The Eighth Circuit Reverses Certification of a Class Challenging an Insurer’s Use of Percentiles to Determine Whether a Doctor’s Bill Was “Usual and Customary”


    In Halvorson v. Auto-Owners Insurance Co., the Eighth Circuit Court of Appeals reversed certification of a class accusing Auto-Owners Insurance Co. (“AIC”) of breaching its insurance policies and violating its duty of good faith and fair dealing by automatically refusing to pay medical expenses in excess of certain predetermined thresholds. Shelene Halvorson bought no-fault personal injury protection coverage from AIC. The policy promised to pay “reasonable charges incurred” for medical services necessary to treat injuries suffered in a car crash, and North Dakota law required AIC to pay the “usual and customary charges incurred for reasonable and necessary medical . . . services.” After AIC paid all but $88.01 of her doctor’s bill, Mrs. Halvorson sued AIC on behalf of a class of all policyholders to whom it issued this coverage in North Dakota, which class the district court certified.

    Because issues common to all class members did not predominate issues specific to individuals within the class, the Eighth Circuit reversed. Allegedly, AIC compiled the prices of medical services in a defined geography and identified the price at which 80 percent of doctors would perform that service. It would refuse to pay in excess of this 80th percentile. Hence the $88.01 left unpaid on Mrs. Halvorson’s bill. While AIC’s treatment of claims might have been applied across a class uniformly, not every class member could show injury simply from their claims taking this haircut. If a doctor accepted AIC’s discounted payment as payment in full, then the bill was settled. In any event, whether each class member’s charges were “reasonable” or “usual and customary” is a fact-intensive inquiry that must be performed one class member at a time. Therefore the court ordered the class de-certified.

    It seems fair to measure “usual and customary” according to such a percentile. A doctor’s bill is hardly proof positive of the reasonableness of the doctor’s charges. Often, no market pressures moderated these charges. Because insurers cannot control who the insureds see, the insurers do not always have agreements with doctors before the patient incurs charges. Many states mandate that insurers offer the coverage Mrs. Halvorson claimed, but these states usually are sensitive to the risk of the mandate causing inflation of the cost of health care. Thus they do not require insurers to settle doctor’s bills at their face value. For some services Medicare and the Veterans Affairs will not pay anything in excess of the 75th percentile, while at least one court has allowed an uninsured patient to sue a hospital for an unfair trade practice because its charge exceeded the 75th percentile. It is fitting to say that a doctor’s bill is not “usual and customary” if he charges more than what 4 out of 5 of his colleagues charge. If instead the insurer adjusted each charge one at a time, according to its own “merits,” either policyholders’ claims would be adjusted by some other uniform matrix or by a fistful of subjectivities that lead to a hodgepodge of outcomes. The former is not obviously better than adjusting them by percentiles, while the latter is plainly worse.

    As forums for putative class actions go, federal courts are often superior to state courts. Whereas the Eighth Circuit in Halvorson rejected a class that would challenge the mere use of a percentile measure of “usual and customary,” Ohio and Oklahoma state courts recently have permitted exactly that class. Meanwhile, the Oregon Supreme Court insisted on entry of judgment on behalf of such a class in the amount of $8.9 million, of which $8 million were for punitive damages.

    The opinion in Halvorson v. Auto-Owners Insurance Co., No. 12-1716 (8th Cir. July 3, 2013) is here.

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