California: Proposed Legislation Regulating Health Care Rates for Payors and Providers

An ambitious California proposal to regulate health care rates and curb long-term health care spending was unveiled last week in Assembly Bill 3087 (Proposed Legislation).  The key concept in the Proposed Legislation is the establishment of an independent commission with the authority to set the rates paid for health care services in most commercial contexts.  The Proposed Legislation —following on the heels of single-payor legislation debated last summer—proves that interest in sweeping health care reform remains high among California lawmakers.  While it is too early to tell whether AB 3087 or something similar will gain traction, here are five key aspects of the bill in its current form:

  1. Creates a 9-member Independent Rate-Setting Commission

The Proposed Legislation vests significant rate-setting power in a 9-member independent commission, and gives little substantive direction, except that rates for health care providers must be at least 100 percent of what Medicare would pay.  The independent commission is directed to set rates based on Medicare payments, but required also to consider factors such as the health care entity’s financial status, changes in state or federal laws that impact costs, increases in labor costs and prevailing wage, increases in capital investments, and changes in the delivery of care. In an annual review of rates, the commission must consider whether rates are sufficient to ensure certain policy goals for health care entities and California residents: meeting state financial solvency requirements, allowing a fair return on investment, avoiding confiscatory results, improving health outcomes, reducing health disparities, reducing health system costs, and increasing the availability and accessibility of health care services.  There would be an administrative appeals process to challenge rate-setting decisions.

  1. The Independent Commission Would Set Rates for Both Health Care Providers and Payors.

Rate-setting for health care payors, which would be based on an adjusted Medicare Advantage capitation rate, may be the more significant aspect of the independent commission’s authority. While the independent commission regulates the amount a health care provider may charge for out-of-network services, non-covered services, and services to the uninsured, it does not appear to set prices for services furnished by health care providers “on a contractual basis to a health plan or health insurer licensed by the state.”  Thus, the financial significance for health care providers that contract with health payors would depend on the extent to which health care payors passed along the impact of adjustments to their capitation rates.    

  1. Anyone “Affiliated” with a Health Care Provider or Health Care Payor Would Not be Allowed to Serve on the Commission.

Under the terms of the bill, the independent commission would be comprised of nine California residents with experience in areas like health policy, health economics, and health care delivery.  Seven of the members would be appointed to six-year terms; three by the Governor, two by the Senate Committee on Rules, and two by the Speaker of the Assembly. The Secretary of California Health and Human Services and the California Public Employees’ Retirement System (CalPERS) would each have a guaranteed representative on the commission.  No member of the commission or the commission’s staff could be employed by, a consultant to, a representative of, or otherwise affiliated with a health care payor or health care provider.  The bill envisions input from health care industry stakeholders through a separate 15-member advisory committee that is required to include representatives of a defined selection of health care providers and payors; however, members of the advisory committee are required to recuse themselves from any matter directly affecting their interests or the interests of the entity or organization they represent.

  1. Federal Health Care Programs are Not Subject to Regulation

The bill does not apply to any federal health care program, including Medicare and Medicaid.  It also does not apply to employee welfare benefit plans governed by ERISA.   The exclusion of federal health care programs from the jurisdiction of the independent rate-setting commission makes the California bill importantly different from the most commonly discussed national model of state-regulated rate setting—Maryland’s all-payor rate-setting system.  Maryland has regulated rates for hospital services for more than thirty years.  The Maryland rates are “all payor” because they apply to Medicare and Medicaid as well as commercial health insurance.  While AB 3087 is more ambitious in the way it covers all health care services, the exclusion of federal health care payors is a significant limitation.

  1. The Independent Commission Must Set a “Global Cap”

The bill requires the independent commission to establish a “global cap,” which creates a mechanism to limit the growth of health care spending over time.  The commission is required to set a global cap for health care expenditures that is based on gross state product.  When there is a failure to achieve the global cap, the commission is directed to identify the reasons for the failure, and has discretion to order corrective action in order to achieve that cap.  These provisions—some of the least detailed in the bill—are susceptible to a wide range of interpretations, and would potentially give the independent commission powers similar to those of the Independent Payment Advisory Board created by the Affordable Care Act (and repealed earlier this year) to implement Medicare reforms if per capita growth exceeded statutory targets.

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