Amidst the current rancor in Washington there is a rare bipartisan effort to address surprise medical bills. Both the Democrat House and Republican Senate have proposals to protect patients from receiving steep bills after inadvertently receiving treatment from out-of-network health-care providers and most analysts anticipate that such a law will pass Congress before the end of the year. As both parties jostle to be the “Party of Healthcare,” it is important to consider the impact of the various proposals to fix this problem. If Congress is too hasty it will create new problems in its wake.
“Surprise billing” occurs when a patient is unexpectedly billed for an out-of-network service. Typically, patients receive surprise bills after emergency treatment or after receiving services from an ancillary out-of-network doctor during a procedure at an in-network health-care facility. When a patient’s insurance plan and the health-care provider are unable to agree on the appropriate level of reimbursement, patients are sometimes stuck with the balance. One study estimated that, in 2014, surprise billing likely occurred in 20 percent of inpatient emergency room cases, 14 percent of outpatient emergency room visits, and 9 percent of elective inpatient admissions
Congress is debating three different solutions to this problem: The first would have the federal government mandate a reimbursement price for out-of-network care; the second would impose an in-network guarantee that would force all providers operating at an in-network facility accept in-network prices; and the third would create an independent dispute resolution process that establishes an independent arbiter and system for insurers and doctors to settle price differences. Fortunately, each proposal protects patients by requiring that they are only responsible for the copay, co-insurance, or deductible they would owe if treated by an in-network provider.
However, both government rate setting and an in-network guarantee threaten to introduce unintended consequences to the healthcare system that offset the benefits of patient protection. These complications arise from the structure of the healthcare system. To create comprehensive provider networks for beneficiaries, insurers contract with providers, who offer discounted rates, and in return the providers receive higher patient volumes, lower administrative burdens, and long-term contract certainty.
For many specialties, this structure works smoothly. But emergency physicians are in a unique moral and legal position. In emergency situations there is a moral imperative that overrides normal market dynamics of consumer choice and competition. And, under a 1986 federal law, every American has a right to life-saving care at an emergency room, regardless of insurance coverage. The law correctly creates a health-care environment that ensures access to care for all patients, but it puts providers at a disadvantage in contract negotiations with insurers because of their legal obligation to provide care. There is much less incentive for insurers to contract with emergency providers, which leads to the higher incidence of surprise billing in emergency scenarios.
Both rate setting and an in-network guarantee would further reduce incentives for insurers to contract with providers. Rate setting threatens to underpay providers for the costs of their services while an in-network guarantee would allow insurers to pay the discounted in-network rates without offering providers any of the benefits in return. Either plan would skew the system in favor of insurers and therefore constrict the supply of providers, leading to access to care and doctor choice concerns for patients.
Unfortunately, rate setting is the leading proposal for both parties. Both the House and Senate have introduced legislation that would establish a local, median in-network rate as an ostensible market-based solution, which is especially problematic. At the moment there is currently no known independent, transparent, and verifiable database that has information on the depth of services and the geographic breadth to serve as an appropriate data set to determine median in-network rates. Without that information, doctors will suffer from an information asymmetry that would work against them. And because insurers can manipulate their portfolio of providers in order to reduce their median in-network rates they can create a downward spiral for both the in-network and out-of-network rates they would owe.
In 2016, California mandated out-of-network rates be set at the lesser of the median in-network rate or 125 percent of the already insufficient Medicare rates. While it is too early to do a robust empirical study of the outcome, qualitative evidence shows that the mandated rate is struggling to support physicians in the state. There are reports of insurance companies cancelling contracts and demanding significant cutbacks in physicians’ reimbursements, further driving down the median in-network rate.
On the federal level, a recent Congressional Budget Office score of the Senate Lower Health Care Cost Act, which includes a provision benchmarking out-of-network rates at the median in-network rate, projects similarly negative consequences. The report estimates that the measure will save $ 24.9 billion over ten years, primarily through reduced federal subsidies for insurance bought through Affordable Care Act marketplaces and employment-based insurance. Premiums are also expected to be one percent lower than current projections.
But the trade-off is a large decrease in payments received by providers. CBO projects that, nationally, average payment rates will fall 15 to 20 percent as reimbursements converge towards the median in-network rate. The actual impact will differ by region, but providers will generally face declining reimbursements.
Thus, the proposed rate setting will favor insurers at the expense of providers making a longer-term reduction in the availability of care inevitable. A better solution would not bias either side. It instead would establish a system that allows market participants to set prices while avoiding harmful distortions.
A Market Solution
An independent dispute resolution (IDR) represents a market-based remedy to surprise medical bills that will sustain physician practices and do little to harm the existing health system. A “baseball style” IDR process allows an arbiter to pick only one of the two proposed prices, encouraging both parties to meet in the middle.
New York State implemented such a system a few years ago, and evidence indicates the system has been a success. Along with protecting patients, it has decreased the frequency of out-of-network bills by 34 percent relative to New England states, incentivized parties to reach agreement on their own, and slowed premium growth more than in than the rest of the country. This system has been found to favor insurers and providers equally, without giving insurance companies pricing power over essential medical services.
Surprise billing is a problem and patients deserve protection. However, Congress should pause and consider the unintended consequences of any proposed solution, especially when there are effective, market-based alternatives such as an IDR. Unfortunately, the House and Senate continue to advance rate-setting legislation that would disrupt the market and give insurance companies a windfall.