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

Core Content

This document evaluates the financial impact of policies aimed at regulating involuntary out-of-network charges on New Jersey hospitals. It analyzes the potential effects of New Jersey Bill A1952, which would cap out-of-network payments at 90–200 percent of Medicare rates, and compares it to an alternative policy of all-payer blended rates, similar to Maryland's model.

Main Findings

• Contribution of Out-of-Network Revenue:
  Involuntary out-of-network services accounted for less than 20% of commercial revenues but nearly 40% of profits from treating commercially insured patients.

  • Inpatient care: 15.7% of commercial revenue came from involuntary out-of-network services.
  • Outpatient care: 19.5% of commercial revenue came from involuntary out-of-network services.
  • Profit contribution: 38% of commercial profits were derived from involuntary out-of-network services.

• Impact of Bill A1952:

  • Capping out-of-network payments at 90–200% of Medicare rates would reduce commercial payments to hospitals by 6–10%.
  • Assuming no change in operating expenses and no recoupment of lost out-of-network revenue, this cap would result in an operating loss for 48–70% of New Jersey hospitals.
  • Capping at 250% of Medicare rates would reduce the average operating margin to 1.2%, with 33 out of 71 hospitals facing an operating loss.
  • Major teaching hospitals and large hospitals (more than 250 beds) would have an operating margin of 1–2%, while smaller hospitals would face a 1% operating loss.

• Indirect Effects on In-Network Rates:

  • Limits on out-of-network payments would reduce hospitals' bargaining leverage, potentially leading to lower in-network negotiated rates.
  • A 1% reduction in out-of-network rates would result in a 0.5% reduction in in-network rates.
  • Including indirect effects, capping out-of-network rates at 250% of Medicare rates would reduce total commercial revenues by 5%, or approximately $1.1 billion annually.

• All-Payer Blended Rates (Maryland Model):

  • Blended rates would set a uniform rate for all payers, with a discount for public payers.
  • A 6% discount would increase Medicare and Medicaid payments, but public payers may not accept this.
  • A 14% discount was modeled, keeping Medicare payments aligned with the base case.
  • Blended rates could provide predictable and sustainable payment levels, but they are technically and politically challenging to implement.

Key Policies and Their Impacts

• Bill A1952:

  • Proposes a cap on involuntary out-of-network payments between 90–200% of Medicare rates.
  • Would lead to a 6–10% reduction in commercial payments to hospitals.
  • Could result in an operating loss for 48–70% of hospitals, with smaller hospitals being most affected.
  • Indirect effects (reduced in-network rates) could increase the financial impact on hospitals.

• All-Payer Blended Rates:

  • Would ensure consistent payment levels across all payers and reduce financial uncertainty for hospitals.
  • Could protect patients from high cost-sharing for involuntary out-of-network care.
  • However, implementation is difficult due to the complexity of rate-setting and political resistance.

Key Considerations

• Hospital Financial Vulnerability:

  • Smaller hospitals are more vulnerable to revenue reductions due to their thinner margins.
  • Major teaching hospitals and large hospitals have greater financial resilience.

• Negotiation Dynamics:

  • In-network rates are determined through negotiations between hospitals and payers.
  • Out-of-network payments serve as a bargaining tool for hospitals to increase in-network rates.
  • Capping out-of-network payments would reduce this leverage, potentially leading to lower in-network rates.

• Policy Trade-offs:

  • Limiting out-of-network payments helps control costs and reduce patient financial burden but risks reducing hospital revenues.
  • Hospitals may respond by cutting costs, reducing services, or merging with others.
  • These cost-cutting measures may have mixed effects on access and quality of care.

Limitations

• The analysis is based on data from 2010–2014 and does not account for changes post-Medicaid expansion in 2014.
• It assumes 80% of out-of-network care is involuntary, based on a national survey, which may not apply to New Jersey.
• It does not consider market consolidation or changes in operating efficiency in response to lower payments.
• The simulation model may not capture all possible hospital responses to revenue caps.

Conclusion

New Jersey hospitals rely heavily on involuntary out-of-network payments to maintain profitability. Policies such as Bill A1952 would significantly impact hospital finances, potentially leading to widespread operating losses. All-payer blended rates offer a more stable alternative but face implementation challenges. Any policy changes must be carefully designed to balance cost control, access to care, and the long-term sustainability of hospitals.