A California law banning surprise billing and setting a standard for out-of-network payment rates shifted negotiation leverage toward payers, according to industry stakeholders interviewed in an article in The American Journal of Managed Care.
The 2017 law was also perceived to have driven further provider consolidation in response to the leverage shift. Lawmakers working on policies to ban surprise billing could use California's approach "to place downward pressure on prices or use a modified approach to decrease market disruption," the study's author, RAND Adjunct Policy Researcher Erin Duffy, said.
The study gives some weight to provider arguments the surprise billing laws would create upheaval in private negotiations, but many patient advocates and policy experts maintain that kind of disruption is exactly what the market needs.
Health policy expert Loren Adler, who was not associated with the research, told Healthcare Dive he wouldn't be surprised if some providers exaggerate their reporting. He noted that an out-of-network benchmark "only binds in-network rates as a ceiling to the degree that the benchmark is higher than the normal market rate." Indeed, Duffy said payers characterized the effects of the California law as correcting an existing market imbalance.
Adler, who is associate director of the USC-Brookings Schaeffer Initiative for Health Policy, said the problem today is the market for emergency and ancillary physicians is unnaturally tilted in their favor so "legislation actually fixing the market failure that allows surprise bills should put downward pressure on the payment rate of physicians who have been benefiting from the market failure, in direct proportion to how much they were exploiting the market failure beforehand."
Surprise billing bans have gained traction in Congress this summer, despite strong pushback by payer and provider lobbies. Federal legislation would be key because most Americans have self-funded, employer-sponsored coverage that can only be regulated federally. Although there are several state surprise billing laws, they don't address that gap.
Several bills aim to halt the practice but they take different approaches. Some, like the draft sponsored by Senate HELP Committee Chairman Lamar Alexander, R-Tenn., use the method California took in setting an out-of-network payment standard. Providers fiercely oppose this policy, with the American Hospital Association calling the Senate proposal "unworkable" and "arbitrary, government-dictated reimbursement."
California's standard is based on payer-specific local average contracted rates or 125% of Medicare's fee-for-service rate, whichever is greater. Duffy told Healthcare Dive some federal proposals instead use a marketwide median benchmark, which "could make it a lot harder for different stakeholders to game the system."
Other federal drafts take the provider-favored approach of relying primarily on third-party arbitration to determine disputed payments, without setting a payment rate.
The California study was based on interviews with 28 stakeholders six to 12 months after the law was implemented in July 2017. Interviewees included executives at hospitals, physician groups and health benefit companies as well as representatives of advocacy organizations and professional associations.
While all interviewees agreed the California legislation had met its objective in terms of protecting consumers from surprise bills, they also said it had disrupted the contracting landscape.
Policymakers should note the ripple effect surprise billing legislation could have, Duffy said. "I think the main takeaway is that however they regulate out-of-network payment levels will influence in-network levels."
Once the law, called AB-72, went into effect, hospital-based physician groups lost the ability to walk away from contract negotiations with payers, and health plans were incentivized to lower or cancel contracts with rates above the new standard.
"Physicians in anesthesiology, radiology, and orthopedic practices reported unprecedented decreases in payers' offered rates and less interest in contracting since AB-72 was passed into law," Duffy wrote.
She noted the results of the study are limited by the small sample size as well as by California's unique regulatory and policy environment. The state has relatively strict network adequacy requirements, for example. It also has high market variation, with Southern California showing less consolidation than the northern area.