Lien/Debt Dichotomy

There is a critical difference between a lien and a debt, which dictates not only best practices in reducing/resolving liens, but also the legal and ethical exposure associated with the same. Liens can ONLY be created by statute/ordinance, or by agreement/contract; whereas debts exist whenever a patient has received care which has not been paid for (even if there is no injury case or recovery at all). A “LIEN” is a legal interest in the proceeds being held in Trust; it is merely a security interest in the proceeds (not a legal right to collect money from a patient). Think of a mortgage. When a homeowner borrows money to buy a house, she or he owes a debt to the bank, but the bank also creates a mortgage which attaches that debt to the real property, as security. The bank could loan someone money to buy a house without creating a mortgage, and the person would still owe the bank the same amount as if there was a mortgage. The only difference is the person could sell the house and pay nothing to the bank from the proceeds of that sale. The same is true of hospital debts and liens.

Accordingly, it is important to determine whether a medical bill/account is a LIEN, or a mere DEBT, and if a lien, whether its contractual or statutory, before engaging in negotiations. The steps you take for resolving a lien are different than the steps you take for resolving a debt.

If there is a valid lien against the proceeds, review the language of the statute or contract creating the legal interest in the settlement proceeds (lien). Next, estimate the “reasonable value,” and calculate the “equitable distribution” amount (provider’s pro-rata portion of an equitable share of the settlement – usually 1/3 of settlement, or 50% of NET). Then lastly, negotiate for the better/lower of “equitable amount” or “reasonable value.” And remember, many lien statutes and some contractual liens obviate or codify “equitable distribution” formulae – always follow the applicable law/language.

If there is not a valid lien against the proceeds, the best strategies to employ are different. First, I strongly recommend obtaining written confirmation that the provider is not pursuing a lien against the client’s settlement. Next, determine if your client even wants to resolve the “mere debt” from the settlement proceeds (remember, you have no ethical responsibilities towards ordinary creditors). If not, you may disburse proceeds upon demand, but I do recommend obtaining signed acknowledgment of the debt, from your client. Only if your client does wish to resolve the debt from her or his proceeds (which I recommend you advocate for), should you negotiate for reasonable value or an equitable reduction. But importantly, note that absent an agreement otherwise, equitable reduction merely resolves liens, as a matter of law. Accordingly, be sure to include language that the provider agrees to accept the equitable amount as “payment in full,” to release all debt.

Responsibility to “Discover” Liens?

Generally, it is a lienholder’s responsibility to put you on notice of their lien. However, Ethics Committees often impute some level of due diligence onto Injury Attorneys in these, as in most other, circumstances. To minimize exposure, I always recommend Injury Attorneys ask all known medical providers if they are pursuing lien rights and if so, to provide documentation of the same. If providers confirm they are not pursuing a lien, it is up to the client whether to pay from proceeds, or not. If a provider confirms they are pursuing lien rights (and provide evidence of such rights in the way of a properly filed HOSPITAL CLAIM OF LIEN or a contractual lien signed by the client), you must hold the encumbered proceeds in Trust and either negotiate a release or adjudicate the lien, if negotiations impasse. And lastly, if a provider refuses to respond or refuses to provide documentary evidence of their lien, I recommend sending several written requests, including deadlines for provision of evidence of a lien and a date for distribution. As a rule of thumb, the more evidence of your due diligence, the better. So, I typically conclude my efforts with a NOTICE OF WAIVER OF LIEN RIGHTS, advising again that any alleged rights will be waived, and monies will be disbursed, on a specific date.

Conclusion

In conclusion, it is ultimately YOUR responsibility to determine if a medical bill is a “lien” or a mere “debt.” Liens are third-party “security interests” in the money you are holding in Trust; you must protect them, and you may not be the “sole arbiter” of a lien dispute. If lien amounts are not agreed in advance of care being rendered, your client owes only the “reasonable value” of the care they received. And that “Reasonable Value” is most easily defined and calculated as the “Cost of Care” plus a “Reasonable Profit.” And finally, always remember that SYNERGY SETTLEMENT SERVICES compliantly negotiates hospital and provider liens nationwide, so you don’t have to spend the time doing so. We are your strategic partner, ensuring you avoid all the many ethical and legal pitfalls of hospital lien resolution, while efficiently reducing hospital liens to an objectively reasonable amount,  protecting your clients’ well deserved and hard-earned recoveries.   

