Caps on Out-of-network Rates

Cap on Out-of-networks Rates

When using out-of-network (OON) price caps, a state regulatory agency has the legal authority to set a maximum payment that commercial payers pay when a health plan member obtains care from a provider outside their insurance network. OON caps could be applied to all out-of-network services or limited to “surprise billing” situations (a circumstance when patients unknowingly receive care from providers that are out of their health plan’s provider network).

OON price caps can control healthcare costs in two ways: 

  1. by truncating very high OON prices charged by providers and 
  2. by altering the negotiating dynamic between health plans and providers over in-network negotiated (INN) rates. 

In the first case, OON caps prevent providers, especially dominant health systems, from threatening to charge excessive OON prices to force plans to agree to higher in-network rates. For example, in the case against Sutter Health, the plaintiffs alleged that Sutter charged punitively high OON rates knowing that plans would be forced to pay these high rates if their enrollees sought care from or were brought to a Sutter hospital in an emergency. Consequently, plans found it uneconomical to try to create a network that excluded Sutter due to a small number of patients that would use OON services from Sutter. 

The second way that OON caps control high health care costs is by giving health plans additional negotiating leverage to negotiate in-network rates that are at or near the level of the OON price cap.  For example, in the Sutter case, the plaintiffs allege that plans were at a disadvantage when negotiating in-network rates with Sutter because of the punatively high OON rates.  As a result, plans likely paid much higher in-network rates than they would have if the state had caps on OON rates. Setting an OON price cap changes this dynamic because if a provider refused to negotiate in-network rates close to the OON price cap, the plan could cancel the contract with the provider and simply pay the OON price cap. Thus, in addition to capping very high OON price levels, a system of OON price caps can create a beneficial “spillover” effect on in-network negotiated prices. The potential savings associated with lower negotiated in-network rates will depend on the level of the OON price cap. Health plans may realize additional cost savings from lower INN rates if the OON price caps are gradually lowered over time.

A state interested in implementing this payment approach would need to pass a law empowering a state regulatory agency, such as a cost commission or the department of health, to determine and enforce the maximum prices a commercial health plan must pay for OON services. The state agency must also collect or have access to data from plans and providers on all OON service prices or have the authority to selectively audit providers and plans in order to support enforcement. The regulatory agency administering an OON price cap model, should also have the authority to: 

  1. vary the OON price caps by region of the state; 
  2. to lower the OON price caps over time; and
  3. to monitor the impacts of this model on provider network participation, member network access and provider financial solvency.  

States can enforce compliance with established OON price caps in various ways:

  1.  requiring that provider and health plan officers, certify under penalty of perjury, that they are in compliance with the regulated OON price caps; 
  2. making a violation an unfair trade practice enforceable by the relevant agency, state Attorney General, and affected individual; 
  3. requiring the provider to refund the payer and pay a penalty payment to the affected individual, and/or 
  4. having violations be something that can cause revocation of a professional or hospital license. 

While OON caps may well increase the negotiation leverage of insurers, there is no guarantee that those savings will be passed to consumers, especially in markets with dominant insurers. Accordingly, a state’s department of insurance should also have the authority to review the prices paid by health plans for INN prices overtime and determine whether health plans are appropriately passing on any savings from lower INN rates in lower premiums for health plan subscribers.

Other than the states with rate setting authority over all-payer hospital rates (see details here), no state has implemented price caps for all OON services. The best example of the potential impact of OON price caps occurs in the context of the federal Medicare Advantage program. The Social Security Act (Section 1866(a)(1)(o) and 42 CFR 422.214, n.d.) requires OON providers participating in the Medcare program to accept the Medicare fee-for-service rate as full payment for any services provided to Medicare Advantage (MA) beneficiaries. This statutory provision creates a de facto OON cap on MA rates for most physician and hospital services. In practice, this provision gives MA plans increased negotiating leverage over most providers and such that in-network negotiated MA plan payments that in most cases closely approximate fee-for-service Medicare rates (Berenson et al. 2015).

In addition to the defacto OON cap for Medicare Advantage plans, 28 states and the federal government have established limits on OON provider payment associated with surprise medical bills. For example, California sets a payment standard of the greater of (1) 125% of Medicare FFS rates or (2) the average contracted rate for that health plan and for that region for non-emergency services provided by OON providers at in-network facilities.

