BILL ANALYSIS
AB 1600
Page 1
Date of Hearing: May 10, 2001
ASSEMBLY COMMITTEE ON JUDICIARY
Darrell Steinberg, Chair
AB 1600 (Keeley) - As Amended: April 30, 2001
SUBJECT : HEALTH CARE SERVICE PLANS: NEGOTIATION OF CONTRACTS
WITH PROVIDERS
KEY ISSUES :
1)ARE HEALTH CARE PROVIDERS AT A SEVERE DISADVANTAGE AS COMPARED
TO HEALTH CARE SERVICE PLANS IN THE RENEGOTIATION OF THE TERMS
OF THEIR CONTRACTS, AND DOES ANY SUCH IMBALANCE AFFECT A
CONSUMER'S RIGHT AND ACCESS TO QUALITY, AFFORDABLE HEALTH
CARE?
2)SHOULD HEALTH CARE PROVIDERS BE AUTHORIZED TO RENEGOTIATE
CONTRACT TERMS WITH HEALTH CARE SERVICE PLANS ON A CLASS, AS
OPPOSED TO INDIVIDUAL, BASIS TO LEVEL THE PLAYING FIELD?
3)DOES THE BILL SATISFY THE PRONGS OF THE STATE ACTION DOCTRINE
WHICH PROVIDES IMMUNITY FROM FEDERAL ANTITRUST LAW FOR
ANTICOMPETITIVE CONDUCT REGULATED BY THE STATE?
SYNOPSIS
This bill seeks to rectify perceived imbalances in the
negotiating power of health care providers vis-?-vis health care
service plans. The bill allows health care providers to
collectively renegotiate contract terms with health care
services plans either when the contract is up for renewal, or,
if there is no provision for renegotiation, during the term of
the contract. The bill sets forth a clear state policy about
the legislative priorities in terms of providing quality,
affordable health care for California citizens and the need to
maintain the financial solvency of health care provider groups.
The bill further declares that the contracting relationship
between health care providers and health plans does not further
the state's goals, and therefore competing health care providers
should be authorized, under active state supervision, to
negotiate as a class. The bill provides that this will enable
the state to ensure that health care plan contracts with
providers are fair, reasonable, and provide appropriate
reimbursement, consistent with the best interests of the
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patients.
Proponents of this bill assert that it will end the truly
anticompetitive process that has been going on whereby health
plans were in complete control over the terms of contracts with
providers, and providers had virtually no bargaining power.
They argue that this has resulted in providers being forced into
unfair, unreasonable contracts, which are detrimental to patient
care. Opponents, on the other hand, suggest that it is not
appropriate to allow competing providers to negotiate as a class
in violation of federal antitrust laws, and that in light of
recent state legislation requiring a review of health plans'
alternative dispute resolution mechanisms, this bill is
premature.
This analysis suggests that the committee may wish to explore
several issues with the author, including, the definition of a
"class," who may collectively negotiate, the standard of review
exercised by the department of managed health care, and the
propriety of referring to the alternative dispute resolution
mechanisms defined in the bill as mediation and arbitration.
SUMMARY : Provides an exemption from federal antitrust laws to
allow health care providers, as a class, to renegotiate
contracts with health care service plans. Specifically, this
bill :
1)Declares that the Legislature's priorities for health care
include the following: providing access to the highest
quality health care for California residents at reasonable,
affordable costs; ensuring that administrative costs in the
health care service plan and health care provider relationship
be as low as possible in order to keep health care costs
affordable; and ensuring that health care service plans and
health care providers remain financially solvent.
2)Declares that the current health care service plan and health
care provider relationship is not satisfactorily meeting the
state's health care priorities in the following ways: a large
number of providers have been economically failing,
threatening the quality of health care in this state; too much
of a health care provider's time is spent in the
administrative aspects of the relationship, reducing patient
access to health care; and that the negotiating relationship
between health care service plans and health care providers is
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imbalanced.
3)Sets forth the intent of the Legislature to implement a
solution to achieve the state's health care priorities. The
solution would allow competing health care providers to
renegotiate contracts with health care service plans to
improve the balance in the contracting relationship.
4)Provides that the Legislature intends this solution be
consistent with the immunity from federal antitrust laws
allowed for "state action."
5)Expressly allows health care providers, on a class basis, and
health care service plans, to agree to negotiate and mediate
any contract term or condition upon renewal of the contract
or, for those contracts not containing a renegotiation clause,
at any time during the contract term.
6)Provides that if the parties reach an impasse during the
negotiations, they may, upon mutual agreement, submit the
matter to mediation. If the mediation is unsuccessful, the
parties may, upon mutual agreement, submit the matter to
arbitration.
