Horizon BCBS Commercial Out-of-Network Reimbursement Analysis

Horizon BCBS Commercial Out-of-Network Reimbursement Analysis Horizon BCBS of New Jersey, Commissioned by Horizon Blue Cross Blue Shield of New Jersey Prepared by Victoria Boyarsky, FSA MAAA Consulting Actuary Bruce Pyenson, FSA MAAA Principal & Consulting Actuary One Pennsylvania Plaza 38 th Floor New York, NY 10119 USA Tel +1 646 473 3000 Fax +1 646 473 3199 milliman.com

TABLE OF CONTENTS TABLE OF CONTENTS... 2 EXECUTIVE SUMMARY... 3 BACKGROUND... 5 FINDINGS... 8 METHODOLOGY AND ASSUMPTIONS...13 DATA RELIANCE AND LIMITATIONS...15 APPENDIX...16 ATTACHMENTS...18 REFERENCES...19 Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 2

EXECUTIVE SUMMARY This report is about the costs of non-contracted physicians for Horizon Blue Cross Blue Shield (Horizon), a major health insurer based in New Jersey. Horizon establishes contracts with hospitals, physicians, and other providers also called network or participating provider--so that the fees that Horizon or its self-insured accounts pay are based on fixed, contracted amounts. However, Horizon and its self-insured accounts also pay for services rendered by non-contracted (out-of-network) providers. These providers often charge much higher fees than those that have been negotiated with contracted providers. Out-of-network provider reimbursement is an important issue for members, who may bear significant personal financial liability; it is also an important cost issue for employers and insurers, as demonstrated in this report. This report quantifies: 1. The costs to Horizon associated with out-of-network physicians in New Jersey, and 2. What those costs would be if out-of-network physicians were paid 150% of the Medicare fee schedule. This report contains estimates of the amount that Horizon would have saved in paid claims in 2013 for the company s commercial book of business if reimbursement to out-of-network physicians was limited to 150% of the fee schedule established by Medicare. This report focuses on commercial business, which is Horizon s largest block of business, but Horizon offers many other types coverages including Medicaid and Medicare. We used Medicare fees for the basis of comparison to Horizon s out-of-network fee levels, because Medicare fees are publicly available and well understood by providers, insurers, and regulators. The Medicare fee schedule is used to pay physicians who serve approximately 38 million Americans in Medicare s traditional programs. We use 150% percent of Medicare in this report for illustrative purposes but recognize that regulatory action and employers choice in benefits could set out-of-network fees higher or lower. This report does not support any particular out-of-network reimbursement level but rather provides insight into reduction on Horizon s 2013 claims costs using the 150% of Medicare illustrative scenario. Horizon members are generally provided with lists of contracted providers, and the majority of health care services for Horizon members are delivered by contracted providers. A member must pay higher cost-sharing if they use an out-of-network provider. Members may voluntarily decide to use an out-of-network provider even though higher cost-sharing may be required. In a hospital inpatient setting or in an emergency, however, a member will often not know whether a particular physician or provider is contracted the patient may not even be conscious when the service is rendered. This report identifies implications to both the member and insurer/self-insured employer of such out-of-network utilization. Out-of-network spending is a challenge for both fully-insured and self-insured benefits programs in the State of New Jersey. The New Jersey Department of Banking and Insurance (NJDOBI) regulates fully-insured programs but does not regulate self-insured programs. Large self-insured programs, however, often comply with insurance regulations, and insurers who administer self-insured programs, such as Horizon, may set the out-of-network fee levels for their self-insured and fully-insured programs in the same way. NJDOBI does not regulate or limit how much out-of-network providers can charge or the reimbursement insurers or patients pay to non-network providers, with limited exception in the individual and small employer markets. NJDOBI does require that insurers protect members from balance billing ( hold harmless agreements) in some Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 3