Furthermore, two states, Oregon and Montana have established payment caps for their state employee health benefit plans that is tied to a multiple of Medicare prices, on both in-network and out-of-network provider payments. These programs are discussed on the rate setting page

In Medicare Advantage (MA), the de facto OON cap is likely one reason that MA plans pay approximately the same rates as traditional Medicare and much less than other commercial rates which are estimated to be in the range of 150 to 240% of Medicare FFS rates. Additionally, researchers found that prices paid to both in-network and OON anesthesiologists for out-patient care decreased after California adopted a payment cap on surprise billing, which suggests OON caps may have a strong spillover effect. The researchers concluded that “state surprise-billing legislation appears to directly lower out-of-network prices and indirectly lower in-network prices by changing payer-practitioner negotiating dynamics.”

While OON caps likely controlled costs in MA plans, states might not have the same experience as health systems may use very high commercial rates as a way to offset low reimbursement from MA plans (i.e., increase cost-shifting).  Furthermore, health systems know that if Medicare-eligible individuals find MA plans too expensive or the MA networks undesirable, those individuals will switch to traditional Medicare plans and the health system will get paid at the traditional medicare. Commercial plans do not have this backstop option.  Theoretically, a public option could serve as a backstop if the payment rates were set by the state to be similar or slightly above the OON caps.

There are at least four potential limitations of OON price caps:

  1. For non-emergency care, providers could refuse to provide care for patients for whom they are out of network. 

Hospitals must provide emergency and stabilization care, but providers may refuse to provide care for patients in other situations.  For example, in February 2022, the Mayo Clinic in Minnesota announced that they would longer schedule appointments for OON Medicare Advantage patients unless federal law required its physicians to care for them.  More recently, UnitedHealthcare and the Mayo Clinic reached an agreement that would make Mayo Clinic in-network for enrollees in UnitedHealthcare Medicare Advantage plans. Nonetheless, as long as the OON cap is set above the marginal cost of providing care, hospitals will generally make money from seeing OON patients unless the hospital is capacity constrained and can replace OON patients with higher paying in-network patients.

  1. OON caps may be less effective in markets with “must-have” providers. 

With “must-have” provider, insurers must include that provider in their networks to have a commercially viable product – either due to network adequacy laws or because employers won’t purchase a plan without that provider. Since these providers will not be out-of-network, an OON cap is essentially irrelevant and “must-have” providers can likely demand rates in excess of the cap.

Perhaps the best example of this dynamic occurred in the market for dialysis services where two entities (DaVita and Fresenius) have a combined 75% market share, with other providers in the low single digit market share.  Researchers found that this dominant position, coupled with network adequacy requirements, and likely all-or-nothing contracting terms demanded by the dialysis providers resulted in in-network payment rates by MA plans that were 27% higher than Medicare FFS rates. The rates were also significantly higher (131% Medicare FFS rates) for large dialysis organizations than for independently owned facilities (112% Medicare FFS rates). In response, Medicare relaxed network adequacy requirements for dialysis clinics as of January 2021, but it remains unknown if in-network MA negotiated prices dropped or will drop as a result.

  1. OON price caps may reduce the number of hospitals or providers participating in insurer networks or, if rates are set too low, may cause service line or facility closures. 

For instance, a recent study found that a reduction in OON prices by 50% might reduce the share of hospitals participating in insurer networks by 15 percentage points. These concerns, however, may be minimal if policymakers are careful to set OON caps that exceed the marginal cost of providing care.  Furthermore, if policymakers set OON caps that are relatively high (e.g. near the median commercial rate) and slowly reduce them over time, that would allow policymakers to monitor impact and minimize disruptions to the delivery system that could result from sudden price reductions.. 

  1. Fourth, while OON caps increase the negotiation leverage of insurers, there is no guarantee that those savings will be passed to consumers, especially in markets with dominant insurers. 

This concern applies to nearly all of the provider rate restriction models and may be particularly problematic in markets with concentrated insurers. The ACA requires insurers to spend a minimum percentage of premiums on medical care. Specifically, individual and small group insurance plans must have an annual minimum medical loss ratio (MLR) of 80% and large group plans must have a minimum MLR of 85%. These restrictions may cause insurers to pass savings on to plan sponsors, but policymakers likely want to monitor the impact of OON caps on premiums and cost-sharing and impose additional restrictions if they suspect the caps are increasing the profitability of insurers without significant cost savings to employers and patients.

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