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The American Journal of Managed Care August 2019
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Influence of Out-of-Network Payment Standards on Insurer–Provider Bargaining: California’s Experience
Erin L. Duffy, PhD, MPH

Influence of Out-of-Network Payment Standards on Insurer–Provider Bargaining: California’s Experience

Erin L. Duffy, PhD, MPH
California’s experience implementing a policy to address surprise medical billing demonstrates that out-of-network payment standards can influence payer–provider bargaining leverage, affecting prices and network breadth.

Objectives: To examine the early effects of California’s recent policy addressing surprise medical billing (AB-72) on the dynamics among physician, hospital, and insurer stakeholders and to identify the influences of the policy’s novel out-of-network (OON) payment standard on provider–payer bargaining. This study can inform current policy formation, given that current federal proposals include a payment standard like that in AB-72.

Study Design: Case study of the implementation of AB-72 and stakeholders’ perspectives, experiences, and responses in the first 6 to 12 months after policy implementation.

Methods: Semistructured interviews were conducted with 28 individuals representing policy experts, representatives of advocacy organizations and state-level professional associations, and current executives of physician practice groups, hospitals, and health benefits companies. Related documentation was collected and analyzed, including bill text, rulemaking guidance, testimony before the California Senate Committee on Health, and advocacy letters. Qualitative analysis techniques, such as process tracing and explanation building, were employed to identify key themes.

Results: AB-72 is effectively protecting patients from surprise medical bills. However, stakeholders report that an OON payment standard set at payer-specific local average commercial negotiated rates has changed the negotiation dynamics between hospital-based physicians and payers. Interviewees report that leverage has shifted in favor of payers, and payers have an incentive to lower or cancel contracts with rates higher than their average as a means of suppressing OON prices. Physicians reported that this experience of decreased leverage is exacerbating provider consolidation.

Conclusions: California’s experience demonstrates that OON payment standards can influence the payer–provider bargaining landscape, affecting network breadth and negotiated rates.

Am J Manag Care. 2019;25(8):e243-e246
Takeaway Points

California’s 2017 policy to address surprise medical billing (AB-72) includes a novel out-of-network (OON) payment standard. Current federal proposals employ similar standards, and California’s experience can inform this policy making:
  • California’s OON payment standard, which is based on payer-specific local average contracted rates, decreased physician leverage and created an incentive for insurers and health plans to reduce or cancel contracts with above-average rates.
  • As a secondary effect, physicians facing lower rates consolidated to regain leverage.
  • OON payment standards influence payer–provider contracting dynamics. Policy makers can use OON payment standards like AB-72 to place downward pressure on prices or use a modified approach to decrease market disruption.
There is growing bipartisan drive to address the widespread consumer protection issue of surprise medical billing, with several federal proposals currently under consideration.1-4 Such bills occur when patients involuntarily receive services from out-of-network (OON) providers, typically in emergencies or when treated by an OON physician at an in-network hospital without the opportunity to choose an alternative in-network physician.5 In these cases, the provider bills the patient’s insurer at usual and customary rates (or charges), which can be substantially higher than in-network rates.6 If the insurer does not pay these full charges, then the provider can bill the patient for the remaining balance. Several studies estimate that patients are at risk of receiving these bills for as many as 1 in 10 elective hospital admissions and 1 in 5 emergency department visits.7,8 Although some patients have success in negotiating down the owed amount, these bills are widely viewed as unfair by patients and are a significant source of medical debt.9-11

There are 4 federal proposals to address surprise medical billing: separate bills from the Senate Health, Education, Labor and Pensions Committee and the House Energy and Commerce Committee; a bill from a bipartisan Senate working group led by Senator Bill Cassidy (R-LA); and a bipartisan House bill introduced by Representative Raul Ruiz (D-CA).1-4 All 4 protect patients from cost sharing above in-network levels and establish arbitration processes or set an OON payment standard dictating the amount that insurers must pay providers for services. Standards that incorporate commercial contracted rates are prominent among the options described in the current federal proposals. Although several states have policies in place to address surprise medical billing, California is one of few states with experience employing an OON payment standard based on commercial rates.12 Federal and state policy makers can gain insights into the influence of this type of OON payment standard on the healthcare market from California’s experience.

California’s Approach to Addressing Surprise Medical Billing

California implemented a comprehensive policy (AB-72) addressing surprise medical billing for OON nonemergency physician services at in-network hospitals in 2017, expanding existing protections in emergency scenarios.13,14 AB-72 limits patients’ cost sharing to in-network levels for all nonemergency physician services at in-network hospitals, unless patients provide written consent to billing 24 hours in advance of services.

Insurers and health plans pay OON physicians at in-network hospitals the greater of the payer’s local average contracted rate (ACR) or 125% of Medicare’s fee-for-service reimbursement rate. ACR rulemaking is conducted separately for health insurers and health plans by the California Department of Insurance (DOI) and the Department of Managed Health Care (DMHC), respectively. From July 2017 through December 2018, a legislated interim ACR was in effect using inflation-adjusted 2015 rates that were self-reported by each payer.13 As of January 2019, the DMHC is updating ACRs annually with a 2-year lookback whereas the DOI continues to use the inflation-adjusted 2015 rates.15,16 AB-72 also establishes a binding independent dispute resolution process to enable physicians to challenge payments from insurers and health plans.

Notably, state insurance regulations only apply to fully insured plans because employers’ self-funded plans are subject to the Employee Retirement Income Security Act of 1974 preemption.17 The current federal proposals would expand states’ authority to regulate both fully insured and self-funded plan types.

Negotiation Dynamics Underlying Surprise Medical Billing

Surprise medical bills are a symptom of physicians and payers (ie, insurers and health plans) failing to contract with one another; thus, one must consider the dynamics between physicians and payers to understand the potential effects of policies that address surprise medical billing. Physicians and payers negotiate contracted rates, and the resulting rates reflect the relative leverage of each entity.18,19 Payers’ leverage in negotiations with physicians can be influenced by market share and state regulations, such as California’s provider to enrollee ratios, maximum travel times, and maximum appointment wait times.20 Such network adequacy requirements can be a source of leverage for physicians in remote or highly consolidated provider markets. Physicians and hospitals also garner leverage through greater market share and a reputation that drives patient demand.

Physicians and payers will reach a contract if they can agree on a rate that is amenable to both parties; if not, physicians will bill the payer and/or patient their charges. When an OON payment standard is imposed, charges are replaced by the new standard as the physician’s price for OON services. An OON payment standard higher than existing negotiated rates creates an incentive for physicians to go OON. In turn, an OON payment standard below negotiated rates discourages payers from contracting and pressures providers to accept lower rates.21 Such effects have been observed within the Medicare Advantage market, in which participating providers are prohibited from billing OON Medicare Advantage patients higher than traditional Medicare rates; thus, provider reimbursement by Medicare Advantage plans tracks traditional Medicare rates closely.22-24

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