circumstances when care by an out-of-network provider is involuntary. Under such hold-harmless regulations, insured members receiving services by out-of-network providers are only responsible for the amount they would owe if they had received care by network providers, no matter how much the provider charges, and insurers are effectively required to pay up to charges to ensure the members are responsible only for the innetwork level of out-of-pocket expenses. However, there are no restrictions on how much out-of-network providers can charge. New Jersey is one of 13 states that has hold-harmless provisions for either hospitalbased or emergency services. Such hold harmless regulations can create incentives for providers to leave the insurers network if they can obtain higher reimbursement outside of the network. Insurers can attempt to negotiate with out-of-network providers to reduce the insurer s liability. The insurer will often pay much higher fees to the out-of-network provider than to the contracted provider. For self-insured plans not regulated by NJDOBI, higher charges can mean that the patient has very high liabilities through balance billing, because the member is typically responsible for amounts in excess of the plan s fee schedule; however, in many cases, the self-insured plan will absorb the higher fee to protect the member from potentially high financial burdens. The unlimited out-of-network fees can lead to high healthcare costs to both the employer and employee. For claims processed by Horizon, the authors repriced Horizon s 2013 commercial out-of-network physician services incurred by New Jersey providers. We assumed that 150% percent of the Medicare Resource- Based Relative Value Scale (RBRVS) fee schedule would apply to these services. Services incurred with outof-state providers were excluded. We found that Horizon s 2013 allowed spending would be reduced by about 4.8% if out-of-network fees were capped at 150% of Medicare. This corresponds to an allowed reduction of $611 million in 2013 out of a total allowed of about $12.8 billion (including both fully-insured and self-insured business). That is, Horizon and its members paid out-of-network providers $611 million more in 2013 than they would have if out-of-network providers were limited to charging 150% of Medicare reimbursement. Translating these figures to a paid basis results in an approximate $500 million reduction from Horizon s 2013 commercial medical claims spending of $11.6 billion, which is an approximately 4.3% reduction in paid claims. If out-of-network fees were capped by regulation, balance billing of members could decrease for nonemergent services and reimbursement to out-of-network providers would also decrease. This report was commissioned by Horizon Blue Cross Blue Shield of New Jersey and may not be provided to any other party without Milliman s prior written consent. If consent is given, the report must be provided in its entirety as extracts taken in isolation can be misleading. This report should not be interpreted as an endorsement of any particular policy, legislation, or regulation by Milliman or the authors. The authors are members of the American Academy of Actuaries and meet the qualification standards to render the opinions expressed in this report. The report reflects the authors findings and opinions. Our estimates are retrospective and may not be appropriate for future periods, as future experience could be influenced by changes in many factors including demographics, case mix/intensity of services provided, benefit design, fee levels, and inflation. Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 4

BACKGROUND Healthcare spending is a challenge to private and public budgets. National healthcare expenditures have risen to almost 18% of gross domestic product (GDP) in 2012 and are projected to increase to 20% by 2020. 1 In this context, the fees paid to providers face scrutiny, and the popular media has brought attention to high out-of-network charges billed by providers. High out-of-network fees can impact insurers, employers, and members. High fees contribute to high premium rates or can lead to increases in member cost-sharing, if the member or employer buys down to a plan with more affordable premiums. Depending on whether the benefit plan absorbs high out-of-network fees, members may be liable for high out-of-pocket costs for provider bills in excess of network fees when the member obtains out-of-network services. The majority of health care services obtained by insured members are through network providers. Insurers contract with network providers to negotiate fixed fees for medical services on behalf of their policyholders, and the policyholders have lower cost-sharing if they obtain care from network providers. The network providers may see increased volume, as policyholders avoid out-of-network providers who generally render services at higher fee levels and higher cost-sharing than in-network services. Members enrolled in health maintenance organizations (HMO) plans typically have access to only network providers, with exceptions for emergency care or referrals to out-of-network providers when no network provider is available to render a particular service or when an in-plan exception is made. Members enrolled in preferred provider organization (PPOs) and point of service (POS) plans have access to out-of-network providers but generally at higher costsharing to the member (i.e., higher deductibles and copays/coinsurance). In addition to any member costsharing, the member may also be responsible for the balance billing portion, which is the difference between the provider charge and the fee reimbursed by the insurer for out-of-network services. Insurers often reimburse out-of-network services using what is known as usual, customary, and reasonable (UCR) fees, which are most commonly derived from a large database of claims at the service category and geographic region level (e.g., FAIR Health). 2 Insurers may also use a proprietary or public fee schedule (Medicare RBRVS is a public fee schedule) to set fees for providers for out-of-network services. A recent study completed by the New York Department of Financial Services indicated that insurers are moving toward the use of publicly available fee schedules (from 19% in 2008 to 40% in 2011 in New York State) and away from proprietary UCR reimbursement, 3 and we believe this shift will affect New Jersey. However, as discussed later in the report, insurers and employers often reimburse out-of-network providers at billed charges because of regulation or to avoid forcing a member to face significant personal financial liability for high billed charges. Horizon's reimbursement methodology for paying out-of-network providers includes fee schedules but also includes paying full chargers, because of hold harmless provisions in New Jersey. Under hold-harmless provisions, insured members receiving services by out-of-network providers are only responsible for the amount they would owe if they had received care by network providers, no matter how much the provider charges, and insurers are effectively required to pay up to charges to ensure the members are responsible only for the in-network level of out-of-pocket expenses. The Affordable Care Act (ACA) encourages a shift to integrated and coordinated care while improving quality and reducing healthcare costs through the establishment of accountable care organizations (ACO). ACOs and other types of provider risk-bearing entities are responsible for comprehensive care for members assigned to them and are typically also held at risk for the cost of care for these members. In the absence of Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 5

