A study has found that a contentious piece of New Jersey legislation, which seeks to control how much commercial health insurers could pay hospitals in the event of a surprise out-of-network bill, could have drastic negative effects on the health care industry in the state.The RAND Corporation, a California-based think tank, released the report Tuesday, commissioned by CarePoint Health, which analyses the potential impact of out-of-network bill payment caps on acute care hospitals.
The New Jersey bill aims to provide more transparency on costs and focuses on curbing expensive surprise bills often resulting from emergency visits. It includes a provision for capping payments from commercial insurers at between 100 to 250 percent of Medicare costs.
Because Medicare and Medicaid typically pay below acute care hospitals’ operating costs, the hospitals rely on negotiated rates from commercial insurers to make up the difference and allow them to post marginal profits.
The study shows that most hospitals have an average of a 3 percent profit, and revenues from involuntary out-of-network services accounted for less than 20 percent of commercial revenues but almost 40 percent of profits from treating the commercially insured.
The report analyzed Medicare costs — for which CarePoint has been consistently ranked highest in the nation — and acute care hospital reports from 71 hospitals in the state. CarePoint is involved in the battle for out-of-network billing since it has been criticized for being out of network with all major insurers in the state and has been profitable from the move.
Analyzing the payer mix for hospitals from 2010-2014, the RAND report shows payouts from Medicaid and Medicare ranged between 80 to 90 percent of the actual hospital cost. By comparison, commercial insurers paid between 120 and 130 percent of the cost.
The legislation sitting in Trenton was recently increased from 200 to 250 percent of Medicare rates after stakeholders told legislators the original 200 percent cap was too low.
The study also shows estimated effects on hospital margins. Based on the data, RAND found that there are currently 22 hospitals reporting an operating loss, and that could increase to 33 — nearly half of the acute care hospitals in the state — if the cap is set to 250 percent of Medicare.
If the cap is set at 250 percent of Medicare, the study estimates a loss of more than $1 billion from commercial revenues for hospitals. By comparison, a cap at 650 percent would equate to a loss of $394 million.
At the heart of the battle in Trenton is what could be an overnight shift in power to insurers, in light of any passing of legislation.
The fear from providers has been that, if there is a cap set on out-of-network bills, that could instantly pull the rug out from under the health care professionals who negotiate with insurers for pay.
The RAND report echoes those fears, stating that “In-network rates reflect relative negotiating power of hospitals and health plans. Caps on out-of-network payments strengthen health plans’ leverage.”
But this issue will affect physicians as well, according to Mishael Azam, with the Medical Society of New Jersey.
Azam repeated previous public comments stating that using Medicare as a standard is harmful to the industry, since the out-of-network bill aims to solve a problem that is based on fee-for-service payments, while Medicare is actively changing into a new fee-for-value model that bundles the payment of a procedure rather than charge per line item.
“We agree that some physicians may be charging outlier rates, but a dispute resolution (process) can be used to reign in those rates. But it has to be meaningful and at market value for that service,” Azam said. “In the current resolution, any payment agreed upon is based on Medicare rates, which is below market rate. Market rate is what the cost is based on physician time, facilities, equipment, expertise and covering staff — all that goes into what the cost is. Artificially lowering to Medicare rates doesn’t just depress out-of-network rates, it takes away the incentive (of commercial insurers) to offer fair rates when they know they can pay as little as Medicare. There is suddenly a law allowing them to pay as little as Medicare.”
The way the system works, hospitals and physicians negotiate rates that are also slightly lower than cost, in exchange for being included in an insurer’s in-network directory. This helps give the provider visibility for insured members who will then visit the provider. A simple volume in exchange for discounted rates, Azam said.
But capping out-of-network at a rate that the federal government never intended to be used as a standard to pay health professionals will result in a sudden dynamic shift in the industry, she said.
“The federal government does not expect doctors to be paid at (Medicare) rates, which is set up for caring for the elderly. We don’t want to have a conversation in which we compare market rates and Medicare; that’s apples and oranges,” Azam said.
The RAND report agrees, showing a quantitative relationship between capping out-of-network rates and in-network rates.
“We estimate that, for every 1 percent reduction in OON prices, in-network rates will decline 0.5 percent. Capping OON payments at 250 percent of Medicare rates would reduce commercial payments by about 12 percent and render approximately 75 percent of all hospitals unprofitable,” the study concluded.
How the policymakers in Trenton will go forward remains to be seen.
The study’s principal investigator, Soeren Mattke, said, “We didn’t try to say what the legislators should do or not do, we just pointed out what would happen to hospital finances if the law got enacted as it currently stands.
“What one needs to keep in mind is the sudden nature of the change,” Mattke said. “If you look at how CMS approaches (payment changes), they start off announcing it and then they do pilots and demonstrations and programs to see how certain changes would play out. Then, they roll out changes to payments over time so that hospitals and other health care providers can adapt to the change in the environment. That is usually the way to do this, as opposed to doing a sudden change that alters the payment environment in 90 days of enacting a law. That tends to be very hard on providers. Hospitals have, as you see in the report, margins of 3 to 4 percent. If you are talking about Google or Apple, they can make huge investments that have no return for years because they swim in money, and have the financial strength to absorb anything unexpected.”
CarePoint, a Jersey City-based, for-profit health system, owns and operates three hospitals in Hudson County.
Mattke said that, although CarePoint commissioned the report, it was told that whether or not it agreed with the results, RAND would publish its findings.