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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.
Workforce Stability and Access to Care

Some physicians experienced revenue decreases under the AB-72 OON payment standard, and many raised concerns about long-term pay stagnation. One anesthesiologist expressed fears about the uncertain future of their practice if “rates are insufficient for me to recruit and retain the caliber of physicians that our hospital and surgery center clients expect.” Another anesthesiologist contemplated leaving California to attain a higher standard of living in a state without OON payment regulations.

AB-72 applies to nonemergency on-call consultations by neurologists, cardiologists, orthopedic surgeons, and other specialists. These physicians were accustomed to billing full charges for OON services, and the AB-72 payment standard is lower than what some are willing to accept for their labor. One physician observed that “we’ve had a number of surgeons just drop off the call list” under the new OON payment standard. Another explained that specialists are now unwilling to be on call for undesirable shifts: “All night long, holidays, weekends, etc—they’re not going to work.”

This response could be especially problematic in safety net hospitals where physicians may rely on high commercial payments to cross-subsidize relatively low Medi-Cal rates. Several stakeholders reported that hospital-based specialist shortages are a longstanding issue for publicly insured patients and they expect only marginal impact from AB-72. However, in the words of one hospital stakeholder, marginal losses matter: “I think every loss of an important specialty is a problem when you’re a Medi-Cal patient who needs care.”

DISCUSSION

AB-72 successfully protects patients in fully insured plans from surprise medical bills. This study demonstrates that OON payment standards influence negotiating leverage between payers and providers. In the initial implementation of AB-72, employing a payer’s own current ACR in the calculation of its future OON payment standard created a mechanism for insurers and health plans to lower their future payments to physicians. This incentivized payers to cancel or reduce the higher-priced contracts in their portfolio.

Beginning in January 2019, DMHC applies contemporary contracted rates to calculate ACR, which may drive a continuation of the in-network price suppression reported by interviewees. Physician and hospital stakeholders interviewed for this study identified several negative aspects of this market disruption, but advocates for cost control may applaud these policy impacts. Policy makers seeking to contain healthcare costs through lower prices could use OON payment standards as a policy lever to place downward pressure on in-network rates. In contrast, DOI continues to compute ACR by projecting forward individual payers’ 2015 contracted rates adjusted for inflation based on the Consumer Price Index for Medical Care Services. This approach preserves rates that reflect the relative pre-existing leverage of physicians and insurers. Therefore, it seems less apt to affect in-network rates or trigger the physician consolidation and workforce instability that interviewees reported in this study.

Limitations

There are several limitations to this study. The sample is not representative of all local markets across California; thus, this study may not capture the heterogeneity in policy effects by local population density, market concentration, and geography. Findings may not be directly generalizable to states with markedly different regulatory and market contexts. The timing of this study enables a close look at stakeholders’ early experiences, but it does not permit comprehensive empirical study of long-term impacts.

CONCLUSIONS

It is early in the implementation process of AB-72, and there may be long-term effects yet to be observed, but California offers a rare example of an OON payment standard based on commercial rates. Thus, California’s experience can inform stakeholders and policy makers as they seek to address surprise medical billing nationally and across states. This study’s findings demonstrate that an OON payment standard incorporating contracted rates influenced the bargaining landscape for insurers and providers, affecting network breadth and in-network rates. Policies modeled on AB-72 can potentially effectively protect consumers in fully insured plans from surprise medical bills and offer a policy lever to influence contracted rates.

Author Affiliation: RAND Corporation and Pardee RAND Graduate School, Santa Monica, CA.

Source of Funding: The Anne and James Rothenberg Dissertation Award.

Author Disclosures: The author reports no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Concept and design; acquisition of data; analysis and interpretation of data; drafting of the manuscript; and obtaining funding.

Address Correspondence to: Erin L. Duffy, PhD, MPH, RAND Corporation, 1776 Main St, PO Box 2138, Santa Monica, CA 90407. Email: eduffy@rand.org.
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