regulations to control out-of-network utilization or cost containment regulations on out-of-network charges in general, ACOs could face significant challenges if they are unable to control use of non-aco providers or if they are unable to set the fees charged by out-of-network providers. ACOs may face out-of-network challenges similar to those faced today by many insurers and employers. 4 OUT-OF-NETWORK FEES The media has publicized cases of very high out-of-network charges billed by providers. Many of these cases involve out-of-network hospital-based providers with privileges in participating facilities 5, 6, where the member may have unknowingly obtained out-of-network services. High out-of-network charges can sometimes be negotiated to lower fees through discussions between the member and the provider. Lower fees may also be obtained by the insurer through negotiation, mediation or arbitration with the provider, or some portion of high fees may be written off by the provider. 7 In some cases, the provider may pursue legal action against either the insurer or member to collect the fees. 8 Some providers may argue that high fees are needed to compensate for low payment rates from Medicare and Medicaid. 9 Insurance regulation (or its absence) can lead to high out-of-network fees in some circumstances. In the presence of hold harmless or balance billing regulations, as discussed below, most or all of the charges described here are paid in full by the insurer or employer to protect the policyholder from excessive balance billing. Out-of-network costs are one component of healthcare spending for members who have such benefits. High out-of-network fees can contribute to high medical costs and high benefit costs. BALANCE BILLING REGULATIONS Generally, members utilizing network providers are held harmless from balance billing because these providers agree, as part of their contracts with the insurer, that the rate negotiated with the insurer is payment in full. Many states have regulations pertaining to balance billing when services are obtained out-of-network (see Attachment A). State insurance departments regulate fully-insured programs and do not regulate selfinsured programs, but certain large self-insured programs comply with insurance regulations on out of network reimbursements, and insurers who administer self-insured programs, such as Horizon, may administer their self-insured and fully-insured programs in the same way. The following examples are from a State Health Facts publication by the Kaiser Family Foundation. 10 HMO or PPO members in Connecticut are held harmless from balance billing for all out-of-network covered services. 10 HMO members in Maryland must be held harmless from balance billing for any covered service performed by out-of-network providers. The hold harmless provisions are effectuated through a combination of insurance regulations and fee schedules maintained by a government agency; hospitals must accept the fee schedules as payment in full. However, PPO members in the same state are exempt from balance billing protection laws of the HMO members for hospital-based physicians or on-call physicians. 10 Some states have guidelines to determine adequate reimbursement for out-of-network services including: Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 6

Maryland, which limits an HMO s out-of-network reimbursement to 125% of Medicare (140% for trauma physicians). 11, 12 California, where regulators use criteria to determine if reimbursement to out-of-network providers is sufficient. This criteria uses a combination of the 50th percentile of a billed charges database, Medicare fees, or 110-120% of the insurer s in-network fee for similar services. 11,13 Attachment A, taken from Kaiser Family Foundation, summarizes some state rules on balance billing. The majority of services that are protected against balance billing are emergency services, hospital-based physician services performed at in-network facilities, and referral/authorization-based services. In essence, these regulations are meant to protect policyholders from being billed by providers because of the patient s involuntary use of out-of-network services. Examples of involuntary use of out-of-network providers are services performed by out-of-network hospital-based providers at in-network facilities, emergencies when it is not feasible to procure services from a participating provider, and situations where the existing network may not be adequate to provide network coverage for certain services. However, these rules may also create an incentive for certain providers (emergency room or hospital-based providers, and potentially others) to not join networks to avoid the fixed fees associated with network participation and try to obtain greater reimbursement levels. The authors did not independently verify the accuracy of the state rules and summaries noted in Attachment A. EMERGENCY SERVICES AND THE ACA The ACA has rules that affect out-of-network coverage. In particular, insurers and employers are prohibited from applying preauthorization requirements for out-of-network emergency room services, and they must provide the same level of coverage for these services as that available in-network. These regulations also define reasonable reimbursement from the insurer for out-of-network emergency services as the greater of (1) the median of amounts negotiated with in-network providers, (2) the amount for emergency services calculated using the same method used to determine payments for other out-of-network services, and (3) the amount reimbursed under Medicare for emergency services. 14 This ACA rule does not limit a provider s ability to balance bill the patient, however, and creates incentives for physicians serving emergency patients to leave networks to obtain higher fees. 15 ACA rules serve to establish minimum out-of-network emergency service reimbursement levels but do not prohibit states from establishing additional standards. OUT-OF-NETWORK REGULATIONS IN NEW JERSEY New Jersey regulations implementing the Health Care Quality Act, N.J.S.A. 26:2S-1 et seq., at N.J.A.C 11:24-5.3(b), N.J.A.C 11:24-5.1(a)1, and N.J.A.C 11:24-9.1(d)9 require the insurer to protect the member from balance billing for emergency services. In addition, N.J.A.C 11:22-5.8 holds members harmless if they utilize out-of-network physicians at an in-network facility. Thus, insurers in New Jersey pay up to billed charges for emergency out-of-network services and services incurred by members with out-of-network physicians at innetwork facilities. New Jersey regulations on balance billing N.J.A.C 11:24-5.3(b), N.J.A.C 11:24-5.1(a)1, and N.J.A.C 11:24-9.1(d)9) protect members enrolled in HMOs against balance billing if they obtain emergency care, or if they obtain other care from an out-of-network provider via referral from a participating provider. In addition, similar legislation exists to hold members harmless if they utilize out-of-network physicians at an in-network facility Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 7

