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The Pennslyvania state flag. (tkacchuk/iStock/Thinkstock)

Federal ruling on State Farm Pa. auto medical insurance surveys raises ‘slippery slope’ questions

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Business Practices | Insurance | Legal | Market Trends

Though a Pennsylvania Supreme Court opinion in favor of State Farm’s auto medical reimbursements raises some concerns for collision repairers, the real takeaways might lie in the original court’s decision.

The Supreme Court on Tuesday upheld a U.S. Eastern District of Pennsylvania ruling that State Farm had the right to use its own method to calculate a fair reimbursement level for medical supplies and not just rely on two options described in the Pennsylvania Code.

Plaintiff Freedom Medical Supply had sued State Farm for ceasing to pay 80 percent of Freedom’s 1,300-7,600 percent markups (which the Supreme Court called “exorbitant”).

Freedom argued that as its the muscle stimulators and portable whirlpools weren’t listed in Medicare and no Medicare processor data was available, the law said State Farm had to pay 80 percent of sticker.

State Farm had used its own survey of local prices and argued it should only pay 80 percent of an average market price it calculated to be hundreds of dollars less.

The vendor not only challenged if State Farm could calculate a “usual and customary charge” itself but also how it did it — alleging negligence on which data the insurer chose to include and omit from its study.

Though the Supreme Court wasn’t asked to consider the latter and made no ruling on it Tuesday, the Eastern District did pass judgement — and what it found could be a rough precedent for collision repairers.

Original ruling

As repairers have similarly alleged in their own litigation regarding labor rates, Freedom accused State Farm of cherry-picking data, according to the Supreme Court’s summary of the prior case.

“State Farm had selectively excluded certain similarly-situated providers who had similar charges for the products and had improperly included nonsimilarly-situated providers who had significantly lower charges for the products,” the Supreme Court wrote.

“… (But) the court found that State Farm had properly considered market data in the Greater Philadelphia area and arrived at an average market price for the products at issue.”

State Farm survey

Let’s take a closer look at what happened in the federal court.

The District Court sided with State Farm that it was necessary to throw out what the insurer considered suspiciously high bills to arrive at an accurate rate, despite Freedom arguing such a study wasn’t a true study.

Freedom argued that the providers State Farm used lacked “similar training, experience, and licensure to Freedom Medical, because many do not submit bills to State Farm under (an auto insurance law).”

The court felt that as the law didn’t define which suppliers had to be used, State Farm could use whoever it wanted in the area. In fact, the court held that State Farm was right to look at how much suppliers charged customers paying out-of-pocket, as there was a threat of bill-padding when insurance was involved.

Freedom also pointed out that one of State Farm’s surveyed suppliers, VSP Medical Supply, only sold three of the devices in question — and two were to State Farm for the study. But as the law didn’t define who was a legitimate provider and who wasn’t, State Farm could use VSP, the court ruled.

While the Supreme Court didn’t rule on the propriety of Freedom’s charges of $1,280 and $545 for gear for which it’d only paid $26 and about $40, respectively, the Eastern District called them “unreasonable.”

It based that on State Farm’s findings and because “State Farm insureds typically have a $5,000 limit on their medical coverage.” So paying hundreds or more than a thousand to Freedom would blow through most of that amount.

Freedom doesn’t come off as a pinnacle of ethical capitalism in the case, and we do sympathize with State Farm on the chance for a vendor and even a customer to run wild with the insurer’s credit card.

But the Eastern District’s rulings regarding State Farm coverage and survey methodology raise some serious “slippery slope” arguments even if appropriate under the circumstances of the Freedom case. Though they involve auto medical insurance, it’s never a bad idea for shops to stay alert for any precedents which could apply to auto property claims.

Coverage: The fact that State Farm customers don’t have enough insurance is not a good argument for what is and isn’t a reasonable demand from a service provider.

By that logic, insurers could slash coverage caps and really compete on price on all lines. Customers, happy for lower premiums, accept them. And then everybody complains to the court that the vendor didn’t cooperate and cut its prices.

Survey: As the court implied in discussing State Farm’s survey, there’s a case to be made for pegging insurance reimbursements to whatever a business would charge someone out-of-pocket. But it’s unclear this is the only thing which would count as fair in the court’s eyes. Would State Farm’s alleged “half plus one” method work too? And would the medical equivalent of a DRP’s contractually lowered rates also count?

On the plus side, the Pennsylvania Code at least requires transparency as to the insurer’s survey methodology. That at least gives providers the option to check the math and point out flaws to the insurer or court — though whether the provider succeeds is another question entirely.

Also according to the Eastern District, a company’s who’s sold three of the items in question — two of which were to State Farm — is a legitimate data point. By that rationale, a retiree who does some body work on the side is a legitimate data point for a collision repair market survey.

Again, while Freedom Medical itself is hard to defend, some of its points are still valid. The Eastern District’s Legislature and Insurance Department should address some of the terms and scope raised by those questions.

Featured image: The Pennslyvania state flag. (tkacchuk/iStock/Thinkstock)