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What the No Surprises Act Means for Health Systems — Issue #7

The new law may impact how health systems choose their physician service partners

Greetings everyone. I can’t believe we are already heading into the holiday season. I’m looking forward to writing my first annual “Year in Review” newsletter, which we’ll plan to send out on January 1st. Then in December, I’m planning to turn the issue over to our COO, Jessica Long, for a special edition we’re tentatively titling “Lessons from a Christmas hospital take-over.” You won’t want to miss that one.

This month, however, we’re going to dive into a topic that’s been on the minds of a lot of leaders in emergency medicine over the past two years: the No Surprises Act. The new law was passed in December 2020, but will formally go into effect on January 1, 2022, after a year of federal rulemaking.

A lot has been written on what this new law means for ER physicians, commercial payors, and patients. But little has been said about what the new rules will mean for health systems. Specifically: how will the No Surprises Act influence or impact the thinking around how to select a hospital-based physician services company given the impact it will have on emergency medicine reimbursement?

I am an admittedly biased messenger for this topic. After all, Core Clinical Partners competes against other EM physician practice groups for hospital business, and, as you’ll see below, I happen to think the new rules may ultimately work to Core’s advantage. In short, I think the new rules will raise the importance of quality while reducing the importance of size and scale.

To understand why, let’s cover some basics. First, how do these companies compete for hospital or health system business?

The Business of Emergency Medicine: How Physician Services Groups Compete

How do hospitals or health systems choose a partner to manage physician services?

The answer is a little mired in mystery, even to me. I can’t peer into the board rooms of hospital leadership. When Core Clinical Partners wins new business, we often don’t know what it was that made the difference in the committee selection process. Anecdotally, it often seems the determining factor is related to what went wrong with the previous group.

Still, there are a few factors that clearly go into the decision-making process:

  1. Price
  2. Perceived Quality of Group
  3. Experience
  4. Staffing capability
  5. Approach

In general, hospitals want to feel comfortable turning over the “front door” of their facility to an experienced leadership team with good quality programs. They want to be assured the group has the resources to appropriately recruit for and staff the emergency department, and of course, they also want to contract with the group they feel is the best value for the money.

The No Surprises Act has the potential to fundamentally alter this whole calculus. This is a long story, but the fundamental takeaway is that the No Surprises Act will force groups to compete more on quality.

How the No Surprises Act Could Impact Reimbursement, Price, and Hospital Subsidies

When groups like Core bid to manage emergency medicine services, one of the key decisions is whether to ask for a hospital subsidy and if so, how much. In markets with a poor payor mix or low volume (often rural or lower income locations), it is often the case that emergency medicine services are run at a loss, and thus the group asks the hospital to cover a projected deficit.

Meanwhile, in areas with good payor mixes, often the wealthy suburban areas outside large cities, physician groups can bill more than enough to be profitable and therefore typically do not need to ask for a subsidy from the hospital. So far, this is all Business of Emergency Medicine 101 stuff.

Here’s where it gets more complicated. I wrote in Issue #2 (The Promises and Failures of Consolidation) that one of the big reasons that emergency medicine groups have undergone so much consolidation over the past decade is so that they can have more leverage in contract negotiations with insurers:

There are a lot of reasons scale might help run a large healthcare organization, but ultimately the issue of rates is at the heart of it all. Both payers and hospitals were engaged in an escalating battle over reimbursement. Insurers got big in order to pay out less, and hospitals got big to counteract that leverage and instead negotiate for more. In that environment, the thinking was that the small EM groups didn’t stand a chance. There was no way they could run revenue cycle as efficiently as a larger group, and as a result, they were more expensive to the hospitals, and thus were more at risk of losing the contract.

In other words, consolidation gave big EM groups leverage against insurers. More leverage means more reimbursement, and more reimbursement means that these companies can ask for lower subsidies from hospitals or no subsidy at all.

This is all important backstory to the fight that eventually played out over the hot button issue of surprise billing and balance billing, and which culminated in the No Surprises Act.

The Fight Between EM Groups And Payors Over Surprise Billing

Starting in 2018 and 2019, Congress started to seriously look at how to fix the problem of patients who got “surprise bills” from out-of-network providers. Everyone agreed it was a terrible, untenable situation: a patient goes to an in-network facility, but then gets a surprise out-of-network bill from one of the providers within that facility.

The problem was that few knew the best way to fix it. You can ban the practice altogether, but the ban raised questions: how would EM groups recoup costs for services provided to those patients? Once you, the government, step in the middle of two parties who have traditionally negotiated on price, is there any way to avoid setting a price yourself? If you decide to force insurers to pay anyway, even if they haven’t contracted to pay, then how much should they pay?

These are not easy questions. As the debate began, EM groups emerged on one side with their own answers, while commercial payors emerged on the other with a different answer (with patients, as usual, stuck in the middle).

Both sides of this debate agreed Congress should find a way to ban surprise billing—but they disagreed over how the ban should handle out-of-network charges. EM groups favored Independent Dispute Resolution (IDR), a baseball-style arbitration method where each side submits a proposal and a third-party arbitrator chooses between them (without being able to “split the difference”). Payors meanwhile favored what they call “benchmarking.” In that method, Congress would set the rate by using whatever the area median in-network rate was. In other words, the government would set the price.

