CMA asks California Supreme Court to review case that could have far reaching implications on managed care contracting

August 21, 2014

The California Medical Association (CMA) and seven other physician associations have filed an amicus letter brief urging the California Supreme Court to review a Fifth District Court of Appeals ruling that would dramatically lower the calculations of the reasonable and customary value for payment of out-of-network services and could have a huge negative impact on providers in managed care.

This case involves a dispute between Children’s Hospital Central California and Blue Cross of California and Blue Cross of California Partnership Plan, Inc. over the reasonable value of the post-stabilization emergency medical services provided by Children’s Hospital to Medi-Cal beneficiaries enrolled in Blue Cross’s Medi-Cal managed care plan. The services at issue were rendered during a 10-month period when Children’s Hospital and Blue Cross were in contract negotiations and did not have a written contract that covered those beneficiaries. The parties agreed that Blue Cross is required under the Knox-Keene Act to pay a rate that is reasonable and customary for the services, but they disagreed over how to determine that rate.

Children’s Hospital claimed the determination must adhere exclusively to Department of Managed Health Care regulations known as the “Gould factors.” The Gould factors require consideration of "(1) the provider's training, qualifications, and length of time in practice; (2) the nature of the services provided; (3) the fees usually charged by the provider; (4) prevailing provider rates charged in the general geographic area where the services were rendered; (5) other aspects of the economics of the medical provider's practice that are relevant; and (6) any unusual circumstances in the case." 

Blue Cross, on the other hand, argued that reasonable and customary must also consider the discounted contract rates that providers offer to accept from other payors as well as the reimbursement rates set by the government under Medi-Cal and Medicare.

The court of appeal agreed with Blue Cross in a published opinion. The court held that (1) the Gould factors are not the exclusive standard for determining the reasonable and customary value of the medical services and (2) the full range of rates a provider offers or accepts, including discounted rates under private contracts with health plans and Medicare and Medi-Cal reimbursement rates can be considered in determining reasonable and customary value for out-of-network services under the Knox-Keene Act.

CMA’s letter brief argues that the court of appeal’s opinion was founded on a fundamental misunderstanding of the out-of-network setting. Out-of-network rates are measured as the reasonable and customary value of medical services, i.e., the free market value of those services. Contracted providers in a health plan’s network, by contrast, discount their rates in exchange for concrete in-network benefits and for numerous other reasons, including prompt payment, number of beneficiaries, utilization management, billing and administrative burden, health plan solvency and referral patterns. Furthermore, Medi-Cal and Medicare reimbursement rates are subject to state budget constraints and other factors having nothing to do with the value of medical services. Discounted rates by in-network physicians and free market rates by out-of-network physicians are separate measures with separate underlying components. Yet the court of appeal's opinion wrongly treats the two as comparable.

CMA’s letter argues that, if left unchecked, the court of appeal’s opinion will dramatically lower the calculations of reasonable and customary value for payment of out-of-network services. Providers would have to accept lower payments similar to their discounted contract rates, but without any of the benefits of contracting such as more efficient claims processing and status as a network provider. The long term concern with the opinion is that it will  eliminate any economic motivation for health plans or providers to contract to maintain and build health plan provider networks. Ultimately, patients would suffer as they lose access to quality medical care.

Without the motivation to contract, health plan network adequacy would also become a central issue of concern. Provider networks are a means for patients to more readily access medical care and to avoid or minimize out-of-pocket costs. Narrower provider networks will make it harder and more expensive for patients to receive care from a network provider.

CMA’s letter notes that inadequate provider networks already are the subject of numerous patients’ class action lawsuits and investigations by state regulators. The court of appeal’s opinion could further exacerbate the problems of inadequate provider networks that are the subject of these actions. 

The American Congress of Obstetricians & Gynecologists, District IX, California Academy of Family Physicians, the California Psychiatric Association, the California Society of Anesthesiologists, Latino Physicians of California, Medical Oncology Association of Southern California and the Osteopathic Physicians & Surgeons of California joined CMA to file this brief. Six other amicus letters were filed by other provider organizations, including the University of California Regents and the California Hospital Association. CMA hopes this showing from virtually all provider interests will convince the California Supreme Court to grant review of this case that will have a widespread impact on the health care industry and the public at large. A decision from the Supreme Court whether to take the case can be expected in 30-60 days.


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