Opinion ID: 2056931
Heading Depth: 1
Heading Rank: 1

Heading: the merger provisions.

Text: Under all prior agreements, a reimbursement method for use in determining payment to the hospitals by Blue Cross for special services was determined separately for in-patient and out-patient services. For example, since October 1, 1962, Blue Cross has paid a percentage (never over 100%) of a hospital's charges for covered services furnished a Blue Cross member in an out-patient department. Until the present agreement went into effect, that percentage was determined from the ratio of (a) all out-patient costs incurred by the hospital (including the costs of clinics, services of residents, interns, nurses and other out-patient department personnel) to (b) all of the hospital's charges for out-patient services. The costs and charges used in this determination were those for out-patient care furnished all patients, not just member patients. Amounts reimbursed for special services furnished in-patients were determined separately in the past for indemnity members and for comprehensive members. For services rendered to comprehensive members, rates of reimbursement were calculated together with rates for accommodations. For services rendered to indemnity members, payments for special services were determined separately and were based upon the lower of costs or charges from the composite costs of all special service departments furnishing services to in-patients and the composite charges of all such departments. [2] The merger provisions of the present agreement provide a single payment procedure for special services rendered by a participating hospital without regard to whether the special service is furnished to an in-patient or out-patient ... [or] whether the member has indemnity or comprehensive coverage. A single percentage, [3] never to exceed 100%, is derived from the ratio of the total hospital costs of special services for certain prior fiscal years to the hospital's charges for special services for those fiscal years. Payments to the hospitals are then determined by applying this percentage to those charges of Blue Cross members for special services for which Blue Cross is responsible. To illustrate the impact of the merger provisions, the parties have set forth an illustration (reproduced below) of a common hospital cost-charge ratio for both in-patient and out-patient special services. In this illustration, which apparently reflects the situation in many hospitals, in-patient charges exceed costs and out-patient costs exceed charges. In studying this illustration, it is important to keep in mind that for all like special services performed by ... [a] hospital, charges to Blue Cross patients are the same as charges to the general public. [Illustration] Out-patient Special In-patient Special Services Services (including (including New Born Special Routine Out-patient Services) Services) Total costs $400,000 $100,000 Total charges $500,000 $80,000 Charges with respect to Blue Cross patients $300,000 [] $40,000 []  Assuming that the present agreement were in effect without the `merger' provisions and reimbursement for special services were determined separately for in-patient and out-patient special services ..., Blue Cross would in [$400,000] the above situation reimburse 80% ________ of in-patient 500,000 [$100,000 charges and 100% ________ butnever to exceed 100%] of out-patient charges to ... members for special services covered by Blue Cross. Total reimbursement would thus amount to $280,000; $240,000 for covered in-patient services and $40,000 for covered out-patient services. [4] Under the present agreement with the merger provisions, the single percentage derived would be approximately eighty-six per cent (total costs or $500,000) (total charges or $580,000). Applying this percentage to total charges with respect to Blue Cross members who received special services, reimbursement to the hospital would total $292,400, $258,000 of which is related to charges for in-patient services and $34,400 of which is related to charges for out-patient services. As is obvious from the above, the net effect of the merger provisions is to increase the amount Blue Cross will reimburse a hospital for special services received by members. The parties also agree that vis-a-vis the immediately preceding agreement (see fn. 4), the net effect of the change is to increase total payments to hospitals by Blue Cross. As stated above, the commissioner opposes the merger provisions on the ground that they do not result in a rate of payment which either reflect[s] reasonable hospital costs or is based on charges made to the general public, whichever is lower. [5] He rests this conclusion not upon the exercise of a discretionary power to disapprove a rate formula, but rather on his belief that the statute is being violated. The question, then, is whether the commissioner's conclusion is required as matter of law. The commissioner concedes that the present reimbursement formula can never result in payments which exceed charges to the general public, since members and the public receive identical charges for like services and since the percentage factor applied to member charges can never exceed 100%. He does contend, however, that the present provisions result in payments to hospitals which exceed those costs of a hospital fairly attributable to the services for which the payment is made, and that this constitutes a violation of the statute. He supports this contention by an examination of the effect of merger upon Blue Cross reimbursement for in-patient special services, considered as a separate category, in the illustration set forth above. [6] But to test the validity of the present agreement in this way is to beg the question. The essence of the merger provisions is that out-patient and in-patient costs of special services are no longer allocated between the two departments in arriving at a reimbursement formula. Thus, if there is nothing in the statute which precludes merger, the reallocation of these costs into their two former categories for the purpose of determining the validity of merger under § 5 is misleading. The commissioner's answer to this is that the words reasonable hospital costs, as used in § 5 of c. 176A, have a meaning which compels the testing of any reimbursement formula against the costs and charges of out-patient and of in-patient departments separately considered. In this view, reasonable hospital costs means the cost to the hospital ... [of] performing the services for which reimbursement is to be made (emphasis supplied). The suggestion here is that the reimbursement rate for any particular category of services, for example for out-patient special services furnished to members, may reflect only costs which were incurred in providing those services. There is nothing in § 5 of c. 176A which compels so restrictive a definition of reasonable