April 9, 2012

The Honorable Ed Hernandez Chair, Senate Health Committee State Capitol, Room 4085 Sacramento, CA 95814 SUBJECT: SB 1285 (Hernandez) Oppose Dear Senator Hernandez: The California Hospital Association, which represents over 400 hospitals and health systems, is opposed to SB 1285, which establishes a complicated default reimbursement rate for emergency services provided by a hospital that has an out-of-network emergency utilization rate of 50 percent or greater for major encounters by local patients. CHA is opposed to SB 1285 because: Rate-setting reduces access to emergency hospital services. Default rate is complex and imposes conflicting legal standards. Default rate eliminates the incentive for health plans to contract. Hospitals and health plans are effectively implementing existing law regarding non-contracted reimbursement for emergency services. Procedures are in place to resolve disputes. Complex rate setting legislation is not necessary.

Hospitals and health plans are often able to negotiate contracts that allow them to be partners in providing health care services to patients. Not every hospital, however, is able to obtain a contract with every health plan, resulting in some patients receiving emergency services at an out-of-network hospital. Some hospitals do not have contracts simply because they serve communities with very few insured residents. Hospitals may also be unable to obtain a contract because of a health plans network strategy, such as focusing on narrow or tiered networks that include only a limited number of hospitals. Hospitals may also be temporarily non-contracted when an existing contract terminates prior to the completion of negotiations. One of the most common reasons hospitals are non-contracted is because they have been unable to negotiate a fair contract with health plans. A major reason that hospitals downsize, close departments or limit services is because they have inadequate managed care contracts with health plans. It is especially difficult for these hospitals to negotiate adequate managed care contracts when they are located in geographic regions that are dominated by only a few large health plans. In 1990, California had 23 major health plans. Today, the market has consolidated to the point where there are only five major health plans. Meanwhile, hospitals share of overall health care spending has been in decline. In 1980, hospitals accounted for 43 percent of health care spending. In 2010, that share dropped to 33 percent. This bill harms those communities in which the local hospital is unable to obtain contracts with certain health plans. The statutory default rate reduces access to care because it does not provide sufficient funds

The Honorable Ed Hernandez April 9, 2012

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to invest in new technology, patient safety and quality initiatives such as electronic medical records, seismic safety and other capital improvements and community services that are not reimbursed. A statutory default rate interferes with the contracting process and increases costs substantially. Health plans loose the incentive to negotiate because they have the default rate to fall back on. In addition, the bill requires the collection and analysis of massive amounts of data to determine if and how the default rate applies. This adds unnecessary complexity to an already complex system. In addition, the bill introduces an ambiguous new legal standard: good faith and reasonable that is remarkably similar but yet different from the existing legal standard of reasonable and customary. Most importantly, the significant interference with contract negotiations between sophisticated parties like health plans and hospitals is not necessary. Existing law is already very specific about how reimbursement is determined absent a contract. In addition, procedures are in place that routinely resolve the types of disputes that are cited by the proponents of this legislation. AB 1455 (Chapter 827, Statutes of 2000) and its related regulations require health plans to pay noncontracted providers the reasonable and customary value for health care services rendered based upon statistically credible information that is based on specified criteria. This process allows both health plans and hospitals to submit information to arrive at a reasonable and customary reimbursement rate. AB 1203 (Chapter 603, Statutes of 2008) establishes a specific procedure for authorizing post-stabilization care in non-contracted provider situations. Hospitals and health plans are effectively implementing these two statutes. Most disagreements are resolved internally or through formal processes such as mediation and arbitration. When necessary, the appropriate forum to resolve disputes remains the courts. For these reasons, CHA must respectfully oppose SB 1285. Sincerely,

Martin Gallegos Senior Vice President and Chief Legislative Advocate MG:tm cc: The Honorable Members of Senate Health Committee Vincent Marchand, Consultant, Senate Health Committee Joe Parra, Consultant, Senate Republican Caucus