7)Provides that any arbitration conducted pursuant to the terms
of this bill shall not limit the rights and remedies otherwise
available to the parties.
8)Requires the Department of Managed Health Care (DMHC) to adopt
regulations for the fair and effective conduct of mediation
and arbitration allowed under this bill. The regulation shall
specify factors to be considered by the mediator or arbitrator
when resolving the matter, including: the stipulation of the
parties; the interest and welfare of patients; the patent's
access to care; the ability of health care providers to render
quality health care services; the cost of providing the
services; and the reasonableness of the reimbursement rates.
9)Requires the parties, mediator or arbitrator to file with the
department a copy of the negotiated contract, mediation
decision, or arbitration award, a statement of reasons, and
the evidence submitted during the process. The department
shall review and either confirm, modify or vacate the decision
or award.
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10)Provides that, in determining the appropriate action to take
with regard to the review of the contract, decision, or award,
the department shall consider whether it is supported by
substantial evidence, consistent with the factors set forth in
8), above.
EXISTING LAW :
1)Regulates health care providers and health care service plans
under the Knox-Keene Act. (Health and Safety Code section
1340 et seq. All further statutory references are to this
code unless otherwise noted.
2)Defines health care provider as any professional person,
organization, health facility, or other person or institution
licensed by the state to deliver or furnish health care
services. (Section 1345.)
3)Sets forth the intent of the Legislature to ensure that
California residents receive high-quality health care coverage
in the most efficient and cost-effective manner possible.
(Section 1342.6; Business and Professions Code section 16770.)
4)Provides that all contracts between a health care service plan
and health care providers shall be fair and reasonable, and
shall contain provisions requiring a fast, fair, and
cost-effective dispute resolution mechanism under which
providers may submit disputes to the plan. (Section 1367.)
5)Requires each health care service plan to ensure that its
dispute resolution mechanism is accessible to non-contracting
providers for the purpose of resolving billing and claims
disputes. (Section 1367.)
6)Requires DMHC, on or before July 1, 2001, to adopt regulations
to ensure that plans have adopted a dispute resolution
mechanism that is fair, fast, and cost-effective for
contracting and non-contracting providers. DMHC shall report
to the Legislature on or before December 31, 2001 on
recommendations for any additional statutory provisions which
are necessary relating to plan and provider dispute resolution
mechanisms. (Section 1371.38.)
7)Makes illegal under the Sherman Act any contract, combination,
or conspiracy in restraint of trade or commerce. (15 U.S.C.
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section 1.)
8)Provides under the state action doctrine, that states may
override the national policy favoring competition and provide
for state economic regulation which immunizes private parties
from violation of the federal antitrust act where the state
clearly articulates a policy to displace competition with
regulation and the state actively supervises the
anticompetitive conduct. ( Parker v. Brown (1943) 317 U.S.
341; California Retail Liquor Dealers Ass'n v. Midcal
Aluminum, Inc. (1980) 445 U.S. 97; Federal Trade Comm'n v.
Ticor Title Insurance Co. (1992) 504 U.S. 621.)
FISCAL EFFECT : The bill as currently in print is keyed fiscal.
COMMENTS : This bill seeks to allow health care providers to
collectively negotiate with health plans. According to the
author, this protection (an exemption from federal antitrust
law) is necessary because "currently, health care providers do
not have the power to bargain equally with health plans since
only a few plans control over 80% of the market, giving them
substantial market dominance. As a result of this dominance,
plans are able to insist that providers accept contract terms
which are unfair, unreasonable and harmful to patient care."
The author further notes that "plans are difficult to deal with,
acting abruptly and refusing to renew contracts that would
provide clarity and fairness in addition to addressing patient
care issues. Saddled with ambiguous and unreasonable contracts,
providers repeatedly find themselves in disputes with plans over
the interpretation of contract provisions. This takes time away
from patient care and increases administrative costs." The
bill's sponsor, the California Medical Association (CMA) states
that this bill will allow providers to obtain contracts that are
fair, reasonable and sufficient to assure patient access.
Health Committee Amendments . This bill was approved by the
Health Committee on Tuesday, May 8, with the author's commitment
that the following amendment would be adopted in the Judiciary
Committee:
On page 5, lines 10-11, delete "shall be referred by the
parties" and insert "may, upon mutual agreement by the parties
be referred"
Author's Amendments . In addition to the amendment raised in the
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Health Committee, the author is submitting the following
amendments for adoption by the Judiciary Committee:
On page 4, line 34, after "federal" insert "and state"
On page 5, line 2, after the period insert: "Any contract
negotiated pursuant to this section shall be subject to the
confirmation process set forth in subdivision (e)."
