In another financial setback for California's healthcare industry, the state's hospitals were stripped of one of their most effective yet controversial means of recovering the full cost of treating injured patients.
The California Supreme Court last week ruled that hospitals that accept an accident victim's private insurance as full payment for treatment cannot later place a lien on any monetary settlement or award the patient receives from the party who caused the injury. The unanimous ruling follows a similar decision in 2003 that forbade the state's hospitals from taking a share of personal injury awards won by Medicaid patients (May 19, 2003, p. 28).
Hospitals contend that using liens to recoup the difference between what insurers contractually agree to pay and the actual cost of care has been essential to their survival, particularly at a time when most emergency rooms are running in the red because of the rising costs of uncompensated care.
Some insurers demand such deep discounts that hospitals "actually lose money on each patient they see," said Jan Emerson, spokeswoman for the California Hospital Association. "Hospitals have believed, and rightly so, that they should be able to collect on the basic cost of providing care."
But lawyers for the plaintiff, Joel Parnell, argued that hospitals had long been abusing a 44-year-old state law that allows them to sue or take other measures against uninsured patients who don't pay their medical bills.
"California's Hospital Lien Act of 1961 was very well-intentioned ... but since the 1990s, hospitals have perverted it and twisted it for purposes for which it was never intended," said William Hanagami, a partner of law firm King & Hanagami.
Hanagami said last week's ruling could expose hospitals to lawsuits by former patients seeking to recoup money that was taken from them through liens. "At a bare minimum, these hospitals breached their contract agreements with PPO insurers," he said.
Most states have laws allowing hospitals to place liens against patients' awards. But many of these laws were written decades ago and were designed mostly to ensure hospitals some compensation when they provided care to the uninsured. Whether the laws also permit liens against insured patients remains hotly contested. Courts in several states, including Arizona, Florida, Pennsylvania and Texas, have addressed the issue with various rulings.
The California case involved 161-bed San Joaquin Community Hospital in Bakersfield, which treated Parnell in 1997 after he was injured in a car crash. Although Parnell amassed a $20,000 medical bill, the hospital accepted $5,000 as full payment under a prearranged PPO contract with Parnell's insurer, a union health fund.
But in 1999, after Parnell won $15,000 in a lawsuit against the driver who had caused the collision, San Joaquin Community put a lien on the entire award. So Parnell sued the hospital's parent, Adventist Health System/West.
The state appellate court in Fresno ruled in Parnell's favor in February 2003. Adventist appealed to the state Supreme Court, which upheld the decision, ruling that the $5,000 collected by the hospital amounted to payment in full. "Because Parnell no longer owes a debt to the hospital for its services, we conclude that the hospital may not assert a lien ... against Parnell's recovery," Justice Janice Rogers Brown wrote.