The problem with the benchmarking approach is that it throws all leverage to the payors. It would allow them to stonewall on all contract negotiations, while slowly, over time, ratcheting down reimbursement rates. This would threaten groups’ ability to staff emergency departments, thus threatening access to emergency care across the country.

In contrast, Independent Dispute Resolution, precisely because the third-party arbitrator would have to choose one price or the other, forces both sides to submit in good faith. It doesn’t price set, but rather puts guard rails on each sides’ negotiating stance.

What the No Surprises Act Did—And What It Left for Later

Throughout 2019 and 2020, both sides lobbied massively for their own method to prevail. In emergency medicine, groups relied on the EDPMA, ACEP, and industry coalitions to bring their case for independent dispute resolution to Congress.

Ultimately and not surprisingly, Congress decided on a compromise. There would be an independent arbitration process, but the guidance provided to the arbitrator on how to decide would include consideration of the area median rates.

BUT, in addition to area median rates, otherwise known as the “Qualifying Payment Amount,” or QPA, the law instructed the arbitrators to consider a range of other factors. According to a summary from the National Law Review, these include:

  • The level of training or experience of the provider or facility
  • Quality and outcomes measurements of the provider or facility
  • Market share held by the OON provider or facility, or by the plan or issuer in the geographic region in which the item or service was provided
  • Patient acuity and complexity of services provided
  • Teaching status, case mix, and scope of services of the facility
  • Any good faith effort—or lack thereof—to join the insurer’s network
  • Any prior contracted rates over the previous four years

But what weight should be given to each of these factors? How much flexibility would the arbitrator really have? Would the QPA be the primary factor or just one of many? These questions were left for later. They were left for the rulemaking process which has unfolded throughout this year.

The September 30th Rule (and Why EM Groups Don’t Like It)

On September 30th of this year, HHS and OPM released the “Part II Interim Final Rule,” which is kind of confusing because how can something be both interim and final—but the point is that this is a proposal for a final rule, not the final rule itself. Meaning, there is still time to get the regulators to change it!

It’s a long document, but here’s the important part. The rule states:

When making a payment determination, certified independent dispute resolution entities must begin with the presumption that the QPA is the appropriate OON amount.

That is exactly the kind of guidance that EM groups spent years arguing against! If the arbitrator begins with the presumption that the median rate is appropriate, what about all the other factors they are supposed to consider?

If regulators stick with this guidance, it could have the same effect as the original, payor-friendly proposal that would allow them to drive down all reimbursement over time. If groups collect less from payors, they will then have to charge hospitals more for the same service—and some of the smaller and rural hospitals are already hanging by a thread, financially speaking.

In response to the September 30th rule, EDPMA released a statement from its Chair, Dr. Don Powell:

Congress was clear when they passed their landmark No Surprises Act last year: protect patients from unavoidable and unexpected costs without jeopardizing patient access to care. The Interim Final Rule released yesterday will inevitably allow insurers to manipulate fair payment standards necessary for sufficient emergency physician coverage. This will harm not just commercially insured patients whom the No Surprises Act was intended to protect, but the rural, medically vulnerable and indigent populations who rely on our nation’s emergency departments as an important safety net.

Fierce Healthcare ran a piece that included more objections. The proposed rule “brought new life to harmful proposals that Congress deliberately rejected,” said AHA Executive Vice President Stacey Hughes.

Still, one of the stated goals of the legislation was precisely to lower out-of-pocket costs for patients. This is probably why the regulators have gone in the direction they have, even if it leads to a long-term reduction in access to care.

The No Surprises Act Means Less Price Disparity Between Groups

I have no crystal ball as to how this will play out. Maybe the final guidance will backtrack and be more friendly to physician groups, which of course I support.

On the other hand, physician groups—indeed all hospitals, health systems, and care providers—have been under intense pressure for some time to become more efficient, do more with less, and to expect further downward pressure on reimbursement. So, in some sense, the “interim final rule,” if adopted as written, will only further trends we’ve all been dealing with for a long time.

Remember that a big reason for EM groups to consolidate was to increase their leverage in contract negotiations with insurers. But EM groups have already ceded (or rather, had taken away) at least some substantial part of that leverage.

The clear outcome is that, over time, the No Surprises Act will lead to an evening out of rates, so that there is less fluctuation between groups in the same market.

To be clear, the rules as they stand now will decrease overall reimbursement to physician groups which will adversely affect hospital finances and potentially decrease access to care in more rural locations.

The silver lining to the bill overall, and even to the final interim rule, is that emergency medicine groups will be less defined by pricing and forced more to compete on quality. The size and leverage of physician groups will matter less, because, over time, most groups will be reimbursed around the same amount for services provided.

The end goal is quality

Ultimately, I believe the No Surprises Act will reduce the importance of leverage and price as physician services groups compete for hospital business while increasing the importance of quality, experience, and approach.

Groups competing on quality instead of price is good for patients. I believe it’s also good for Core, which has put a commitment to service and partnership at the heart of our business model. And that is proving to be good business just in itself.

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