On page 5, line 36, strike "Upon reaching the decision, the
mediator, or if mediation is unsuccessful, the arbitrator, shall
file a copy of the mediation decision" and insert: "Upon
negotiation of a contract, the parties, or upon successful
mediation, the mediator, or if the parties agree to arbitration,
the arbitrator shall file a copy of the contract, mediation
agreement"
On page 5, line 40 through page 6, line 1, delete "the decision
or award. When considering the award" and insert "the contract,
agreement or award. When considering the contract, agreement or
award"
The Sherman Antitrust Act . Federal law prohibits any person
from engaging in anticompetitive behavior in restraint of trade
of commerce. However, an exemption from this prohibition may be
available in limited contexts. Specifically, state economic
regulation can authorize private parties to engage in
anticompetitive practices despite the prohibition on antitrust
activities where the state regulation satisfies the "state
action doctrine". This bill declares that it meets the test of
the state action doctrine, and therefore the bill's grant of
authority to health care providers to renegotiate their
contracts on a class basis is not a violation of federal
antitrust regulations.
Under the state action doctrine (first articulated by the
Supreme Court in Parker v. Brown (1943) 317 U.S. 341),
anticompetitive conduct by private parties may be immune from
antitrust violation, but only if authorized by state law and
supervised by state officials. In other words, "[a] state law
or regulatory scheme cannot be the basis for antitrust immunity
unless, first, the state has articulated a clear and affirmative
policy to allow the anticompetitive conduct, and second, the
State provides active supervision of anticompetitive conduct
undertaken by private actors." ( Federal Trade Comm'n v. Ticor
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Title Insurance Co. (1992) 504 U.S. 621, 631.) The theory
behind the state action doctrine is that a state may determine
if, in particular instances, the competitive market economy is
not working to the interest of the state, and state regulation
in this particular area is a more appropriate method of
achieving the state's goals and the public interest.
Does This Bill Satisfy the Prongs of the State Action Doctrine?
The bill clearly articulates the state policy and priorities of
making quality health care available and affordable, lowering
administrative costs, improving the negotiating relationship
between health plans and providers, keeping health plans and
providers financially solvent, and ensuring patients have
continuing access to their own health care providers. This
would seem to clearly satisfy the first prong of the state
action test.
The second prong of the state action test requires that the
state engage in "active supervision" of the anticompetitive
conduct. The courts have held that "the active supervision
requirement stems from the recognition that where a private
party is engaging in the anticompetitive activity, there is a
real danger that he is acting to further his own interests,
rather than the governmental interests of the State. . . .The
requirement is designed to ensure that the state-action doctrine
will shelter only the particular anticompetitive acts of private
parties that, in the judgment of the State, actually further
state regulatory policies." ( Patrick v. Burget (1988) 486 U.S.
94, 100-101.)
However, "actual state involvement, not deference to private
price-fixing arrangements under the general auspices of state
law, is the precondition for immunity from federal law."
( Federal Trade Comm'n v. Ticor Title Insurance Co. 504 U.S. at
633.) A state may not simply rubber stamp the activities of
private actors. "The active supervision requirement mandates
that the State exercise ultimate control over the challenged
anticompetitive conduct." In analyzing what level of action is
required, the courts have held that "the purpose of the active
supervision inquiry . . . is to determine whether the State has
exercised sufficient independent judgment and control so that
the details of the rates or prices have been established as a
product of deliberate state intervention, not simply by
agreement among private parties. ( Id . at 634-635. Emphasis
added.)
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This bill requires the state to review the negotiated contract,
mediation agreement or arbitration award and either confirm,
modify, or vacate the award. However, in making this decision,
DMHC appears limited to determining whether the award is
supported by substantial evidence. California law recognizes
different standards for review of regulatory and court
decisions. In some instances, the regulatory body or court is
required to exercise its independent judgment to determine if
the earlier decision was appropriate. In other cases, a more
deferential test is applied, the substantial evidence test ,
which asks if the decision is substantially supported by the
evidence presented. It may be argued that the court in Ticor
was requiring the "independent judgment" test, and that this
bill's substantial evidence review does not meet the rigorous
state action test. The Committee may therefore wish to explore
with the author amending the bill to require the Department of
Managed Health Care, when deciding whether to confirm, vacate,
or modify the contract, agreement, or award, to exercise its
independent judgment to ensure that anticompetitive conduct in
each instance is in the public interest and furthers the
articulated state policy.
