There is interest among U.S. policymakers in using out-of-network payment limits to control rising health care spending. RAND researchers estimated the effects that four proposed out-of-network payment limits for hospital care—125 percent of Medicare payments, 200 percent of Medicare payments, state average payment by private plans, and 80 percent of billed charges—would have on negotiated in-network prices and total payments for hospital care.

The Price and Spending Impacts of Limits on Payments to Hospitals for Out-of-Network Care

Erin Lindsey Duffy, Christopher M. Whaley, Chapin White

ResearchPublished Mar 12, 2020

A bipartisan consensus has emerged around the need to address "surprise medical bills," and policymakers have shown a growing interest in using out-of-network payment limits as a tool to control rising health care spending in the United States. Such policies cap the total amount that hospitals and physicians can be paid when they are not in network and prohibit providers from billing patients for an excess balance. Medicare Advantage currently limits payments to out-of-network providers at traditional Medicare payment rates, and the state of Oregon has recently enacted an out-of-network payment limit for its public employee insurance plans. In addition, limits on out-of-network payments to hospitals have been proposed by U.S. senators and 2020 presidential candidates. However, there is a lack of information about the potential impacts of applying such payment limits broadly to hospital services. This lack of information is complicated by the nuanced role that out-of-network limits play in the negotiation process for in-network prices. To fill this gap, RAND researchers estimated the effects that four proposed out-of-network payment limits for hospital care—125 percent of Medicare payments (a strict limit), 200 percent of Medicare payments (a moderate limit), state average payment by private plans (a moderate limit), and 80 percent of average billed charges (a loose limit)⁠—would have on negotiated in-network prices and total payments for hospital care. These four scenarios reflect the variation in base measure (traditional Medicare, market price, and charges) and payment generosity among existing policy proposals.

Key Findings

Strict out-of-network payment limits on hospital care could yield savings similar to more-sweeping proposals, such as Medicare for All, rate setting, and global budgets

  • Out-of-network payment limits set below status quo effective out-of-network payments could substantially reduce hospital payment levels for in-network services.
  • The strictest out-of-network payment limit considered, 125 percent of Medicare payments, would yield an annual reduction of $108 billion to $124 billion in nationwide hospital spending—comparable to estimated cost savings under Medicare for All.
  • A loose limit, such as 80 percent of state average charges, is estimated to increase hospital spending by $13 billion or decrease spending by $7 billion, depending on the assumptions of the estimation approach used.
  • Out-of-network payment limits would indirectly influence in-network payments by private plans, but this model is not a form of direct price regulation of contracting private health plans and hospitals. Thus, although out-of-network payment limits would be a bold cost containment reform, they are not as heavy-handed as the rate setting and global budget models.

Although cost containment can benefit patients facing rising health costs, such changes are disruptive to hospital revenues

  • The strictest limit considered, 125 percent of Medicare payments, could drastically reduce hospitals' net revenue from private plans such that hospitals might be forced to seek substantial reductions in operating costs to remain profitable.
  • In contrast, a loose limit, such as 80 percent of state average charges, could induce increases in hospital payments by private plans.
  • A policy that reduces hospital revenues to an extent that results in hospital closures or lower quality of care would not be in the best interest of patients.

Recommendations

  • Bold approaches to cost containment—including out-of-network payment limits—must balance cost, access, and quality impacts.
  • An out-of-network payment limit must be selected and implemented carefully to yield cost containment without negatively affecting access to hospital services and patient outcomes.
  • The level of the payment limit is critical to avoid inflating hospital expenditures or deflating private plan payments to an extent that results in catastrophic losses to hospital revenues and facility closures.

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Citation

RAND Style Manual
Duffy, Erin Lindsey, Christopher M. Whaley, and Chapin White, The Price and Spending Impacts of Limits on Payments to Hospitals for Out-of-Network Care, RAND Corporation, RR-4378-RC, 2020. As of September 9, 2024: https://www.rand.org/pubs/research_reports/RR4378.html
Chicago Manual of Style
Duffy, Erin Lindsey, Christopher M. Whaley, and Chapin White, The Price and Spending Impacts of Limits on Payments to Hospitals for Out-of-Network Care. Santa Monica, CA: RAND Corporation, 2020. https://www.rand.org/pubs/research_reports/RR4378.html.
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