(N.J.A.C. 11:22-5.8). Though some of these are HMO based requirements, they have been extended to members enrolled in PPOs and other types of managed care plans. In 2007, an administrative action by the NJDOBI against Aetna and in favor of providers required Aetna to reprocess all claims under insured contracts issued in New Jersey for services rendered by non-participating providers for emergency care, for services rendered by out-of-network providers during an admission to a network hospital by a network provider, and for services rendered by non-participating providers pursuant to a referral or authorization from Aetna, so that the total benefit paid for such services amounts to the provider s billed charges, less the costsharing of the covered person for network services. 8 Under these circumstances, Aetna was required to reimburse providers up to billed charges, which, as previously mentioned, can be very high. Under the current New Jersey regulations, there is very limited incentive for providers whose patients see them involuntarily or in emergencies to participate in insurer networks, because out-of-network physicians can collect reimbursement at their full billed charges without any limits. This dynamic may lead insurers to pay these physicians more to stay in the network, which would tend to increase costs in-network as well. As discussed above, New Jersey does not currently have regulations governing or limiting out-of-network reimbursement. In addition, there is no limit to the fees that out-of-network providers can charge insurers in New Jersey. The impact of hold harmless regulations have led to potentially unrestrained billed charges and spending for out-of-network services. OVERVIEW OF HORIZON S COMMERCIAL BENEFIT PLANS AND PROGRAMS Horizon Blue Cross Blue Shield of New Jersey is the state s largest health insurance company. It serves approximately 3.7 million members and offers Medicare, Medicaid, and commercial coverage. 16 This report focuses on Horizon s commercial book of business, which provides comprehensive health benefits to individuals, small groups, and large group employers, on a fully-insured and self-insured basis for large group employers. The large group market comprises several sectors including national accounts, public employers, federal employees, and the largest sector, the New Jersey State Health Benefits Program (SHBP). Horizon administers several plan offerings in the commercial market including EPO, PPO, POS, and HMO products. Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 8

FINDINGS Figure 1 summarizes the paid dollars that were included in our repricing analysis. FIGURE 1 COMPONENTS OF 2013 COMMERCIAL HORIZON SPENDING (PAID CLAIMS IN $MILLIONS) TOTAL Total Medical Paid Claims 1 $11,596 less Excluded Claims 2 $3,919 Claims With Horizon Primary $7,677 less Total Institutional (e.g., hospital) $3,955 Total Professional, Before Exclusions $3,722 less Professional Exclusions: Participating Providers $2,628 Out-of-State Claims $92 Repricing Exclusions 3 $51 Non-network Professional Claims Included in the Repricing Analysis $953 1 Obtained from Horizon s utilization and trend reporting engine and includes capitation payments. Does not include adjustments for reinsurance, bonus incentive payments or other such adjustments. Also excludes administrative expenses and prescription drugs. 2 Excludes claims for Medicare Primary, BlueCard, and members where Horizon pays secondary. 3 Based on various factors, including missing fees from the Medicare fee schedule (see Figure 5). This report is based on our analysis of the $953 million in out-of-network professional paid claims, representing approximately 8% of the 2013 commercial paid medical claims of $11.6 billion or approximately 26% of Horizon s commercial professional paid claims of $3.7 billion (after exclusions for Medicare Primary and BlueCard members, and other members where Horizon pays secondary). The analysis considered only claims incurred with New Jersey providers (i.e., excluding out-of-state claims). Because of the large number of different benefit plan designs that Horizon administers in the individual, small group, and large group markets, it was not possible for the authors to directly re-estimate paid claims. Therefore, we present our findings below on an allowed basis (i.e., plan paid plus member cost-share) and estimate ranges of potential reductions to paid claims. Based on actuarial relationships, we estimate that the out-of-network allowed professional claims represent about 9% of total allowed commercial medical claims (compared to the 8% of paid stated above) or 27% of total allowed commercial physician claims (compared to the 26% of paid stated above). We developed cost reductions relative to Horizon s 2013 out-of-network allowed levels assuming that fees for out-of-network physician services were capped at 150% of the Medicare RBRVS fee schedule. We use 150% percent of Medicare in this report for illustrative purposes, acknowledging that regulatory action could choose a higher or lower percentage. We also provide estimates for reductions to paid claims. Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 9