What Constitutes A "Class"? In part, this bill comes out of a
1998 decision of the trial court in Anesthesia Care Associates
Medical Group, Inc. v. Blue Cross of California which found that
"California law recognizes and permits class arbitration when a
large number of plaintiffs have common claims against a
defendant." (Statement of Decision Granting Plaintiffs'
Petition to Compel Class Arbitration, affirmed by the court
appeal in an unpublished opinion.) The case expressly allowed
health care providers to engage in classwide arbitration with
health care service plans. In that case, however, the court
made clear that the "class" was going to be certified by the
court, which requires among other things, a showing of that the
interests of the class members coincide, and a showing of
whether the relationship between the named parties is unique or
identical and common with that of all others of the class.
(Federal Rules of Civil Procedure, Rule 23.)
This bill does not envision court intervention or certification
of a class, and does not otherwise define the parameters of the
proper parties to a class. According to the sponsor, the class
of providers that may collectively renegotiate contracts with
health care service plans under this bill may be all providers
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in the State of California, or any subset thereof. This is
important because the purpose of allowing collective negotiation
is to improve access to quality, affordable health care, keep
the plans and providers solvent, and provide for reasonable and
affordable health care costs. The Federal Trade Commission, in
commenting on a proposal out of the District of Columbia which
similarly sought to permit competing physicians to engage in
collective bargaining with health plans, opined that "such an
exemption [from the antitrust act] will not ensure better care
for patients, and threatens to raise health care costs and
reduce access to care." The Committee may wish to explore with
the author whether the providers who may negotiate collectively
as a class should be more narrowly defined to ensure that the
state's goals in allowing this anticompetitive conduct are
satisfied, or whether the bill's expansive approach is more
appropriate.
"Mediation" and "Arbitration" . The bill authorizes the
providers as a class to agree to mediation or, if mediation is
unsuccessful, to agree to arbitration. However the process of
mediation and arbitration subsequently described in the bill do
not appear entirely consistent with the common understanding of
these alternative dispute resolution mechanisms. For example,
the bill provides that DMHC shall develop regulations setting
forth "factors to be considered by the mediator . . . when
resolving the issues." Mediators, however, do not consider
specific factors. They may facilitate discussion as to those
issues in helping the parties reach resolution, but they do not
do so themselves. The bill further provides that the mediator
"shall file a copy of the mediation decision," and a statement
of reasons, and that the decision shall be subject to review by
DMHC. Typically, mediations, including the discussions that
occur during the mediation and documents that are exchanged, are
confidential. (Evidence Code section 1119.) This bill would
provide otherwise. Also, although, as described above, review
by DMHC is a necessary element to establish the "active state
supervision" prong of the state action immunity test, if DMHC
controls the ultimate outcome, it is no longer a "mediated
agreement". The Committee may wish to explore with the author
changing the terminology used for this procedure to
"conciliation" or "facilitated negotiation" and more
appropriately specify the role of the "conciliator" or
"facilitator."
The California Dispute Resolution Council (CDRC) informally
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noted concerns about the use of the term "arbitration" as well,
and suggested that the term "advisory arbitration" be used
instead. CDRC raises concerns that one of the key elements of
arbitration is its finality, and under this bill, again, the
department, not the arbitrator, determines the ultimate outcome
of the matter. The Committee may therefore wish to explore with
the author his willingness to re-categorize this procedure as
well.
Participants in the Negotiation Process . The California Nurses
Association (CNA) opposes this measure, noting that "AB 1600
raises profound new problems for registered nurses." More
specifically, CNA writes that "these subjects of bargaining have
a direct and significant impact on the scope of nursing
practice. . . .If physician coalitions gain the sole right to
negotiate prices for health care services, the result is
predictable. A larger share of a finite reimbursement dollar
would go to physicians, leaving less funding for already
under-funded nursing care budgets. The legislation could
empower physicians and HMOs to negotiate cuts in RN staffing,
and substitution of less-expensive and less-qualified unlicensed
personnel to replace nurses. This could produce devastating
results for patient care." The Committee may therefore wish to
explore with the author amending the bill to revise the
definition of "health care provider," for purposes of this
measure only, to include nurses. This would enable nurses to
have a seat at the negotiating table to ensure that the concerns
raised by CNA do not materialize.
ARGUMENTS IN SUPPORT : The California Medical Association (CMA),
the sponsor of this measure, submitted the following statement
in support of this bill:
The need for the bill is simple. We have had the privilege
of one of the best health care delivery systems in the world
in our own back yard. . . .But now California's health care
delivery system is falling apart before our eyes. The
California Medical Association has called a "Code Blue" on
the health care delivery system in our state. . . .
During the last decade, dozens of health plans merged to
leave us with seven health plans controlling the market. . .
