No More Surprise Medical Bills: California Assembly Bill 72

Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

On September 23, 2016, the California Legislature passed, and Governor Jerry Brown signed, Assembly Bill 72 (AB 72 or the Act), creating a new regime for the regulation of “surprise bills.” (Health Insurance—Out-of-Network—Coverage, 2016 Cal. Legis. Serv. Ch. 492 (A.B. 72)) The Act became effective on January 1, 2017. Cal. Health & Safety Code §§ 1371.30-.31.

Below we explore the text of the Act itself, its supporters and opponents, and current developments since its passage.

What Is AB 72?

The Act’s goal was to protect consumers from surprise medical bills. Surprise medical bills are bills a patient receives from treatment at an in-network facility with out-of-network health professionals—a practice that was already prohibited in California in the context of emergency services before AB 72. Prospect Medical Group, Inc. v. Northridge Emergency Medical Group, 45 Cal. 4th 497, 502 (2009). Under the Act, insured individuals are only responsible for costs equal to what they would pay if they received the service from an in-network provider. Cal. Health & Safety Code § 1371.9(a)(1). Further, out-of-network providers are prohibited from billing or collecting any amount from the enrollee for their services except for the in-network cost-sharing amount. Cal. Health & Safety Code § 1371.9(a)(3).

However, there are carve-outs. The billing limitations do not apply if the enrollee has a healthcare service plan that pays for out-of-network services. Cal. Health & Safety Code § 1371.9(c). Moreover, the Act does not extend protections to all services provided by out-of-network providers. For example, healthcare service plans do not need to cover services that are not required by the plan or by law. Cal. Health & Safety Code § 1371.9(g). Additionally, the provisions do not apply to Medi-Cal managed healthcare service plans, to certain contracts with the State Department of Health Care Services for public social services, or to emergency services and care. Cal. Health & Safety Code § 1371.9(j)(k). To ensure that patient services are not compromised, however, the Act does require health plans to meet existing network adequacy requirements, including but not limited to inpatient hospital and specialist physician services. Cal. Health & Safety Code § 1371.31(a)(5).

While limiting collections for out-of-network providers, the Act tries to strike a balance by ensuring that providers are reasonably reimbursed for their services by either an agreed-upon rate or a default payment rate based on geography. Out-of-network providers are to be reasonably reimbursed in one of two ways. First, the healthcare service plan and the out-of-network provider can agree on a reimbursement rate. Cal. Health & Safety Code § 1371.31(a)(1). Second, as an alternative, if an agreement is not reached, AB 72 requires plans to reimburse out-of-network providers at either the greater of the average contracted rate or 125% of the amount Medicare reimburses on a fee-for-service basis for the same or similar services in the general geographic region in which the services are provided. Id.1

AB 72 also provides for an independent dispute resolution process that gives out-of-network providers the option to resolve their disputes with healthcare service plans short of formal litigation. Cal. Health & Safety Code § 1371.30(a)(2). Under the independent dispute resolution process (IDRP), the out-of-network provider must complete the health plan’s internal process for submitting and reviewing claims. Id. Subsequently, if the provider still disagrees with the amount of reimbursement, it can (but is by no means required to) appeal the decision to IDRP. Id. The decision obtained through IDRP is binding on both parties and must be implemented by the plan. Cal. Health & Safety Code § 1371.30(d). However, “[i]f dissatisfied, either party may pursue any right, remedy, or penalty established under any other applicable law.” Id.

Support for AB 72

While pending, AB 72 was supported by various groups, including the California Black Health Network, Children Now and the National Health Law Program. In supporting the Act, many of these groups cited the unfairness to patients under the current system, under which patients made an effort to go to in-network providers and facilities yet ended up with exorbitant surprise bills from out-of-network specialists they did not choose. Legislative History AB 72, Senate Rules Committee, Office of Senate Floor Analyses, Aug. 15, 2016, LIS-12c, page 6.

Organizations such as the California Labor Federation and the Consumers Union highlighted the importance of the Act in taking the burden off of the patients both in dealing with surprise bills and negotiating with providers. Id. They emphasized that “[c]onsumers should not pay the price for the complicated relationships between doctors, facilities and health plans.” Id. These organizations characterized the Act’s payment scheme as a balanced solution to the problem of surprise billing, because it provided for fair compensation to out-of-network doctors and afforded them a process to appeal for higher payment. Id.

