Retrospective on surprise billing law

The New York Times reported that the issue of surprise billing has been getting more attention at the national level. Apparently, California's legislation has garnered much attention. Interestingly, Brookings reported that after California's legislation went into effect, insurance companies' network of physicians increased by about 16%. The theory is that by reducing the attractiveness of remaining out-of-network, more physicians will agree to be in-network. California's legislation achieves this effect by stipulating that insurance plans need only to "pay out-of-network physicians at in-network hospitals the greater of the insurer's local average contracted rate or 125% of the Medicare reimbursement rate."

California's legislation might introduce some interesting quirks. For example, insurance companies now have a much stronger incentive to not contract with the most expensive providers, since removing them from the network would reduce the average for all out-of-network providers. Additionally, instead of paying above-average rates, payers can now just pay average rates when their patients go to that provider (if the payer refused to contract with those most expensive providers). This immediate effect might be the legislation's intention, but the effect might lead to a downward pressure on quality. Suppose, for example, higher quality medicine is more expensive to deliver (a supposition not yet academically proved): in that case, insurers may be tempted to not contract with the expensive providers for a short-term boost of cheaper, higher-quality care. In the long-run, however, such providers might go out of business or might cut back on their quality. A way to balance this would have been to pick a reimbursement percentile higher than 50% (e.g. 65%) of the local average such that insurers have a stronger incentive to negotiate for providers to contract with them. Alternatively, payers might have been able to largely solve this problem by offering higher rates to (or contracting exclusively with) providers who agree to never consult with out-of-network providers (or at least pay for any charge differences) for the insurers' patients (this does not solve the case of when a patient has an emergency and goes to the nearest provider, who is out-of-network). Another reasonable option might have been to limit physician reimbursement to something like 400% of Medicare's reimbursement rate -- in which case insurers would have a strong incentive to negotiate, but have limited prices in the cases of emergencies.