.In their eagerness to gain marketshare, these plans cut
reimbursement for providers to the bone. In many instances
reimbursement now does not cover the cost of care.
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California courts have held that plan contracts are
"contracts of adhesion" with little to no opportunity for
the providers to negotiate. Providers need these contracts
in order to see their patients, and cannot simply refuse to
contract. . . [T]here are substantial ongoing unresolved
contract and operational issues. These unresolved issues
add administrative costs and affect the ability to deliver
patient care. . .
Physicians need to be able to negotiate both contract terms
and rates. . . .As a handful of health plans control the
market and the physician's access to patients, there is
little choice but to sign even a bad contract. . . .We must
find a way to correct this market imbalance. When the
state's interests are being injured by the competitive
market, the state can displace unfair competition with a
state program. This bill authorizes and outlines the
program. . . .The bill creates a mechanism for better
contract renegotiations. . . .AB 1600 could have a
significant influence on a clearly dysfunctional market.
The California Academy of Family Physicians notes that this bill
"provides an opportunity for more constructive dialogue between
health plans and physicians without requiring a plan or
individual physician to remain in an untenable contractual
relationship. We believe AB 1600 may be a key element towards
ensuring the fairness and success of managed care in
California."
The California Podiatric Medical Association echoes these
reasons, and notes that "health providers need to be empowered
with the tools to protect themselves in the current managed care
environment. . . .In a market so dominated by a few large
managed care companies, it is important for health care
providers to have a mechanism to raise issues associated with
the contracts between the plans and providers. AB 1600 provides
that mechanism. AB 1600 provides a flexible, fair, fast and
effective way for providers to resolve disputes when dealing
with a partner of superior market strength."
ARGUMENTS IN OPPOSITION : The California Association of Health
Plans strongly opposes this measure, writing that:
This bill establishes a broad right for physicians and other
provider groups to engage in activities that are otherwise
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barred under federal anti-trust law, including such
practices as price fixing and boycotts. . . .When competing
doctors - or any other profession - are allowed to meet
secretly and discuss much money they would like to be paid,
it is called price fixing, it is illegal, and it is the
focus of federal anti-trust enforcement efforts across the
country. . . .
We note that federal legislation authorizing the same form
of antitrust exemption AB 1600 would enact drew wide
opposition last year. The Consumer Federation of America,
the Clinton Administration Department of Justice, the
Federal Trade Commission, and groups representing both
business and labor all opposed that earlier effort - exactly
because of the serious and harmful consequences that
collusion produces. . . .
[Further, u]nder current law, health plans already are
required to have a dispute resolution process in place.
Under last year's legislation . . . this dispute resolution
process was made broader and more comprehensive, and is now
subject to oversight by the Department of Managed Health
Care. Regulations to enforce these requirements are due
from the administration in two months. Accordingly, we are
puzzled at what dispute resolution improvements are sought
in AB 1600 - or the need for them, at least at this point."
Consumer Federation of California (CFC) also raises concerns
about this measure, writing that AB 1600 "has a laudable goal[:]
. . . to reduce the leverage of the health plans and the
pressure they put on physicians to accept unreasonable
compensation. . . .[However, we] fear that under this bill, the
economic incentive to collude against consumer interests would
be too great to resist for even the most well-intentioned
physicians. CFC is concerned that this bill could authorize the
creation of health cartels, not unions. The bill could hurt
consumers and taxpayers by raising the cost of both private
health insurance and government programs with no assurance that
quality of care would be improved."
Health Net also opposes this bill, writing that "AB 1600 would
allow otherwise competing providers, including those not party
to a contract, to join together to coerce health plans to
bargain with them and would prohibit these providers from
agreeing to boycott the plan. This aggregation of economic
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power is the evil prohibited by anti-trust laws, which are
designed to protect consumers from the harm caused by concerted
economic action by economic parties that are expected to
compete, not conspire, for economic gain."
REGISTERED SUPPORT / OPPOSITION :
Support
California Medical Association (sponsor)
California Academy of Family Physicians
California Podiatric Medical Association
American Academy of Pediatrics, California District
California Dental Association
University of California
California Psychological Association
California Psychiatric Association
American College of Obstetricians and Gynecologists, District IX
California Chiropractic Association
Opposition
California Association of Health Plans
PacifiCare
California Nurses Association
Consumer Federation of California
Blue Shield of California
American Medical Group Association
California Association of Physician Organizations
National Independent Practice Association Coalition
Health Net
Health Insurance Association of America
Blue Cross of California
Association of California Life and Health Insurance Companies
California Chamber of Commerce
Analysis Prepared by : Donna S. Hershkowitz / JUD. / (916)
319-2334