Opposition to AB 72

While AB 72 had significant support, it also garnered opposition. A series of medical associations argued that the Act “awards plans for failing to maintain adequate networks” and characterized the Act’s payment scheme as a “fee cap” which would “actually incentivize plans to further narrow networks, making it that much harder for patients to receive in-network care.” Legislative History AB 72, SP1-459.

The American Society of Plastic Surgeons and the California Society of Plastic Surgeons contended that AB 72 would “unjustly enrich insurance companies” because “Medicare rates are notoriously low and are clearly ill-suited for non-Medicare patients.” Legislative History AB 72, SP1 – 508, Aug. 23, 2016. They also argued that the Act’s payment scheme “makes providers de facto network participants without offering them the patient access advantage that comes with being a contracted provider.” Id.

The California Medical Association (CMA) took a more balanced approach. While recognizing that AB 72 provided a comprehensive and fair solution to the surprise billing issue, the CMA argued that the Act needed certain additional provisions for adequate physician protections. Hearing on A.B. 72 Before the S. Comm. on Health, 2016 Leg. (Cal. 2016) (statement by Sen. Ed Hernandez, O.D., Chair).2 Ultimately, the CMA took a neutral position on the Act, recognizing the need to protect patients from exorbitant surprise bills and concluding there were adequate protections in the Act.

AB 72 Is Challenged in the Courts

Currently, AB 72 is facing its first legal challenge. On October 13, 2016, the Association of American Physicians and Surgeons, Inc., filed a lawsuit against Governor Edmund G. Brown, Jr., and Director of the Department of Managed Healthcare Shelley Rouillard claiming that AB 72 violates “multiple constitutional rights of physicians and patients.” Ass’n of Am. Physicians & Surgeons, Inc. v. Brown, No. 216CV02441MCEEFB, 2018 WL 1535531, at *1 (E.D. Cal. Mar. 29, 2018). Defendants filed a Motion for Judgment on the Pleadings, which the court granted on March 29, 2018, with leave to amend.

In granting the motion, the court concluded that 1) the claims against Governor Brown are barred, because he was too attenuated of an actor to have enforcement duties; 2) the plaintiff failed to allege standing; and 3) the plaintiff failed to state a claim that the Act is facially invalid. Plaintiff filed a First Amended Complaint on April 30, 2018.

While this case does not at this juncture provide much guidance, the court did state in its ruling on the defendant’s motion that:

There are aspects of the Act that appear troubling at this early stage. For example, although the default rate provisions seem to leave open the possibility that out-of-network doctors will be able to negotiate higher rates, from a practical perspective, it seems more likely that in practice those rates will end up acting as a ceiling rather than a floor. To the extent that occurs, Plaintiff may be able to successfully pursue an as applied challenge based on its current position that those rates are confiscatory. That said, because it is entirely possible that reimbursement rates will actually be higher than the default rates, the Act’s provisions are simply not amenable to a facial challenge.

Brown, 2018 WL 1535531, at *7.


Ultimately, at this juncture, there is no way of predicting how the court will treat the First Amended Complaint. However, the decision should give both proponents and opponents pause.

1. By January 1, 2019, DMHC must specify a methodology that the health plans, and their delegated entities, must use to determine the average contracted rates for services most frequently subject to Section 1371.9. Cal. Health & Safety Code § 1371.31(a)(3)(A). The methodology must take into account, at a minimum, information from the independent dispute resolution process, the individual health provider’s specialty and the geographic region of the contracted rates. Id. DMHC must also consult with interested parties in the development of the standardized methodology and hold its first stakeholder meeting no later than July 1, 2017. Cal. Health & Safety Code § 1371.31(a)(3)(F).

2. For example, the CMA wanted a provision calling for the health insurance plans to collect any in-network cost-sharing amount the patient would be responsible for in the case they received out-of-network care pursuant to the bill in order to clarify to consumers what portion of the care they would be required to pay. Id. Additionally, the CMA proposed excluding on-call specialists from the bill’s provisions because of its concern that the payment scheme would deter physicians from volunteering to be on call, thereby limiting access to such specialists. Id.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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