Capped and Calculated: The 80th Percentile Debate in Insurance Reimbursements

From the Desk of Josh Hayward:

Under Washington Law, PIP carriers are required to pay all reasonable and necessary medical expenses. Carriers must also develop reasonable standards for, and conduct prompt, reasonable investigations to determine whether medical expenses are reasonable and necessary. Failure to conduct a reasonable investigation may give rise to a claim under Washington’s Consumer Protection Act (“CPA”).

Claims Pointer:

The Washington Supreme Court recently determined that an insurer’s reliance on an objective, formulaic review process satisfied its requirement to conduct a reasonable investigation, and therefore did not violate the CPA.  

Schiff v. Liberty Mutual Fire Ins. Co., 2 Wash. 3d 762, 542 P.3d 1002 (2024)

Facts:

Liberty Mutual Fire Insurance Company (“Defendant”) provided personal injury protection (“PIP”) and MedPay benefits to insureds in Washington. When Defendant received a bill for medical expenses from an insured or their insured’s provider, it used a third-party database to determine the reasonableness of the medical provider’s charges. Specifically, Defendant would calculate the 80th percentile charge for a medical treatment in a geographic area and pay bills falling within the 80th percentile in full. Charges exceeding the 80th percentile would be reduced, with Defendant only paying up to the 80th percentile price.

Based on Defendant’s 80th percentile review, health care provider Dr. Stan Schiff’s (“plaintiff’s”) bills were reduced on two occasions for a total reduction of $144.27. Plaintiff sued Defendant, arguing that Defendant’s practice of capping reimbursement for medical services at the 80th percentile violated Washington’s PIP statute and the CPA.

The parties filed cross motions for summary judgment, which the trial court denied, and the parties appealed.

The Washington Court of Appeals reversed the trial court’s denial of Plaintiff’s motion for summary judgment because the PIP statute required “an individualized assessment rather than substituting a formulaic approach that pays only 80 percent of the average charge for a large geographic area,” and under Folweiler Chiropractic, PS v. American Family Insurance Co., 5 Wash. App. 2d 829, 429 P.3d 813 (2018), an insurer engages in an unfair practice by failing to conduct an individualized assessment.

Defendant sought review, which the Washington Supreme Court granted.

Law:

Under the CPA, “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.” RCW § 19.86.020.

To prevail on a CPA claim, a plaintiff must prove: (1) an unfair or deceptive act or practice (2) in trade or commerce, (3) which affects the public interest, (4) an injury to plaintiff’s business or property, and (5) a causal link between the unfair or deceptive act or practice and the injury. Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wash. 2d 778, 784-85, 719 P.2d 531 (1986).

The Washington PIP statute mandates that insurers offering auto insurance policies must offer minimum personal injury protection of $10,000 for medical and hospital benefits. RCW § 48.22.095(1)(a). Medical and hospital benefits “means payments for all reasonable and necessary expenses.” Id. § 48.22.005(7) (emphasis added).

Washington regulations outline specific unfair claims settlement practices, including (1) failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies, and (2) refusing to pay claims without conducting a reasonable investigation. WAC 284-30-330(3)-(4). Additionally, if an insurer decides not to pay a bill or a portion of a bill, the standards for prompt and fair settlements require the insurer to determine whether the medical services are (1) not reasonable, (2) not necessary, (3) not related to the accident, or (4) not incurred within three years of the accident. WAC 284-30-395(1).

Analysis:

The Washington Supreme Court determined that Defendant’s 80th percentile method of evaluating medical claims did not violate the PIP statute, and was not an unfair or deceptive practice under the CPA.

In reaching this conclusion, the court rejected Plaintiff’s argument that the 80th percentile method was not a “reasonable investigation” and that specific factors about a provider must be incorporated into the review process.

The court, overturning Folweiler, concluded that the PIP statute and insurance code had no express requirement to look specifically at the qualifications of a medical provider, and indeed “insurers are tasked with creating their own reasonable investigations and reasonable standards for prompt investigation of claims.”

Moreover, comparing charges for the same treatment within the same geographic area was relevant to determining the reasonableness of a provider’s charges.

The court noted that the Washington Court of Appeals, repeated an error from Folweiler and misstated Defendant’s practice when it said Defendant “pays only 80% of the average charge.” On the contrary, Defendant paid 80 percent of medical bills in full automatically, with only the top 20 percent being reduced to the level of the 80th percentile.

Finally, the court noted that its conclusion was supported by decisions from other jurisdictions, where the 80th percentile practice had been upheld.

Based on this analysis, the Washington Supreme Court reversed the decision from the Court of Appeals and remanded the case to the trial court for entry of summary judgment in favor of Defendant.

Big Picture:

The Washington Supreme Court’s decision clarifies that insurers may use data-driven reimbursement models, rather than conducting individual assessments, without violating consumer protection laws. This ruling offers insurers greater flexibility in structuring efficient claims procedures for evaluating whether medical expenses are reasonable and necessary.