The Tylenol Debate: Can Hospitals be Sued for Excessive Markups on Medications and Devices?

By Alex Stein

Steven Brill’s TIME MAGAZINE blockbuster article, Bitter Pill: Why Medical Bills are Killing Us, uncovers the CHARGEMASTER: a publicly undisclosed pricelist accountable for what we see in hospital bills. What we see there doesn’t look good: it includes acetaminophen sold for $1.50 a tablet (you can buy 100 of those for the same price at Amazon); $77 for a box of sterile gauze pads (Amazon’s prices vary between $6 and $11); $18 for a single diabetes test strip (sold for 54 cents by Amazon); $108 for antibacterial Bacitracin ointment (Amazon’s prices vary between $2.50 and $6.50); and so forth. Charges for stay, scans, surgeries, canes, and wheelchairs skyrocket as well.

The American Hospitals Association (AHA) rejects Brill’s analysis. According to AHA, the chargemaster aggregates the hospital’s overall costs on delivering quality care to patients: “In order to take medications in a hospital, even over-the-counter medicines, they must be prescribed by a doctor (a little bit of cost for the doctor), that order gets transmitted to the pharmacy (a little more cost), the order gets filled by a pharmacist or pharmacy tech who retrieves just one Tylenol pill and individually packages that one pill (still more cost), the pill gets transported from the pharmacy to the nursing unit where the patient resides (a little more cost), then the pill is retrieved by a registered nurse who personally gives the pill to the patient and then must document the administration of that pill in the patient medication administration record (a little more cost). All of this process to give a patient a single dose of Tylenol in a hospital bed [must also be] in compliance with all pertaining regulations (a little more cost).”

This post will not try to resolve the Tylenol Debate. Nor will it say anything about the government as a plausible substitute for the eccentric chargemaster. Instead, I will raise a legal question: Can patients sue hospitals for excessive markups on medications and devices?

My answer to this question is a qualified YES. Entrepreneurial and business aspects of running a hospital fall under states’ consumer protection laws (Brookins v. Mote, 292 P.3d 347 (Mont. 2012)). Those aspects certainly include billing (Jaramillo v. Morris, 750 P.2d 1301, 1304 (Wash. App. 1988); Ambach v. French, 216 P.3d 405 (Wash. 2009)). The key question here is whether an excessive markup on medications and devices amounts to deceit or an unfair trade practice. If it does, the hospital would be in violation of the relevant state consumer protection law. This might happen to hospitals whose billing practices—to which patients gave no informed consent—are particularly aggressive. Those hospitals might face class action suits and the prospect of paying treble damages. They also may be stripped of the special protections given to defendants in medical malpractice suits (that include shortened limitations and repose periods for filing suits, caps on damages, and charitable immunities). For my account of the competition between medical malpractice and consumer protection rules, click here.

Brill and other participants in the Tylenol Debate call on the government to start regulating hospital prices. My short advice to hospitals: get rid of unconscionable markups forthwith.

    10 thoughts on “The Tylenol Debate: Can Hospitals be Sued for Excessive Markups on Medications and Devices?

    1. We tried the strategy of suing hospitals for their chargemaster rates about 7 years ago. (My favorite legal theory was that the admission paperwork constituted an open-price contract, and thus subsequent charges had to be fair and reasonable.) The problem is that an individual patient’s charges are rarely high enough to justify an attorney taking the case on a contingent fee basis. And, these cases are difficult to aggregate, since each individual patient has a different set of charges, and it is fact-intensive to figure out a fair price for each item.

      My sense is that this problem will be largely mitigated by the expansion of health insurance coverage. Insurers are in a better position to negotiate prices in the aggregate. They don’t pay chargemaster.

      • Thanks for your comment, Chris!
        You can’t fall on the contract law “open price” doctrine here because under this doctrine it’s OK to charge any price which is customary and nondiscriminatory (which is what the chargemaster does). For that reason, unconscionable markups are best dealt with in a class action under the consumer protection law. For FRCP 23 “typicality” purposes, such an action must target the pricing of standard medications and devices. Declaratory relief can be a promising remedy here as well. Insurers surely sweeten the “bitter pill,” but the overcharge still hurts any non-Medicare patient. A.S.

    2. Could hospitals avert these problems by, say, charging a dime for Tylenol but adding a $1.40 fee for “Tylenol processing and administration”?

    3. Based on your response to Adam, Alex, it seems like the only objection is a formalist one. The aggregate prices are fair, but hospitals should just separately disclose the product cost from the delivery cost? Not sure why the law would/should require that, if the overall transaction is fair.

      • Based on Brill’s findings and copies of hospital bills, virtually every single item was priced extravagantly. That’s the whole problem and, potentially, a cause of action under consumer protection laws. Adam’s hypo, on the other hand, included a completely reasonable charge for administrative expenses. Some hospitals do charge reasonably, I have to say.

        • I understood Adam to be taking one of your examples of extravagantly priced items (your first one, tylenol) and then just dis-aggregating the price into the commodity plus the service. He thereby transformed extravagance into reasonableness, it appears. So lets take the second one — “$18 for a single diabetes test strip (sold for 54 cents by Amazon).” Suppose the hospital priced it as $1 for the strip plus a $17 fee for processing and administration. Would that make the transaction fair and reasonable, when it was otherwise unfair and unreasonable?

          • Adam put in very reasonable numbers.
            Your example is very helpful — thanks! In this example, a $17 fee for processing and administration may well be reasonable, too, but only when the hospital doesn’t charge it elsewhere in the bill. In reality, hospitals do charge steep prices for doctors’, nurses’ and administrators’ work under separate headings.