Figure 2 summarizes the repriced allowed claims at 150% of the Medicare RBRVS fee schedule in New Jersey s two localities, as defined by CMS, Northern and Rest of New Jersey and in total. LOCALITY FIGURE 2 2013 ALLOWED COST REDUCTIONS BY LOCALITY (IN $MILLIONS) ALLOWED REPRICED ALLOWED (CMS 150%) Northern New Jersey $883 $413 Rest of State $288 $147 Total Out-of-Network Professional Claims $1,171 $560 REDUCTION TO ALLOWED $470 53% Reduction $141 49% Reduction $611 52% Reduction The difference between the original allowed and the allowed repriced using 150% of Medicare RBRVS (i.e., the cost reduction) is $611 million or a 52% reduction in 2013 allowed spend. The level at which Horizon reimburses claims for out-of-network providers is, on average, at least three times Medicare reimbursement (i.e., at least 300% of Medicare) for the same services. Horizon and its members paid out-of-network providers $611 million more in 2013 than they would have if out-of-network fees were limited to 150% of Medicare reimbursement. The results are similar in both New Jersey localities. This reduction amounts to 4.8% of Horizon s total medical allowed commercial claims (approximately $12.8 billion in 2013). We estimated the reduction in paid claims, relative to total non-network professional paid claims of $953 million, by applying an average actuarial value (defined as paid claims divided by allowed claims) for out-ofnetwork benefits. We estimate the average actuarial value is 81% for the out-of-network professional claims for the commercial business. If allowed fees decrease but benefits do not also decrease, the actuarial value of a benefit may go down, as a higher portion of the spending falls into deductibles and copays (i.e., deductible de-leveraging). For purposes of this analysis, and as a practical and simplifying assumption, we assume that, if out-of-network fees are decreased, benefits would also be adjusted (i.e., enriched) to arrive at the original actuarial value for out-of-network benefits. This allows us to assume that the actuarial value for out-of-network benefits would remain constant, and any reduction in allowed claims would produce a roughly similar reduction in paid claims. Figure 3 summarizes the cost reductions achieved as a percentage of total physician out-of-network paid claims and as a percentage of total medical paid claims for Horizon. As summarized below, the cost reductions achieved from revising the out-of-network fee schedule to 150% of the Medicare fee schedule could result in overall medical cost reductions for Horizon s commercial book of business by 4.3% (or 52% of physician out-of-network claims). Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 10

FIGURE 3 HORIZON OUT-OF-NETWORK COST REDUCTIONS (IN $MILLIONS) COST REDUCTION COST REDUCTION (AS % OF HORIZON PHYSICIAN NON-PAR PAID) COST REDUCTION (AS % OF HORIZON MEDICAL PAID CLAIMS) Total Commercial Medical Paid Claims Administered by Horizon Horizon Physician Non-Par Paid Repriced Physician Paid @ 150% and 81% Actuarial Value $11,596 $953 $456 $497 52% 4.3% In our model, the percent reduction in medical paid claims of 4.3% is roughly the same as the percent reduction to medical allowed claims (4.8%), because we are assuming out-of-network benefits would be adjusted to produce a constant actuarial value. The remainder of the report presents the cost reductions on an allowed basis. Figure 4 summarizes the estimated allowed claims at 150% of the Medicare RBRVS fee schedule for hospitalbased physician services and all other physician services separately. Hospital-based services, incurred in either the inpatient or outpatient facility setting, include surgeon, anesthesia, and emergency room physician services while all other physician services include office visits, chiropractor, and physical therapy services in a doctor s office. The analysis summarizes these allowed cost reductions by locality and in total. Out-ofnetwork hospital-based physician services represent a little over a third of total out-of-network physician services, while the remaining (less than) two-thirds represents out-of-network other physician services. Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 11

FIGURE 4 ALLOWED AMOUNT DIFFERENCES FOR 150% OF MEDICARE FOR ALL OUT-OF-NETWORK PHYSICIAN CLAIMS (IN $MILLIONS) LOCALITY ALLOWED HOSPITAL-BASED PHYSICIAN SERVICES REPRICED ALLOWED (CMS 150%) Northern New Jersey $349 Rest of State $111 Total $459 OTHER PHYSICIAN SERVICES Northern New Jersey $534 Rest of State $177 Total $711 ALL PHYSICIAN SERVICES Grand Total $1,171 $69 80% Reduction $26 76% Reduction $96 79% Reduction $344 36% Reduction $121 32% Reduction $465 35% Reduction $560 52% Reduction Interestingly, higher cost reductions are derived from hospital-based physician services (79%) than from other physician services (35%). The original allowed amount divided by the repriced allowed amount at 150% of Medicare RBRVS gives a sense of the original fees as a percent of 100% of Medicare RBRVS. The 79% figure for hospital-based physicians suggests that the physician claims repriced in this study in 2013 received over seven times Medicare reimbursement (i.e., [1 / (1 79%)] x 1.5), and the physicians providing other nonhospital-based services received over two times Medicare fees. In general, a shift from reimbursing out-of-network providers using billed charges and to reimbursement based on a fixed fee schedule could lead to an increase in balance billing of members. However, if out-of-network provider charges were capped, there would be a limited impact to members. Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 12

