Capping out-of-network payments offers significant savings potential
Limiting payments for out-of-network hospital care could yield savings of an estimated $108 billion to $124 billion annually.
Capping out-of-network payments for provider services could yield health care cost savings nearly equivalent to Medicare for All style proposals, a recently released analysis by Rand Corp. has found.
The study looked at four different payment limits on out-of-network fees from 80% of average state billing charges to 200% of Medicare payment rates. It found that a strict limit of 125% of Medicare payment rates would reduce in-network negotiated hospital prices by 31% to 40% and yield savings of an estimated $108 billion to $124 billion annually.
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The researchers found that the approach could produce significant cost savings across the health care system by pressuring downward the amount health care providers can negotiate for in-network payment rates with private insurers, while also limiting so-called surprise medical bills from balance-billing for out-of-network costs.
“The whole idea behind limiting out-of-network bills is protecting patients from surprise medical bills, which is a really good policy. But we have found there is an indirect effect of changing price negotiation dynamics that leads to systemic changes in how prices are negotiated and those fundamental changes will lead to substantial price savings,” said Christopher Whaley, Rand policy researcher and professor at Pardee RAND Graduate School in an interview Friday.
But because it also could sharply reduce hospital revenues, the out-of-network price caps would have to be monitored carefully so as not to disrupt hospital operations, the researchers said. If revenues fell too much, hospitals might have to close or reduce care quality, which wouldn’t be in patients’ best interest, the researchers said.
“Among the many bold proposals to contain the cost of hospital care, limiting out-of-network payments arguably is less heavy-handed as it does not impose rates on all providers or shift the source of health insurance coverage for a large share of the nation’s population,” said Erin L. Duffy, the study’s lead author and an adjunct researcher at RAND, a nonprofit research organization, and post-doctoral research fellow at Schaeffer Center for Health Policy and Economics at University of Southern California, in a statement.
In an interview Friday, Duffy said, “addressing out-of-network payment limits doesn’t totally upend the system of private health insurance in this country or employer-provided insurance, so it is politically more feasible and administratively less burdensome than Medicaid expansion or public options.”
The study’s authors noted growing interest by state and federal lawmakers in the U.S. in using out-of-network payment limits to control rising health care costs as well as to eliminate surprise medical bills for consumers. Medicare Advantage and some other government insurance plans already impose caps on out of network payments. The U.S. The Department of Health and Human Services also recently included terms and conditions for eligibility for COVID-19 emergency funding for health care providers language that limited surprise billing of patients. Broad payment limits also have been proposed in the U.S. Senate legislation and by several Democratic presidential candidates.
A California law enacted in 2017 caps the total amount that physicians in that state can charge out-of-network and prevents them from billing patients for the balance.
“The approach taken by California legislation that limits the fees that can be charged by out-of-network facility-based physicians appears to be reducing the number of surprise medical bills that patients receive for care at in-network hospitals,” Duffy said in a statement last year when findings on a study of that law were published.
“It also appears to be reducing physicians’ leverage to negotiate higher in-network payments, and in turn is speeding the consolidation of physician groups as they seek to regain lost leverage,”she said.
The Rand study released last month applies a similar policy principle and expands it to hospital facility payments. It finds that in addition to limiting surprise bills, out-of-network payment caps reduced health care providers’ leverage in contract negotiations “by shifting the threat-point of out-of-network services from its self-imposed charges to the level of the legal payment limit,” according to the news release.
Some health care providers, including physicians’ groups and private-equity owners, oppose such out-of-network caps for that very reason. The researchers noted, however, that capping out-of-network billing would be less disruptive to providers than some other policy alternatives such as Medicare for All.
“Limiting out of network caps in a smart manner can get you the same savings as reformulating the U.S. health care system with less potential disruption,” Whaley said.
The Rand Corp. study examined the potential effect of four proposals for limiting out of network payments: They were a strict limit of 125% of Medicare payment rates; a moderate limit of 200% of Medicare payment rates; a moderate limit of the average of payments made by private health plans in a state; and 80% of average billed charges in a state, a loose limit.
They used information from the 2017 Centers for Medicare & Medicaid Services Hospital Cost Report Information System to estimate status-quo hospital operating expenses, Medicare payments, payments by private plans and hospital charges .The analysis found that limiting out-of-network payments to 125% of Medicare creates the biggest reduction in hospital payments.
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