Author: Richard H. Adler

A class action lawsuit was filed against State Farm alleging that it breached insurance policy contracts with its insureds and violated the Washington Insurance Code and the Washington Consumer Protection Act by using Fee Facts as the sole basis for reducing payment of its insureds' PIP medical expense bills. The trial began on October 28, 1994, in the King County Superior Court. After five days of trial, State Farm agreed to settle the case.

The purpose of Fee Facts was to provide information about existing health care providers' fee structures in a given area. Fee Facts conducted a survey of a specific population of providers' charges. Fee Facts then averaged these charges together to arrive at a "usual or customary" fee. If a provider's fee was higher than the "average," then the insurer would pay a reduced amount. If a provider's bill was less than the average, then he/she would be paid at the level billed. For example, if a doctor in Seattle charged $40.00 for an office visit and a doctor in Spokane charged $30.00 for an office visit, then the average would be $35.00. The Seattle doctor's fee would be reduced down to $35.00, but the Spokane doctor's fee of $30.00 would be paid in full.

State Farm's modus operandi in using Fee Facts included sending a form letter to the health care provider. This letter stated in part:

Our analysis of the charges presented in your statement indicates that these charges as submitted exceed the prevailing reasonable, customary charges for this area. This position is based on a comparison of your charges in this case with those presented in a recently published survey, Fee Facts - First Edition, Volume 12, (2nd Half, 1991).

We feel a strong obligation to monitor the charges of health care providers as our policyholders are concerned about rising health care costs as well as the cost of insurance coverage. We feel our resolution in this matter if fair.

This letter would be addressed to the provider and a copy sent to the patient. Additionally, the patient would receive another letter stating that their provider was overcharging and they did not have to pay the excess amount owing since it was justifiably reduced.

State Farm's use of this cost containment tool was protested by its own insureds, their insured's attorneys, and health care providers because:

1. The insured was not getting what he/she paid for. The insured/patient pays insurance premiums for PIP automobile insurance coverage. PIP provides for the payment of treatment charges that are "reasonable, necessary, and related" to the accident. State Farm's use of Fee Facts changed the insurance contract from "reasonable, necessary, and related" to "customary charges." These are different legal/insurance phrases meaning very different things. State Farm was retroactively changing the terms of the insurance policy.


2. Fee Facts used inaccurate, inconclusive, and unreliable data. The Fee Facts publication itself recognized that the information it provided was not entirely reliable or accurate. The Fee Facts document stated:
   
   
   While the information solicited, received, and utilized to compile the results contained in this publication is believed to be reliable, its accuracy cannot be guaranteed. ...While the methodology used in gathering, compiling, and reporting the data contained herein conforms to generally accepted standards, the published results cannot be construed to perfectly predict the pricing behavior of the entire population of providers. ...Final decisions regarding payment of claims rests with the insurer in accordance with its policies.
   
   
   Despite this caveat, State Farm continued to use this as an exclusive litmus paper test to determine the reasonableness and necessity of a doctor's bill.


3. Interference with the doctor/patient relationship: When a patient is advised not to pay a bill and further told that their health care provider is overcharging, a patient may then begin to think "bad thoughts" about their doctor. Perhaps the patient switches health care providers. Perhaps the patient chooses not to pay his/her bill incurred for treatment. Perhaps the doctor threatens collection processes against his/her own patient. All of these consequences obviously do not foster better doctor/patient relationships, but rather tend to undermine them.


4. Fee Facts advises insurers of the average "customary charge," but fails to take into account differences in doctors' training, experience, years of practice, and time spent with the patient that may affect a particular doctor's charge. Moreover, Fee Facts advises an insurer of a "average" customary charge, but the "average" is not representative of the charges in a given locale.

Despite many letters to State Farm insurance adjusters, claim managers, regional supervisors, and the Washington State Insurance Commissioner's office, it took a class action lawsuit to stop State Farm. On November 14, 1994, State Farm reached a settlement agreement with the class action plaintiffs. A preliminary order was entered approving a class settlement. The terms of the settlement are as follows:

1. All Fee Facts reductions imposed against health care providers will be reimbursed in full.


2. In addition, State Farm must pay a penalty of twenty-five percent. For example, if a doctor's bill was reduced by $100.00, State Farm has to reimburse the patient $125.00.


3. State Farm will cease relying upon Fee Facts, in its present form, as the sole determinant of "reasonable" medical expenses.


4. State Farm will pay all reasonable fees and costs incurred by the class action plaintiffs.


5. A follow-up hearing is scheduled for February 7, 1995. Notice of the upcoming hearing was published in eighteen Washington State newspapers on December 4, 1994, at State Farm's expense.

Any patient or health care provider whose bill was reduced because of State Farm's use of Fee Facts is encouraged to contact Beverly Bailey, paralegal for the law firm of Levinson, Friedman, Vhugen, Duggan & Bland, at (206) 624-8844 to obtain a claim form.

Very truly yours,
ADLER GIERSCH, P.S.

Richard H. Adler
Attorney at Law