METHODOLOGY AND ASSUMPTIONS We repriced Horizon s 2013 commercial out-of-network physician service spending using the 2013 Medicare RBRVS fee schedule appropriate to the claim locale. We repriced claims for employees and under-65 retirees only, and only in-state claims, and where Horizon was the primary payor relative to coordination of benefits (COB). We considered only physician services for out-of-network providers; out-of-network facility claims, which amount to approximately 4% of total facility claims (or less than 2% of total claims spend) were not repriced. We performed the repricing on both hospital-based physician services (i.e., out-of-network physician services incurred in an inpatient or outpatient setting) as well other physician services (i.e., those incurred in a doctor s office, lab, or other/home places of service). DATA OVERVIEW The out-of-network claims repricing analysis was performed using the medical claims data provided by Horizon for its commercial claims incurred in calendar year 2013, and paid through August of 2014. Horizon excluded the following members from the data: Retirees who are also Medicare-eligible Commercial members where Horizon is a secondary payor BlueCard members who are out-of-state and incur claims outside of New Jersey, because the analysis is primarily focused on out-of-network reimbursement in New Jersey The claims that were repriced met the following criteria: Claim lines with an indicator that the rendering provider is out-of-network Claims with an area indicator of inside the state of New Jersey. Hospital-based physician services were identified through indicators for inpatient or outpatient place of service. Other professional services were identified as having place of service in a doctor s office, laboratory, or other/home. REPRICING METHODOLOGY The 2013 out-of-network physician services were repriced using the 2013 Medicare RBRVS fee schedule. The RBRVS assigns a relative value unit (comprising physician work, practice expense, and malpractice), by service, which is then adjusted by area and multiplied by a conversion factor to produce the payment amount for a specific locality. Medicare has two localities in New Jersey, and we repriced the claims using the Medicare county mapping designated for New Jersey (Northern NJ or Rest of State). The physician claims were repriced using the Milliman Global RVU s and Medicare Repricer TM software. 17 Specific modifier logic, as supplied by Horizon, was applied to claims with specific CPT codes and a POS IP and OP, and where the MOD2 field is not either 26 or TC ; modifier field to 26 was assigned to these claims before repricing. The claims were repriced using 150% of Medicare RBRVS. In cases where the repriced claim exceeded the billed charge, the claim was capped at the billed charge. Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 13

The technical appendix includes specific repricing examples and a supplement on methodology with additional details (e.g., bundled claims, units, and capping). REPRICING EXCLUSIONS Approximately $51 million in out-of-network physician claims, representing approximately 5% of out-ofnetwork physician claims, were excluded from the repricing analysis, and we assumed no change in these payments. The reasons for the exclusions, as well as the portion of claims that they represent, are summarized in the table in Figure 5. FIGURE 5 EXCLUSION REASON PERCENT OF ALL EXCLUSIONS No Fee Available on Fee Schedule 71% Facility Only/Technical Claim Procedures 17% Billed Charges missing or below minimum threshold 6% Missing CPT/HCPC 3% Unable to Bundle 3% Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 14

DATA RELIANCE AND LIMITATIONS We relied on the following information provided by Horizon: Institutional and professional claims Membership files Supporting documentation In performing our analysis, we relied on data and other information provided to us by Horizon and on data from the Centers for Medicare and Medicaid Services (CMS). We have not audited or verified this data and other information beyond reviewing it for general reasonableness. If the underlying data or information is inaccurate or incomplete, the results of our analysis may likewise be inaccurate or incomplete. Actual results will vary from our estimates. This report has been prepared for the sole benefit of Horizon Blue Cross Blue Shield of New Jersey. No portion of this report may be disclosed to any other party without Milliman s prior written consent. In the event such consent is given, the report must be provided in its entirety. Milliman does not intend to benefit any thirdparty recipient of its work product, even if Milliman consents to the release of its work product to such third party. Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 15

APPENDIX APPENDIX A: REPRICING EXAMPLES 2013 MEDICARE ALLOWED CALCULATION: EVALUATION AND MANAGEMENT PROCEDURE CODE PROCEDURE CODE DESCRIPTION 99213 Office/outpatient visit est PROVIDER COUNTY MEDICARE CARRIER - LOCALITY ESSEX 12402-01 BASE RVU - NON-FACILITY WORK PRACTICE EXPENSE MALPRACTICE TOTAL 0.9700 1.1000 0.0700 2.1400 CARRIER-LOCALITY ADJUSTED RVU - NON-FACILITY WORK PRACTICE EXPENSE MALPRACTICE TOTAL 1.0127 1.3046 0.0732 2.3904 CONVERSION FACTOR MEDICARE ALLOWED $34.02 $81.33 Medicare Allowed = 2.3904 x $34.02 2013 MEDICARE ALLOWED CALCULATION: ANESTHESIA PROCEDURE CODE PROCEDURE CODE DESCRIPTION 00810 Anesth low intestine scope PROVIDER COUNTY MEDICARE CARRIER - LOCALITY MONMOUTH 12402-99 UNITS BASE UNIT BILLED UNIT TOTAL 5.0 2.0 7.0 CONVERSION FACTOR MEDICARE ALLOWED $22.81 $159.67 Medicare Allowed = 7.0 x $22.81 Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 16

