California Surprise-Billing Law Lowers In-Network Payments: Study

Ken Terry

August 14, 2019

California's policy on surprise billing is lowering the rates paid not only to out-of-network but also to in-network physicians, a new study shows.

A California state law — Assembly Bill No. 72 — which was passed in 2017 to protect consumers, is motivating some physicians to form larger groups to restore their leverage with health plans, according to the study, which was published online August 5 in the American Journal of Managed Care.

These reported effects are likely to provide ammunition for opponents of one of the surprise-billing measures now pending in Congress. The Senate Committee on Health, Education, Labor and Pensions (HELP) recently approved a bipartisan bill that would limit the amount that an out-of-network physician could receive for his or her services to the median amount paid to in-network providers in the region, according to the Hill.

Hospital and physician associations have assailed this legislation as a form of price control that gives insurers too much bargaining clout.

Two other bills, one in the House and the other in the Senate, would allow physicians to appeal the payment of a standard rate to an independent arbiter. This approach is more popular with providers than the Senate HELP measure.

Under California's AB-72 law, an insurer pays out-of-network providers at the payer's local average contracted rate or 125% of Medicare's fee for service rate, whichever is greater. The provider cannot balance-bill patients for the difference between that standard rate and his usual rate unless the patient has specified in writing that he or she is willing to pay the higher amount.

The legislation does, however, create an independent dispute resolution process that allows a noncontracted provider to appeal a claim payment dispute.

AB-72 applies only to nonemergency services; another state law bans balance billing by out-of-network providers who treat patients during emergencies. In addition, AB-72 covers payments only by fully insured plans. Self-insured plans are regulated by the federal Employee Retirement Income Security Act and are not subject to state regulation.

Bargaining Positions

The study's author, Erin L. Duffy, PhD, MPH, of the RAND Corporation, a nonprofit public policy think tank, interviewed 28 people about the impact of AB-72. These individuals included policy experts, representatives of advocacy organizations and professional associations, and executives of physician groups, hospitals, and health insurers.

In the absence of a law like AB-72, Duffy notes, physicians and payers negotiate rates, and the final agreement reflects their relative leverage. Payers' leverage can be influenced by market share and state regulations, including network adequacy requirements. Physicians' and hospitals' market share and reputation give them a bargaining advantage.

If physicians and payers can't reach an agreement, physicians will bill the payer at their usual rate and then balance-bill the patient for whatever the health plan doesn't cover. When legislation imposes an out-of-network payment standard, as AB-72 does, this becomes the physician's price for out-of-network services.

If the standard price is higher than the existing negotiated rate, physicians have an incentive to leave the insurance network. If the out-of-network standard payment is lower than negotiated rates, payers can pressure providers to accept lower rates or end their contracts.

Physicians in anesthesiology, radiology, and orthopedic practices report "unprecedented decreases in payers' offered rates and less interest in contracting since AB-72 was passed into law," Duffy writes.

She adds, "Some physicians experienced revenue decreases under the AB-72 [out-of-network] payment standard, and many raised concerns about long-term pay stagnation."

These dynamics apply to hospital-employed as well as independent groups — one reason why hospitals have opposed the Senate legislation.

AB-72 has created other unintended consequences, Duffy writes. Some hospital-based physicians say that they intend to merge with other practices and to contract exclusively with facilities to regain their leverage over health plans.

The California law also applies to nonemergency on-call consultations by specialists. These physicians were accustomed to billing full charges for out-of-network services, Duffy notes. Now that their payments have been lowered, some surgeons have dropped from their hospital's call list, and other specialists refuse to be on call for undesirable shifts.

MGMA's View

The approach of the Senate HELP bill, which is in some ways similar to that of the California law, would lead to lower payments for physicians, whether they are in or out of network, Anders Gilberg, senior vice president of government affairs for the Medical Group Management Association (MGMA), told Medscape Medical News.

"It would be a rolling slow decline," he said, "because what the bill would do is set the out-of-network payment at the median of the negotiated rates. Any plan with an existing contract would renegotiate their rate below the median, which would be recalculated over time, and the median would be driven down fairly quickly."

In addition, he said, imposing standard rates for out-of-network care would incentivize the kind of consolidation that Duffy describes in her article. "Our members are extremely concerned that government intervention in this case will tip the scales in favor of more consolidation."

In a letter to the Senate HELP committee, the MGMA said, "In general, the government should not establish a fixed payment amount for out-of-network services. A fixed payment rate could undermine patient access to in-network care because health plans have less incentive to contract in-network clinicians if they can rely on a default out-of-network payment rate."

In contrast, Gilberg praised New York's law on out-of-network billing, which requires arbitration between physicians and plans when the latter think that physicians' bills are too high. This system seems to work, he said, and it gives both sides some means to negotiate.

Flaw in California Law

Paul Ginsburg, PhD, professor of health policy and director of public policy at the Schaeffer Center for Health Policy and Economics at the University of Southern California, attributes the unanticipated consequences described in Duffy's article to a flaw in the California out-of-network billing law.

The problem is that the state Department of Managed Health Care (DMHC) calculates the average contracted rate on the basis of current payments to providers. Secondarily, it uses each payer's own rates, rather than the average of all payment rates in the area, he told Medscape Medical News.

These features provide a bigger incentive for payers to lower rates in cases in which they were paying physicians more than the standard rate.

In contrast, according to the study, the state Department of Insurance, which regulates the payers that the DMHC doesn't, uses insurers' 2015 contracted rates, adjusted for inflation, to calculate the out-of-network payment standard. "This approach seems less apt to affect in-network rates or trigger the physician consolidation and workforce instability that interviewees reported in this study," Duffy writes.

Although the Senate HELP bill does not use an historical benchmark like the one chosen by the California Department of Insurance, the standard rate specified in the bill is based on the rates paid by all payers in a market, Ginsburg notes. "The degree to which the California law changed the incentives [to pay lower rates than the median] is greatly diluted in the Senate HELP bill, because it's the market, rather than any individual insurer." Therefore, he said, it’s unlikely that the legislation would undermine the ability of physicians to negotiate rates with health plans.

Ginsburg said that although he doesn't know much about the impact of the New York law, he suspects it has led to higher payments to physicians than the benchmarking approach would have, because of the parameters it imposes on arbitrators.

Am J Manag Care. Published online August 5, 2019. Full text

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