hospital costs. Section 5 states in this regard: The commissioner in determining reasonable cost shall give consideration to services provided by the hospital and the costs of comparable hospitals, and may give consideration to depreciation, amortization, interest, occupancy and individual services which are rendered for partial or no payment. Contrary to the commissioner's view, this language suggests that the hospital costs which Blue Cross rates of reimbursement must reflect may include those necessary costs of any legitimate and reasonable services which hospitals have traditionally furnished. The reason for such a broad provision is obvious. All of the various costs which a hospital incurs must be recovered in some manner if that hospital is to stay in existence. Thus, to whatever extent Blue Cross under the hospital agreements is precluded from acknowledging and paying a proportionate share of necessary costs, nonmember patients must and will be assessed disproportionately higher rates. It is doubtful that the Legislature intended that § 5 should have such an effect. Nor has the statute been so interpreted in the past. Thus, both the present and prior agreements have included the basic expenses of operating a hospital in their various formulae for determining rates of reimbursement. That the commissioner's restrictive view of reasonable hospital costs is untenable is further revealed by the following facts: Under prior hospital agreements (since at least 1950) Blue Cross payment for in-patient special services has been made by selecting the lower of costs or charges from the composite costs of all special service departments furnishing services to in-patients and the composite charges of all such departments. Reimbursement for in-patient special services has never been based upon the total of the lower of costs or charges within each in-patient special service department. In certain special service departments in-patient charges were and are greater than costs and in other such departments costs were and are greater than in-patient charges and this has and does vary from hospital to hospital. Thus, the merger principle has long been utilized in respect to the costs and charges of the individual special service departments. If the logic of the commissioner's contention that rates for providing specific services must reflect the reasonable hospital costs of those very services is correct, this use of composite departmental costs might also be invalid under § 5. Another argument advanced by the commissioner is based upon the agreed fact that the total cost of out-patient services performed by the hospitals includes the cost of certain services which are not available as a benefit to Blue Cross members. The commissioner concludes from this that merger results in the reimbursement of hospitals by Blue Cross for services which are not available to Blue Cross members. [7] This objection is inaccurately directed against merger because it ignores the fact that neither prior agreements, nor the present agreement without the merger provisions, separates these out-patient costs and charges from those which are available to members in arriving at a determination of the Blue Cross rate of payments. It is, moreover, incorrect to say that under the present agreement Blue Cross is paying for the costs of unavailable services. In fact, the rate of hospital reimbursement is merely derived from a cost-charge relationship which is in turn influenced by the costs and charges to the public of these unavailable services. The commissioner further contends that the merger of special service costs and charges of the in-patient and out-patient departments violates a historical separation between the two. This does not, however, compel the conclusion that the merger provisions are invalid. Concerning the separate treatment of each department under prior agreements, the former commissioner said in approving the merger provisions: I question the logic of the present separation and find nothing in G.L.c. 176A, § 5 requiring a fragmentation of hospital services in determining reimbursement. This opinion doubtless was based on the fact that under the immediately preceding agreement, [i]n determining the cost of services rendered on an out-patient basis (and on an in-patient basis as well), the costs of special service departments ... were required to be allocated between in-patient services and out-patient services because special service departments ... furnish services both to in-patient and to out-patients. The merger provisions have obviated the necessity of allocating the costs of each special service department to either in-patient or out-patient services, a process which, it would seem, could not have been very precise. Finally, the commissioner objects to merger because the net effect of the present agreement is to increase total payments to hospitals by Blue Cross and because [s]ubstantially all of that increase is attributable to ... [merger]. This is not in itself, however, enough to invalidate the merger provisions under § 5. Of course, merger would be more difficult to justify if Blue Cross members did not themselves make substantial use of out-patient facilities, since in this situation it could fairly be described as a device for defraying the high costs of out-patient services rendered to nonmembers by increasing the total payments of Blue Cross for in-patient special services received by members. The fact is, however, that in 1964 Blue Cross processed 859,793 claims under its basic program, of which 425,702 or almost 50%, were claims for services rendered in the out-patient departments and clinics of hospitals. The plaintiffs have argued that the purpose of merger is to encourage hospitals to expand their out-patient facilities and to keep down their charges for services rendered therein. Merger, it is said, will tend to encourage hospitals to substitute out-patient treatment for in-patient treatment wherever possible, since the higher cost than charges ratio characterizing most hospital out-patient departments results under merger in increased Blue Cross payments. It is contemplated that this will in turn reduce total hospital costs and ultimately Blue Cross subscription charges, since generally the overall cost to the hospital of out-patient care is less than that of in-patient care. As the commissioner correctly points out, there is no guaranty that these developments will materialize under the present agreement. But this question need not detain us since our function here is limited to measuring the present agreement by the standards set forth in § 5. Having done so, we are of the opinion that the requirement that rates of payment reflect the lower of reasonable costs or charges to the public does not render invalid a hospital agreement in which this standard is measured against a hospital's entire experience in furnishing special services.