CA Surprise Medical Bill Law Lowers Hospital Reimbursement Rates

August 15, 2019 - A California law that addresses surprise medical bills by setting out-of-network payment rates increased the bargaining power of insurers in the state, causing the payers to lower or cancel contracts with some providers, according to a recent RAND Corporation study.

The law may also have motivated increased consolidation among physician practice groups looking to improve their bargaining power after the implementation of the law, the study published in the American Journal of Managed Care found.

“The approach taken by California legislation that limits the fees that can be charged by out-of-network physicians appears to be reducing the number of surprise medical bills that patients receive for care at in-network hospitals,” said Erin L. Duffy, author of the study and an adjunct researcher at RAND Corporation. “It also appears to be reducing physicians' leverage to negotiate higher in-network payments, and in turn is speeding the consolidation of physician groups as they seek to regain lost leverage.”

Policymakers have recently prioritized addressing surprise medical bills, or large, unexpected physician bills for out-of-network care received at hospitals that are within the network of the patient’s insurance plan.

Research shows surprise medical bills are common. A study published earlier this week in JAMA Internal Medicine found that the incidence of out-of-network billing from 2010 to 2016 increased from 32.3 percent to 42.8 percent of emergency department visits and 26.3 percent to 42 percent of inpatient admissions. The mean potential liability to patients also increased during the period, rising from  $220 to $628 for emergency department visits and $804 to $2,040 for inpatient admissions.

California implemented AB-72 in 2017 to protect patients from such potential liability.

Specifically, the law limits how much providers can charge patients for out-of-network services for non-emergency services at in-network hospitals. Under the law, patients pay their in-network cost-sharing obligations, and payers reimburse out-of-network payers the higher of the payer’s local average contracted rate or 125 percent of Medicare’s fee-for-service rate.

The law has protected patients from surprise medical bills for out-of-network non-emergency care. However, it also significantly impacted the negotiation dynamics between hospital-based physicians and payers, the study found based on interviews with 28 stakeholders. Interviewees included representatives of advocacy organizations and state-level professional associations, as well as current executives of physician practice groups, hospitals, and health benefits companies.

Stakeholders largely agreed that the surprise medical bill law shifted bargaining power to payers, enabling insurance companies to walk away from contract negotiations with hospital-based physician groups that have payment standards about the local average contracted rate.

As a result, payers lowered or terminated contracts with rates above the local average contracted rate, they said. In particular, payers lowered the rates for physicians in anesthesiology, radiology, and orthopedic practices.

Payer-based interviewees, however, told researchers they gained “a small amount of leverage under AB-72,” and the law corrected an existing imbalance between hospital-based physicians and insurance plans.

The surprise medical bill law may have also had other unintended consequences, including consolidation and workforce challenges, the study showed. Some stakeholders pointed out that specialists were less willing to work, especially nights and holidays, under the new law.

Currently, the California law only applies to fully-insured plans, and not self-funded plans, which are subject Employee Retirement Income Security Act of 1974 preemption. Fully-insured plans cover about half of Californians with private insurance, but federal proposals to address surprise medical bills could cover lives under self-funded plans, too.

Several recent bills that address surprise medical bills aim to implement a benchmark price for out-of-network services rendered at in-network hospitals. Most of the proposals would accomplish that by setting a standardized rate using average in-network charges for a certain service in a region or charge a certain percentage – most commonly 125 percent – of the Medicare fee-for-service rate.

Hospital advocates have opposed setting benchmark rates for out-of-network care, arguing that the policy would motivate payers to form inadequate networks so they would not have to pay higher reimbursement rates for in-network care.

In general, provider groups have been in favor of legislation that would implement an independent arbitration system in which payers and providers name their fair price for out-of-network services and a third-party arbitrator determines what the insurance company pays.

However, payers have voiced their discontent with arbitration, leaving surprise medical bill legislation still up for debate.