The Underlying Causes of Surprise Medical Bills

By David Blumenthal, M.D. and Shanoor Seervai, The Commonwealth Fund.

Why do people get surprise bills in the first place and what can policymakers do to address the problem?

Consumers’ shock in receiving surprise medical bills has led to deep public discontent, giving rise to political urgency behind finding a federal solution

High health costs are keeping Americans up at night — nearly half of working-age adults say they could not pay an unexpected $1,000 medical bill within 30 days, according to a 2018 Commonwealth Fund survey. Several estimates suggest one of five inpatient emergency department visits may lead to surprise bills. The problem has captured the interest of lawmakers on both sides of the political aisle because these bills have such an outsized impact on consumers and are widely regarded as unfair. But why do people get surprise bills in the first place and what can policymakers do to address the problem?

What is a surprise bill?

A surprise bill can refer to any number of situations in which a patient is surprised by the bill they receive for health care services. In this case, we are referring to a medical bill that a patient unexpectedly receives because he or she was treated by an out-of-network provider at an in-network facility. The term “balance bill” is sometimes used interchangeably with surprise bill, but they are slightly different. In balance billing, insurance pays part of the bill and the patient is billed the balance.

Why do consumers receive surprise bills?

Health plans contract with doctors and hospitals to reduce the costs of care and keep premiums low for consumers. Most plans also consider quality, but cost is the dominant concern. Insurers seek out doctors and hospitals who accept lower payment per patient in return for an expected greater total number of patients. In the process, the plans create networks that exclude higher-priced providers, thus “narrowing the network” of available doctors and hospitals. When people get care from out-of-network doctors and hospitals, narrow-network plans may not cover all or any of the costs. If they did, they might lose the leverage they have with in-network providers to extract lower prices.

This narrow-network phenomenon partly gives rise to surprise billing: in emergency situations, a patient may use in-network facilities but receive care from consulting physicians — the emergency room doctors, for example — who do not have contracts with the patient’s plan.

Surprise billing also may occur in nonemergency situations where unexpected complications require the services of specialists with whom the plan does not have a contract. For example, a patient might receive a hip replacement from an in-network orthopedist and hospital. But a postoperative complication, like a heart attack, can require consultation with and heart catheterization by an out-of-network cardiologist. Health plans may then reject the resulting bills, which get forwarded unexpectedly to patients.

Surprise bills as a market failure.

Why would a health plan not have contracts with the full range of providers and services that their clients might need? The answer reflects distortions in local markets. Even if the plan gives consumers access to an adequate network, there may be a mismatch in the availability of providers at a critical moment. In other cases, certain types of providers enjoy monopoly power in particular areas. Plans that want to do business there simply have no negotiating leverage. As a result, sometimes plans and providers cannot reach agreement and providers remain out of network. Out-of-network rates are high compared with other doctors. In the case of anesthesiologists and emergency medicine physicians, charges are about five times greater than the equivalent Medicare payment.

Local monopolies can occur in rural areas where health care personnel are scarce, particularly specialists, and when specialists band together and refuse to contract with insurers unless plans meet their demands. This practice may raise antitrust concerns, but may not have sufficient economic consequences to get the attention of authorities.

Surprise billing shows how health care is different from other goods and services.

Other businesses routinely employ the equivalent of narrow networks. They pick and choose among their suppliers based on price and quality, so they can produce goods and services efficiently, charge lower prices, and compete in markets. When health plans mimic other types of businesses, however, the results are often consumer outrage and pressure on elected representatives to intercede. Why the difference?

Americans don’t accept that essential — and potentially lifesaving — health services may not be available or affordable because health plans and suppliers couldn’t agree on a price. They also object to the lack of choice in selecting providers or hospitals that lies at the heart of the controversy over surprise billing. Receiving a surprise bill without warning for an out-of-network essential service just adds insult to injury.

What solutions can policymakers deploy?

Given the market failures and consumer expectations at the heart of surprise billing, it is no surprise that there is pressure for the government to intervene. Currently there’s no federal law to protect consumers from receiving a surprise bill. There are some state laws, tracked by Kevin Lucia and Jack Hoadley of Georgetown University’s Health Policy Institute for the Commonwealth Fund. But even the states that have acted are preempted by federal law from protecting consumers who get their insurance from employers with self-funded plans.

Solutions at the state level fall into two categories. States may set a reimbursement rate for out-of-network services received at an in-network facility — for example, tying them to Medicare rates so the consumer doesn’t receive an astronomically high bill. The other is establishing an arbitration procedure that determines how a dispute between insurers, providers, and consumers should be resolved.

To avoid accusations of price-setting, policymakers have shied away from the first approach and leaned toward the second. Although arbitration is a form of regulation, it doesn’t cause opponents as much aggravation: the government is determining the process of rate-setting rather than the rate itself. But even establishing a process is a step away from free markets.

The urgency and interest at the federal level has prompted a host of federal proposals in the last session of Congress, which included bills introduced in the House and Senate, such as a proposal from a bipartisan group led by Sen. Bill Cassidy (R–La.).

The shock for consumers receiving these bills has led to deep public discontent, giving rise to political urgency behind finding a federal solution, which would be a step forward. But surprise bills arise because of local market issues which may be impossible to resolve, particularly in rural areas.

As policymakers search for a solution, they should consider that regulation that either prevents providers from balance billing or holds the consumer harmless — that is, protects them from paying the surprise bill by leaving it to the insurers and providers to fight it out — would help address the public sense of injustice around these bills. Many state laws do this. But without price regulation to take market power away from local providers, the surprise billing problem won’t go away.

April 26, 2019