Case Study: AB 72 Threatens Private Practice Contract

Editor’s Note: The following case study comes from the head of a large (greater than 60), physician-only anesthesia group that has been contracted with a certain Risk Bearing Organization (RBO) for more than 20 years. It stands as a prime example of how Assembly Bill 72 can be misused by payors to renegotiate contracts, to decrease access to care and drive physicians out-of-network, and to leverage lower than fair market rates on even fairly large physician groups)


By Anonymous MD,

Assembly Bill 72 (AB 72), passed in late 2016, has been successfully used against us. Nearing the end of 2017, a risk bearing organization with whom we have an exclusive contract at the majority of their facilities demanded a renegotiation of our contract rates. A major stipulation of this renegotiation - a 40% decrease to our existing contract rates, the magnitude of which was made possible by invoking the threat of AB 72.

The RBO in question is owned by a large hospital health system, and prior to this renegotiation, our group had held and maintained a level contract with them for the last ten years with no increases, and without even cost of living adjustments. We entered into renegotiations with the RBO in January of 2018 when, much to our surprise, AB 72 was invoked as a negotiation tactic from the very first meeting and at almost every meeting that followed. They argued that they would not mind if we became non-contracted because it would allow them to pay out rates at 125% of medicare or the average contracted rate (which would still be significantly lower than our contract rates). Notably, the hospital CEO’s in this health system were present at each of these negotiation meetings - a highly unusual practice for an insurance contract negotiation. The insinuation was that if we did not play ball, we could risk losing our hospital contracts altogether.

The negotiations drew out over the whole of 2018. Though we always met with them at their convenience and on their notice, the RBO complained to all involved that we were the cause of delays. After the first nine months of negotiations, we were only able to get them to move up on their proposed rates by only three percent - still a 37% decrease for us from our existing rates. They argued that our rates were too high, despite the fact that the CEO of a health consultancy firm specializing in anesthesia (who has done extensive work for the ASA) confirmed our rates were in the 25th percentile. We also presented them Medical Group Management Association and Sullivan/Cotter physician compensation market rates for southern California, but they disregarded those published rates. The response was, “We know the market rates - we are the market. And we set rates for all of [our geographic region].” At one point in the negotiations, we even offered to use a mutually agreed upon third party consultant (and to share the cost) to do a fair market valuation for our area and to make it binding. The RBO refused.

The RBO had a uncompromising view of what they were going to pay. They also wanted to pay a separate inpatient rate and outpatient rate for the same surgery. We countered that surgeons do not get paid separate inpatient and outpatient rates, but this had little effect. We also pointed out that comparing our group to a small, three room, free-standing surgery center was unsound and baseless because of the myriad other services that we provide - 24/7 call coverage, in-house Obstetrics, Neurointerventional Radiology, and adult and pediatric Cardiothoracic surgery to name a few.

The RBO also cited significant capital losses on their side as the precipitating cause for the 40% contract reduction, and they asked us for ways that they could save money on costs. We showed them several simple ways, including switching the large majority of their cases that were done at inpatient hospital facilities to a free-standing surgery center (a change that could of saved them millions of dollars alone), providing time data on their surgeons that highlighted the increased expenses of their slower, less efficient surgeons, and offering surgical utilization data that revealed rates multiple times higher than comparable, competing RBO’s. Despite the data we presented them, however, they continued to pursue significant reimbursement cuts to our anesthesia services.

As part of this process, we also looked up the publicly available tax forms for this RBO (The non-profit IRS Form 990). The form showed that, for the previous year, this money-losing organization included the following executive salaries:

  • $7.3 million (1)
  • $2.9 million (1)
  • $1.5 million (4)
  • $500,000-$1 million (9)
  • $200,000-$500,000 (11)

When we brought this to the table, they indicated that there would be no reductions in executive compensation because these salaries were market competitive.

When we reviewed their proposals, the amounts the RBO proposed bore a remarkable resemblance to what would likely be paid out through AB 72 for out-of-network services. In September of 2018, after nine months of negotiations, my physician group received notice of our contract's cancellation. As a direct consequence of such a cancellation, many of the RBO’s enrollees would have difficulty gaining in-network access to care. Of concern, the nearest in-network facilities available where my group was not the sole anesthesia provider were some distance away, particularly for pediatric care! But the network adequacy issue, however, did not dissuade them. Ultimately, with little room to negotiate against a phantom ACR, we chose to accept a significantly reduced contract rather than allow them to limit a significant number of patients’ access to care in our region.

On Dec. 31, 2018, immediately before the planned expiration of the contract and after nearly a year of negotiations, we acquiesced and signed a new agreement with the RBO that amounted to a more than 20% decrease on our prior reimbursement rates. While we were unable to prevent significant decreases in our contract rate in this case, we were able to improve on their 40% decrease initially proposed largely because of the advocacy of the CSA and direct communications with our local and state representatives. Notably, lobbyists for the RBO promptly appeared in the offices of state representatives, as well, upon hearing of our legislative communications.

Outgunned in every way, and with AB 72 used against us at every turn, we realized how much of a David we can be to their Goliath and we do not want to see this happen to another practice in California. It is our hope that our experience can help others avoid or better combat a similar scenario, and we hope that the CSA will continue to make the problems associated AB 72 a top priority.

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