Proposed California Surprise Billing Legislation: Impacts On Access To Care And Other Lessons Learned

King & Spalding
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This article discussed legislation that was until recently pending in California (AB 1611) and that was intended to prevent patients from receiving “surprise” bills from out of network hospitals after the patients receive emergency and post-emergency services. (A surprise billing law with a different focus already exists in California. AB72, enacted in 2016, protects against patients' being required to pay more than their in-network cost sharing if they visit an in-network facility but receive treatment from an out-of-network physician during the course of their visit.) The problem with the new proposed legislation was that it created a default rate that would severely limit reimbursement to hospitals and would jeopardize access to care for many low income individuals. The author of the bill recently pulled the bill from consideration due to complaints by hospitals about the default rate. The author indicated that the bill may be introduced next legislative session.

California hospitals support legislation that would prevent surprise bills being sent to patients. California hospitals prefer receiving payments directly from health plans, and support limiting patient liability and removing patients from the middle of disputes between hospitals and health plans regarding payment issues.

The problem with the current proposed legislation was that it created a default rate that would remove the incentive for commercial health plans to negotiate with hospitals to be part of their network. If health plans are able to receive preferential rates by keeping hospitals out of network, they have no incentive to negotiate contracts with hospitals. This could threaten the financial viability of some hospitals and cause other hospitals to drastically reduce the care that they are able to provide to their communities.

First a few facts. In 1995, there were approximately 400 hospitals in California. Despite the large increase in the population in the state, there are now approximately 300 hospitals. Rural communities have been hit particularly hard. In the Central Valley and north of Sacramento, more than a dozen hospitals have closed since 2000. According to the American Hospital Association, 25-35% of hospitals are operating at a loss at any given time.

By comparison, insurance companies are reaping considerable profits. According to 2018 report by the Council of Economic Advisors, health insurer profitability in the individual market has risen due to substantial premium increases, government premium tax credits that pay for those premium increases, and the large, government-funded, Medicaid expansion. Since the implementation of the Affordable Care Act on January 1, 2014, health insurance stocks outperformed the Standard & Poor’s 500 Index by 106 percent.

Medicare and Medi-Cal payments do not cover the costs of care. According to a study published by West Health Policy Center, Medicare pays hospitals an average of 79% of their costs. In some counties, the amounts are much lower. In Alameda, San Francisco, Santa Clara, Santa Barbara, Contra Costa, and San Luis Obispo Counties, Medicare pays approximately 55% of a hospital’s costs. In 2016, California hospitals suffered $12 billion in losses from government payers. Therefore, unless the federal and state governments are willing to substantially increase Medicare and Medi-Cal payments – which is unlikely -- hospitals have to rely on private insurance payments to help maintain access to care and remain financially viable. Any reduction in commercial reimbursement could jeopardize the financial viability of many hospitals and would likely result in less access for patients, especially in low-income and rural areas.

The form of the proposed California surprise billing legislation that was pending states that health plans only have to pay hospitals the lower of the reasonable value of the services or the average contracted rate paid by the health plan. This legislation would have encouraged health plans to terminate their more generous contracts and only keep their lowest rate contracts. Hospitals would be unable to negotiate for higher payments as health plans could simply force hospitals to accept the lowest contract rates.

Hospitals are willing to invest in expensive technology, and provide sophisticated tertiary services – such as stroke, heart attack and cancer services – if they have contracts with health plans that encourage their members to obtain their health care services at the hospital. If health plans are incentivized by the current legislation to cancel all but a few of their low-paying contracts, many hospitals may be less willing to invest in the healthcare services that their community needs.

Finally, this legislation did nothing to address the role of employer self-funded plans governed under the federal Employee Retirement Income Security Act (ERISA), which often limits providers’ ability to recover payment. Specifically, the practice of including anti-assignment clauses in contracts with employers can preclude providers from directly seeking legal action for non-payment.

There is general agreement that patients should not have to shoulder the cost of medical bills when they receive emergency and post-emergency services at out-of-network hospitals. Legislation to fix that problem is appropriate. AB1611 was at best a problematic solution to that problem.

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