Evaluating the Impact of Policies to Regulate Involuntary Out-of-Network Charges on New Jersey Hospitals

by Soeren Mattke, Chapin White, Mark Alan Hanson, Virginia Kotzias

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Research Questions

  1. How dependent are New Jersey hospitals on out-of-network payments?
  2. What would be the impact of New Jersey Bill A1952 and similar policies on hospital finances?
  3. How would an all-payer blended rate, similar to the payment model in Maryland, affect different payers?

Policymakers must balance the complex and sometimes conflicting objectives of ensuring access to care, limiting the financial burden on patients, and controlling overall costs. States differ in how they handle involuntary out-of-network charges — i.e., payment for care when a patient does not have the option of selecting a hospital in his or her health plan's network. New Jersey's current regulations emphasize patient protection, in that patients are only responsible for the portion of the cost that they would have incurred for in-network care, and health plans must pay the remainder of the provider's charges. This policy is seen as contentious by health plans, who argue that they have been made responsible for paying whatever charges a hospital submits, and proposals to limit payments for involuntary out-of-network care are being debated in the state legislature. This report seeks to inform the current debate (as of October 2016) by analyzing the role of out-of-network payments in New Jersey hospitals' financial performance and simulating the effect of policies to limit charges for involuntary out-of-network care. The authors' estimates suggest that implementing New Jersey Bill A1952, which proposes a limit of between 90 and 200 percent of Medicare rates for involuntary out-of-network hospital care, would have reduced payments for hospital care by commercial plans by between 6 and 10 percent during 2010 through 2014. Assuming no change in operating expenses and no recoupment of lost out-of-network revenues, the cap would have led to an operating loss at between 48 and 70 percent of hospitals.

Key Findings

Effects of Caps on Payment for Involuntary Out-of-Network Services

  • Among hospitals in New Jersey, revenues from involuntary out-of-network services accounted for less than 20 percent of commercial revenues but almost 40 percent of profits.
  • The authors' estimates suggest that implementing New Jersey Bill A1952, which proposes a limit of between 90 and 200 percent of Medicare rates for involuntary out-of-network hospital care, would have reduced payments for hospital care by commercial plans by between 6 and 10 percent during 2010 through 2014. Assuming no change in operating expenses and no recoupment of lost out-of-network revenues, the cap would have led to an operating loss at between 48 and 70 percent of hospitals.
  • The authors also estimated that a 1-percent reduction of out-of-network rates because of the caps would reduce negotiated in-network rates by half a percent, as it would weaken hospitals' bargaining position.

All-Payer Blended Rates

  • An alternative payment model to reduce high charges for involuntary out-of-network services could be the approach used in Maryland, under which a uniform rate is set for all payers, with a 6-percent discount to public payers. A 14-percent discount for public payers relative to commercial payers would make this model budget-neutral for public payers and hold hospital margins constant but would increase payments by commercial insurers by about 10 percent.

The research underlying this paper was sponsored by Carepoint Health, Inc., and conducted in RAND Health Advisory Services, the consulting practice of RAND Health.

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