APPENDIX B METHODOLOGY SUPPLEMENT We used the Physician Repricer module of the Milliman GlobalRVUs and Medicare Repricer software to reprice the claims data. The Milliman GlobalRVUs and Medicare Repricer software combines a comprehensive set of relative value unit (RVU) and Medicare fee schedules with a processing engine and an Excel-based reporting structure. This software provides a simple solution for assigning RVUs or Medicare-allowed charges to the entire claim database. The Physician Repricer processes professional medical claims at the detailed service line level and assigns RVUs and/or Medicare-allowed amounts. The Physician Repricer is not always able to adjudicate and assign RVUs to every claim or service line that is processed. Depending on the data and configuration settings, claims may be excluded for missing units, unrecognized or missing procedure codes, and various other reasons. Please refer to the Methodology section of this report for a discussion of exclusions. We used the 2013 Medicare Resource-Based Relative Value Scale (RBRVS) fee schedule. Implausible unit coding was capped at a maximum allowed unit value, a parameter option in the Repricer software. The maximum allowed units vary by Healthcare Common Procedure Coding System/ Current Procedural Terminology code and are applied across all services with a given HCPC/CPT code within a claim. The Medicare-allowed amounts assigned using the physician fee schedules may differ from actual Medicare payment for the following reasons: Medicare makes significant changes to payment rates annually. Interim payment changes are also made throughout the year, though these midyear updates usually have a small impact on Medicare allowed levels. The Physician Repricer represents our understanding of Medicare payment rules in effect as of the date of release. The Repricer is updated annually to reflect annual changes to Medicare s payment rules and rates. Medicare employs prepayment edits to deny payment for certain services. The Physician Repricer does not deny payment based on claim edits. The Government Accountability Office (GAO) estimated the impact of prepayment edits in fiscal year 2010 to be approximately 0.5% of Medicare fee-forservice costs. Medicare makes additional payments to professionals participating in the Physician Quality Report Initiative (PQRI). The bonus was 1% in 2011. Those payments are not included in the Physician Repricer. The Physician Repricer does not reduce payments to reflect sequestration. Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 17

ATTACHMENTS ATTACHMENT A: STATE RESTRICTION AGAINST PROVIDER S BALANCE BILLING Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 18

REFERENCES 1 CMS. National Health Expenditure Projections 2012-2022. Retrieved, from http://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and- Reports/NationalHealthExpendData/downloads/proj2012.pdf. 2 Kahn, H. and Parke, R. (February 2012). Using Medicare RBRVS for reimbursing out-of-network claims in commercial insurance. Milliman White Paper. Retrieved, from http://publications.milliman.com/publications/health-published/pdfs/using-medicare-rbrvs.pdf. 3 Lawsky, B. (March 7, 2012). An Unwelcome Surprise: How New Yorkers Are Getting Stuck with Unexpected Medical Bills from Out-of-Network Providers. New York Department of Financial Services. Retrieved February 20, 2015, from http://www.governor.ny.gov/assets/documents/dfs%20report.pdf. 4 The Advisory Board Company (April 22, 2014). One challenge for coordinated care: Patients often go outside the 'ACO'. Retrieved, from http://www.advisory.com/daily-briefing/2014/04/22/onechallenge-for-coordinated-care-patients-often-go-outside-the-aco. 5. Mathews, A. W. (December 4, 2008). Surprise health bills make people see red. The Wall Street Journal. Retrieved, from http://online.wsj.com/articles/sb122834911902477643. 6 Rosenthal, E. (September 20, 2014). After surgery, surprise $117,000 medical bill from doctor he didn t know. New York Times. Retrieved, from http://www.nytimes.com/2014/09/21/us/drive-bydoctoring-surprise-medical-bills.html. 7 Kyanko, K. and Busch, S. (November 2012). The out-of-network benefit: Problems and policy solutions. The Journal of Health Care Organization, Provision, and Financing, p. 352-361. 8 State of New Jersey Department of Banking and Insurance. In the Matter of Violations of the Laws of New Jersey by Aetna Health Inc.: Order Directing Remediation and Assessing Penalties. Retrieved February 20, 2015, from http://www.state.nj.us/dobi/pressreleases/pr070725_ordera07_59.pdf. 9 Burns, J. (August 2011). Health plans seek leverage when physicians submit extremely high bills. Managed Care Magazine. Retrieved, from http://www.managedcaremag.com/archives/1108/1108.gouging.html. 10 Kaiser Family Foundation (March 2013). State Restriction Against Providers Balance Billing Managed Care Enrollees. State Health Facts. Retrieved, from http://kff.org/private-insurance/stateindicator/state-restriction-against-providers-balance-billing-managed-care-enrollees/. 11 Maryland Health General Section 19-710.1, Retrieved from http://law.justia.com/codes/maryland/2005/ghg/19-710.1.html. 12 New Jersey Hospital Association. Out-of-Network. Issue Brief. Retrieved, from http://www.njha.com/media/34681/outofnetwork.pdf. 13 California Medical Association. Balance Billing Advocacy ToolKit. Retrieved from https://www.calpath.org/docs/bbtoolkit.pdf 14 Section 2719A of the Public Health Service Act codified under 45 CFR 147.138(b). 15 Thompson, T. S. (August 2012). Out-of-network involuntary medical care: An analysis of emergency care provisions of the Patient Protection and Affordable Care Act. Bates White Economic Consulting. Retrieved, from http://www.bateswhite.com/insight-49.html 16 Horizon Blue Cross Blue Shield Company Information. Retrieved January 1, 2015 from http://www.horizonblue.com/about-us/our-company. 17 Milliman. GlobalRVUs. Retrieved, from http://us.milliman.com/solutions/products/globalrvus/. Horizon BCBS Commercial Out-of-Network Reimbursement Analysis 19