[1] GERARD F. ANDERSON, PhD is a professor of health policy and management and professor of international health at the Johns Hopkins University Bloomberg School Public Health, professor of medicine at the Johns Hopkins University School of Medicine, director of the Johns Hopkins Center for Hospital Finance and Management. His work encompasses studies of chronic conditions, comparative insurance systems in developing countries, medical education, health care payment reform, and technology diffusion. He has directed reviews of health systems for the World Bank and USAID in multiple countries. He has authored two books on health care payment policy, published over 250 peer reviewed articles, testified in Congress over 40 times as an individual witness, and serves on multiple editorial committees. Prior to his arrival at Johns Hopkins, Dr. Anderson held various positions in the Office of the Secretary, U.S. Department of Health and Human Services, where he helped to develop Medicare prospective payment legislation. See https://publichealth.jhu.edu/faculty/11/gerard-anderson

[2] In Florida for example, reasonable charges for non-emergency room care are defined as 200% Medicare, while the reasonable value of care rendered in the Emergency Room is 75% of the hospital’s billed charges.

[3] See American Hospital Association, Fact Sheet: Reference Based Pricing at https://www.aha.org/fact-sheets/2021-06-08-fact-sheet-reference-based-pricing.

[4] Ala. Code § 35-11-370; Alaska Stat. § 34.35.450; Ariz. Rev. Stat. Ann. § 33-931; Ark. Code Ann. § 18-46-101; Cal. Civ. Code § 3045.1; Colo. Rev. Stat. Ann. § 38-27-101; Conn. Gen. Stat. Ann. § 49-73; Del. Code Ann. tit. 25, § 4301; D.C. Code § 40-201; Ga. Code Ann. § 44-14-470; Haw. Rev. Stat. § 507-4; Idaho Code Ann. § 45-701; 770 Ill. Comp. Stat. Ann. 23/1; Ind. Code Ann. § 32-33-4-1; Iowa Code Ann. § 582; Kan. Stat. Ann. § 65-406; La. Rev. Stat. Ann. § 9:4751; Me. Rev. Stat. tit. 10, § 3411; Md. Code Ann., Com. Law § 16-601; Mass. Gen. Laws Ann. Ch. 111, § 70a; Minn. Stat. § 514.68; Mo. Ann. Stat. § 430.230; Neb. Rev. Stat. Ann. §§52-401 & 52-402; Nev. Rev. Stat. Ann. § 108.590; N.H. Rev. Stat. Ann. § 448-A:1; N.J. Stat. Ann § 2a:44-35; N.M. Stat. Ann. § 48-8-1; N.Y. Lien Law § 189; N.C. Gen. Stat. Ann. § 44-49; N.D. Cent. Code Ann. § 35-18-01; Okla. Stat. Ann. tit. 42 §§43 & 44; Or. Rev. Stat. Ann. § 87.555; R.I. Gen. Laws Ann.§§9-3-4 to 9-3-8; S.D. Codified Laws § 44-12-1; Tenn. Code Ann. § 29-22-101; Tex. Prop. Code Ann. § 55.001; Utah Code Ann. § 38-7-1; Vt. Stat. Ann. tit. 18, § 2253; Va. Code Ann. § 8.01-66.2; Wash. Rev. Code Ann. § 60.44.010; Wis. Stat. Ann. § 779.80

[5] “The Alachua County Lien Law, ch. 88-539, Laws of Fla., is a special law which creates a lien based on a private contract between a hospital and its patient, and is thus unconstitutional under Art. III, § 11(a)(9), Fla. Const.”
Shands Teaching Hosp. & Clinics v. Mercury Ins. Co., 97 So. 3d 204, 207 (Fla. 2012)

[6] See Extreme Markup: The Fifty US Hospitals With The Highest Charge-To-Cost Ratios https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2014.1414

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