| Daily Briefing

Did California's physician payment rate setting law work? Experts are split.

A California law touted as a national model for addressing so-called "surprise bills" has led to fewer surprise bills for patients and lower payment rates for in-network and out-of-network physicians—but it may be driving physician group consolidation, according to recent research.

How the California law works

The California law (AB 72) took effect in 2017 and aims to protect patients against so-called balance billing, which occurs when patients receive a bill for the difference between the cost of their out-of-network health care services and amount their insurer covered.

The law established a benchmark payment rate for out-of-network bills and does not use arbitration as backstop. Under the law, patients who receive out-of-network care are billed at in-network rates and providers are reimbursed at either 125% of the Medicare reimbursement rate or the physician's average contracted rate (ACR), which represents the local standard.  However, the law does not include ED care, which makes up a large portion of surprise bills.

California's law has widely been viewed as a model for a national law to address surprise medical bills. California's bill most closely resembles a legislative package (S 1895) before the Senate, which also relies on a benchmark payment rate for out-of-network services without an arbitration backstop.

A separate bill (HR 3630) before the House would similarly establish benchmark payment rates for out-of-network services but also includes a fallback option for providers to contest rates and request an independent arbitrator review the case.

Insurance groups, such as America's Health Insurance Plans (AHIP), have supported California's law and congressional proposals to create a new benchmark payment rate for out-of-network care. However, hospital groups have argued against the use of rate setting to address surprise bills in favor of an arbitration approach. Tom Nickels, executive vice president of American Hospital Association, told the House's Committee on Energy and Commerce, Subcommittee on Health that such proposals would allow insurers to "simply default to a benchmark payment and decline to contract with many different types of physicians."

Other critics of California's law predicted it would lead insurers to reduce the number of providers in their networks in order to lower their health care spending.

Research suggests new law increases insurance networks, lowers payment rates, but drives physician consolidation

However, recent studies conducted separately by AHIP and a researcher at RAND offer insights into the real-world effects of California's benchmark payment rate-setting approach.

AHIP surveyed 11 health plans and asked them to provide the total number of in-network physicians across six specialties from before and after the law took effect. The survey did not include Kaiser Permanente, which AHIP notes is the largest health plan in California, because they have exclusive contracts with Kaiser providers.

In the American Journal of Managed Care, AHIP wrote that the number of in-network physicians in California grew by 16% since the law passed. AHIP found those growth rates fluctuated by specialty. For example, AHIP found a:

  • 26% increase in in-network diagnostic radiology physicians;
  • 18% increase in in-network anesthesiology physicians;
  • 10% increase in in-network emergency medicine physicians and general surgery physicians; and
  • 1% increase in in-network pathology physicians.

AHIP wrote that the study's data shows California maintained strong insurance networks after the new state-mandated benchmark payment rates took effect as the state adjusted provider reimbursements.

However, a separate study published last month in American Journal of Managed Care showed while the law resulted in fewer surprise bills it also led to lower provider payment rates and increased physician group consolidation.

For the study, Erin Duffy, a RAND researcher, interviewed 28 individuals—including policy experts, representatives from advocacy organizations and professional associations, and executives from physician groups, hospitals, and health insurers—on the law's impact.

Duffy's results showed California's law succeeded at protecting patients from surprise medical bills, but respondents said tying the benchmark payment rates to the "payer-specific local average commercial negotiated rates" gave insurers a leg up in negotiations with providers.

For instance, respondents said the law created an incentive for insurers to decrease or cancel contracts with providers who have above-average payment rates, representing a shift in bargaining power.

Physicians in anesthesiology, radiology, and orthopedic practices reported "unprecedented decreases in payers' offered rates and less interest in contracting" since the law took effect, Duffy wrote.

She added, "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."

Overall, physicians said the changes and lower payment rates are forcing more physician groups to consolidate, and some have sought to negotiate exclusive contracts with facilities to gain more leverage, according to the study.


Anders Gilberg, SVP of government affairs for the Medical Group Management Association (MGMA), said that his group members are still concerned that proposals to establish payment rates for out-of-network bills would lead to lower reimbursements and incentivize consolidation. Gilberg said, "Our members are extremely concerned that government intervention in this case will tip the scales in favor of more consolidation."

Gilberg added that New York provides a better model for addressing surprise bills through an arbitration process. He said New York's model appears to work and provide insurers and providers with leverage in negotiations. 

Paul Ginsburg, a professor of health policy and director of public policy at the Schaeffer Center for Health Policy and Economics at the University of Southern California, said flaws in the California law have created an incentive for insurers to pay providers lower rates. According to Ginsburg, the problem lies in how Department of Managed Health Care (DMHC) calculates the average contracted rate.

He said DMHC uses current payment rates and payer's own rates instead of the average of all payment rates in the area to determine the average contracted rate, which creates the incentive for insurers to pay providers with above-average rates a lower price as an out-of-network provider under the state law. In contrast, the Senate's proposal to address surprise bills would establish a benchmark rate using rates paid by all payers in a market. "The degree to which the California law changed the incentives [to pay lower rates than the median] is greatly diluted in the Senate … bill, because it's the market, rather than any individual insurer," Ginsburg said.

However, Jeanette Thornton, SVP for product, employer, and commercial policy for AHIP in a public statement said the research "shows that we can protect patients, improve affordability, and ensure strong provider networks with the right legislation to stop surprise medical bills" (Morse, Healthcare Finance News, 8/23; Waddill, HealthPayerIntelligence, 8/26; Terry, Medscape, 8/14; Cohen, InsideHealthPolicy, 8/29 [subscription required]).

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