DRAFT Attachment A Taken from Kaiser Family Foundation State Restriction Against Providers Balance Billing Managed Care Enrollees State Restriction Against Providers Balance Billing Managed Care Enrollees? Restriction Applies to Network Providers? Restriction Applies to Network Providers? Restriction Applies Restriction Applies to Outof-Network State Restriction Location to HMO? Providers? Applies to PPOs? United States 49+DC Yes 49+DC Yes 49+DC Yes 13 Yes 27 Yes 27 Yes 9 Yes Alabama HMOs only Yes Yes No No No No Alaska No No No No No No No Arizona HMOs only Yes Yes No No No No Arkansas HMOs only Yes Yes No No No No Restriction Applies to Outof-Network Providers? California HMOs and PPOs Yes Yes Yes, ER services (except Yes, ER services (except Yes Yes ambulance services) ambulance services) Colorado HMOs and PPOs Yes Yes No Yes Yes No Connecticut HMOs and PPOs Yes Yes Yes, for covered benefits Yes Yes Yes, for covered benefits Delaware HMOs only Yes Yes Yes, ER services and in Yes, ER services and in certain other situations No No certain situations related to related to inadequate inadequate networks networks District of Columbia HMOs only Yes Yes No No No No Florida HMOs and PPOs Yes Yes Yes, any other service covered and authorized by HMO and when the provider knows that the HMO is liable Yes Yes Yes, any other service covered and authorized by PPO and when the provider knows that the PPO is liable Georgia HMOs and PPOs Yes Yes No Yes Yes No Hawaii HMOs only Yes Yes No No No No Idaho HMOs and PPOs Yes Yes No Yes Yes No Illinois HMOs only Yes Yes Yes, ambulance services No No No Indiana HMOs only Yes Yes No No No No Iowa HMOs only Yes Yes No No No No Kansas HMOs only Yes Yes No No No No Kentucky HMOs and PPOs Yes Yes No Yes Yes No Louisiana HMOs only Yes Yes No No No No Maine HMOs and PPOs Yes Yes No Yes Yes No Maryland HMOs and PPOs Yes Yes Yes, for covered benefits Yes Yes HMOs Yes, for on-call physicians and hospital-based physicians that accept assignment of benefits Massachusetts HMOs and PPOs Yes Yes No Yes Yes No Michigan HMOs only Yes Yes No No No No Minnesota HMOs and PPOs Yes Yes Yes, for certain covered Yes, for certain covered Yes Yes services services Mississippi HMOs and PPOs Yes Yes No Yes Yes No PPOs Not for Distribution Milliman 2/20/2015

DRAFT Attachment A Taken from Kaiser Family Foundation State Restriction Against Providers Balance Billing Managed Care Enrollees HMOs PPOs Location State Restriction Against Providers Balance Billing Managed Care Enrollees? Restriction Applies to HMO? Restriction Applies to Network Providers? Restriction Applies to Outof-Network Providers? State Restriction Applies to PPOs? Restriction Applies to Network Providers? Restriction Applies to Outof-Network Providers? Missouri HMOs only Yes Yes No No No No Montana HMOs and PPOs Yes Yes No Yes Yes No Nebraska HMOs and PPOs Yes Yes No Yes Yes No Nevada HMOs and PPOs Yes Yes No Yes Yes No New Hampshire HMOs and PPOs Yes Yes No Yes Yes No Yes, for emergency and Yes, for emergency and New Jersey HMOs and PPOs Yes Yes Yes Yes urgent care services urgent care services New Mexico HMOs and PPOs Yes Yes No Yes Yes No New York HMOs only Yes Yes Yes, for ambulance services and acute care facilities for end of life cancer care No No Yes for ambulance services North Carolina HMOs only Yes Yes No No No No North Dakota HMOs and PPOs Yes Yes No Yes Yes No Ohio HMOs only Yes Yes No No No No Oklahoma HMOs and PPOs Yes Yes No Yes Yes No Oregon HMOs and PPOs Yes Yes No Yes Yes No Pennsylvania HMOs and PPOs Yes Yes Yes, for emergency services Yes Yes Yes, for emergency services Rhode Island HMOs and PPOs Yes Yes Yes, for covered services provided or made available Yes Yes No by an HMO South Carolina HMOs only Yes Yes No No No No South Dakota HMOs and PPOs Yes Yes No Yes Yes No Tennessee HMOs only Yes Yes No No No No Texas HMOs and PPOs Yes Yes No Yes Yes No Utah HMOs only Yes Yes Yes, in rural areas for specified covered services No No No Vermont HMOs and PPOs Yes Yes No Yes Yes No Virginia HMOs only Yes Yes No No No No Washington HMOs and PPOs Yes Yes No Yes Yes No West Virginia HMOs only Yes Yes Yes, for covered services when a provider is aware that patient is an HMO No No No enrollee Wisconsin HMOs only Yes Yes No No No No Wyoming HMOs only Yes Yes No No No No Source: http://kff.org/private-insurance/state-indicator/state-restriction-against-providers-balance-billing-managed-care-enrollees/ for notes and sources. Downloaded on Not for Distribution Milliman 2/20/2015