Cottage Health Throws Down Gauntlet on Kaiser Permanente

Santa Barbara Hospital Sues National Chain, Alleging Kaiser Underpaid by ‘Tens of Millions’ of Dollars

Cottage Health President and CEO Ron Werft | Credit: Courtesy

Cottage Health System spared few emotionally charged adjectives in lambasting Kaiser Permanente for allegedly short-changing Cottage to the tune of “tens of millions” of dollars in a lawsuit filed against the national health chain early this month. Attorneys representing Cottage — with three hospitals and several urgent care centers — did not merely accuse Kaiser of acting in ways both “illegal and unfair.” In addition, they charged that Kaiser had behaved in a manner that “may only be classified as immoral, unethical, oppressive, and unscrupulous.”

Specifically, Cottage charged Kaiser had routinely underpaid for services rendered mostly in Cottage’s emergency rooms to patients covered by Kaiser Permanente. In 2018, Cottage alleged, Kaiser paid only 62 percent of the face value of the bills accrued at Cottage by patients covered by Kaiser. In 2019, Kaiser paid only 58 percent. In 2020, it was 70 percent. And in 2021, it was again 70 percent. All these payments not fully paid cost Cottage “tens of millions” of dollars, the lawsuit claimed. All the while, Cottage maintained, Kaiser was reporting net revenues ranging from $3.5 billion to $6.5 billion.

Most of the billing disputes involved patients seeking treatment at one of Cottage’s two emergency rooms. Some also involved patients seeking “post-stabilization care.” Since 2018, Cottage charged, Kaiser had underpaid “on thousands of occasions.”

Cottage’s attorneys included one specific example involving a client seeking emergency treatment on November 7, 2021, for a wrist fracture. Kaiser opted to pay only 10 percent of the list price, claiming that the fee “exceeded the maximum allowable under contracted fee arrangement.” Cottage stated no such contractual agreement existed and that the 10 percent did not begin to cover Cottage’s costs. 

When Cottage sought to appeal, its payment adjusters found themselves confronting a system designed by Kaiser to obfuscate, frustrate, and discourage challenges. “Kaiser intentionally underpays claims and maintains an opaque and difficult appeal process to place the burden of payment on providers like Cottage Health,” the lawsuit charged. In addition, Cottage charged Kaiser disguised its “self-awarded discounts to prevent effective appeals.”


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Cottage complained that efforts to reach Kaiser by phone proved especially exasperating. “Kaiser typically left Cottage Health waiting, sometimes for over an hour.”

Ultimately, in the case of the wrist fracture, Kaiser reportedly informed Cottage it would respond to its billing by February 11. It did not do so. 

The appeals themselves, Cottage’s attorneys wrote, were confounding in the extreme. For example, according to Cottage, Kaiser required appellants to articulate in their appeal what Kaiser’s reasoning was for paying what they said they would pay. Those reasons — at least in the case of the wrist fracture — relied on what Cottage described as “nonsensical reasoning” and could not reasonably be described. And failure to comply with the intricacies of Kaiser’s byzantine appeals standards, Cottage stated, effectively disqualified the appeal.

Kaiser Permanente released a statement responding to the lawsuit in only the vaguest of terms. The chain, the statement read, was committed to “paying fair and reasonable rates for emergency services provided to our members by non–Kaiser Permanente hospitals.” The statement said Kaiser looked forward to a court review of Cottage’s claim for “high charges” and expressed confidence that Kaiser would prevail “following an impartial review of the facts.” 

Cottage maintains an effective monopoly for hospital care throughout the South Coast and enjoys more leverage than many hospital operations in extracting higher compensation from insurance providers. This was one of the considerations in play when federal regulators declined to approve efforts by Cottage to merge with Sansum Clinic several years ago. 

But in its court papers, Cottage portrayed itself as an aggrieved David going up against a very large and greedy Goliath. Cottage Health, the lawsuit stated, “was founded in 1888 by a group of 50 Santa Barbara women who recognized the need for a not-for-profit facility dedicated to the wellbeing and good health of all residents, regardless of the one’s ability to pay.” The watchwords of the health-care system were — and remain — “excellence, integrity, and compassion.” Cottage, the lawsuit added, provides “tens of millions in no-cost services for the benefit of most in need.” 

Kaiser, by contrast, was described in the lawsuit as “a private multibillion-dollar company with a national presence,” with 39 hospitals, 730 medical offices, 24,000 physicians, and 140,000 nurses. No mention, however, was made of the lawsuits against Kaiser brought by the federal government in recent months for overcharging Medicare patients.


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