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Healthcare Litigation


Date: October 20, 2016
Source: Manatt
Author:  Andrew H. Struve, Jessica J. Slusser & John M. LeBlanc


Recently, California Governor Jerry Brown signed into law “surprise medical bill legislation,” seeking to curb out-of-network medical bills. This law, designated AB 72, amends California’s Health and Safety Code to limit the ability of out-of-network physicians who provide services at in-network facilities to balance bill patients. (Balance billing is the practice of billing patients for the difference between what the patient’s health insurance reimburses and what the provider charges.) With the goal of keeping patients out of the fight between providers and insurers, the new law essentially sets a reimbursement rate schedule that insurers are required to pay to out-of-network providers, and promises to establish a binding independent dispute resolution process.

New California Law

AB 72, a bipartisan bill authored by Democratic Assemblyman Rob Bonta, provides that if an insured receives covered services by an out-of-network provider at a facility that is in the insured’s network, the patient’s financial obligation is limited to no more than what he would have owed had the provider been in-network.

Out-of-network providers are prohibited from billing or collecting any amount beyond the insured’s cost sharing obligation (a practice known as balance billing), unless the insured’s plan includes out-of-network benefits and the insured consents in writing to receive services from the out-of-network provider at least 24 hours in advance of the care. Additionally, out-of-network providers must give the insured a written estimate of total out-of-pocket costs for the care at the time consent is provided.

The new law applies to commercial coverage through health maintenance organizations (HMOs) and preferred provider organizations (PPOs) regulated by the Department of Managed Health Care (DMHC), which are the most common types of commercial coverage in California. It also applies to individual coverage and PPOs regulated by the California Department of Insurance. AB 72’s provisions do not apply to Medicaid, Medicare or self-insured employer health plans, which are not subject to state regulations pursuant to the federal Employee Retirement Income Security Act (ERISA).

AB 72 applies only to nonemergency care, as balance billing by emergency physicians in California already is barred under Prospect Med. Grp. v. Northridge Emergency Med. Grp., 2009 BL 3336, Cal., No. S142209, 1/8/09. Similarly, balance billing is prohibited in public coverage.

Reimbursement Rate Dictated by Law

Avoiding problems faced by prior legislation related to balance billing, AB 72 sets the payment rate for out-of-network providers at either the amount the insurer normally pays an in-network physician for such services in the same general geographic region in which the services were rendered or 125% of the Medicare rate, whichever is greater.

Health plans also are required to report data showing average contracted rates for those services most frequently subject to out-of-network bills during the 2015 calendar year, and their methodology for determining such rates, to the DMHC. The DMHC, in turn, will establish one methodology for health plans to determine average contract rates by January 1, 2019.

Binding Independent Dispute Resolution

Reimbursement by a plan to an out-of-network provider at the rate established in AB 72 will constitute payment in full unless either party employs the yet-to-be-established independent dispute resolution process. To that end, AB 72 requires the DMHC to institute an independent dispute resolution process, by September 1, 2017, for resolving payment disputes between out-of-network providers and payers—and the decision will be binding. The parties must complete the plan’s internal appeals process prior to proceeding to independent dispute resolution.

Other Out-of-Network Legislation

Florida enacted a similar law this year (extending a ban on balance billing of managed care enrollees for out-of-network emergency and other hospital visits to include PPO members), joining New York (holding consumers harmless on bills for emergency services from out-of-network providers when no in-network providers are available) and Connecticut (protecting consumers against surprise bills for nonemergency services from out-of-network providers at in-network facilities if the patient did not knowingly choose the non-network provider over a network provider and limiting consumer costs to in-network cost sharing, similar to California).

On the other hand, similar bills proposed in seven other states, including Colorado, New Jersey, Pennsylvania and Tennessee, failed in 2016. According to the National Conference of State Legislatures, as reported by BNA,1 Georgia and other states are studying the issue or considering legislation. Observers predict the bipartisan passage of the California law may boost legislative efforts in other states.2

Potential for Provider Litigation

The goal of AB 72 is to incentivize physicians to contract with health plans. With AB 72, the Legislature has taken the position that providers should not include balance billing as part of their payment model. Even so, it is possible that providers will have less incentive than before to enter contracts with health plans if the doctors using the new independent dispute resolution process achieve higher overall payments than the rate allowed in AB 72. While some argue that AB 72 will create further narrowing of already narrow networks, because specialists most affected by the new law will not be inclined to contract with health plans, the law’s authors answer that existing DMHC rules for network adequacy—including specialists—and timely access to care will prevent the narrowing of networks under AB 72.

Those on both sides of the issue have questioned whether AB 72’s dispute resolution process will spark more lawsuits between providers and health insurers than it avoids. If that is the case, the dispute resolution process may actually drive up healthcare costs by increasing litigation between providers and health plans.

Initial data from New York following passage of similar legislation indicates that results have so far been fairly even between payers and providers, with insurers prevailing slightly more often than providers in several hundred conflicts adjudicated by the state’s independent entity, as reported by Crain’s New York Business.3

New York is now closely watching the outcome of the mechanism its Department of Financial Services created for providers and insurers to arrive at reimbursement figures, using several independent contractors to determine payment conflicts.

In New York, disputes are settled through an arbitration process where both sides submit what they believe to be an appropriate reimbursement amount, and an independent contractor choses one of those options.

In several hundred arbitrations on bills for emergency services, data shows the amount paid by health plans was deemed reasonable in 22% of the cases, whereas providers won 13% of the time. Many claims were ineligible for the process or are still pending, and as such, the results at this point are incomplete. Preliminary data indicates that insurers were more likely to win disputes in cases where the final resolution awarded doctors $500 or less. As the amount in dispute increased, the likelihood of either party to prevail leveled to even. In emergency cases where the payment at issue fell between $1,000 and $5,000, independent contractors found the provider’s charges to be more reasonable in 18 cases, as compared to 20 cases where the insurer’s payment won.

New York has found certain billing issues more difficult to resolve for providers. For example, New York law requires written consent for an in-network doctor to send a specimen out to an out-of-network lab.

In short, while the volume of new litigation cannot be determined at this early stage, if the New York equivalent of AB 72 is any indication, the outcome of out-of-network provider disputes with payers does not appear to be skewed in favor of one party or another. Only time will tell.

AB 72 takes effect January 1, 2017.


1New California Law Bans Surprise Medical Bills, BNA’s Health Care Policy Report (October 3,

2Passage of California surprise‐bill legislation could spur other states to act, Modern

(September 1, 2016), last accessed at

3 New York law to curb surprise billing shows promising results, Modern Healthcare (April 7, 2016), last accessed at http://www.modernhealthcare.com/article/20160407/NEWS/304079996?template=print.