i5 Questions is a periodic feature produced by Cornerstone Research, which asks our professionals, senior advisors, or affiliated experts to answer five questions.
We interview Professor Erin Trish, of the Schaeffer Center for Health Policy and Economics at the University of Southern California, to gain her insights on the economic circumstances that drive surprise billing in healthcare, recent legislation designed to curtail it, and legal challenges to those regulations.
What does the term “surprise billing” in healthcare mean, and how often does it happen?
Patients generally seek medical care from providers that are part of their insurer’s network. Staying “in-network” is cheaper than going out-of-network. Yet even when patients choose to visit an in-network provider, they can be treated, unexpectedly, by another provider who is not in their network. This can happen when patients require emergency care (including emergency transportation to medical care), or even in cases like surgery or childbirth. The patient is transported to, or schedules care with, an in-network hospital and an in-network lead physician, but then may also be treated by another, out-of-network physician—whom they did not choose. Most commonly, this provider is a facility-based specialist like an anesthesiologist, radiologist, pathologist, or assistant surgeon.
When a patient receives out-of-network care in this unexpected manner, the insurer pays some amount to the out-of-network provider. The provider may then bill the patient for the difference between the provider’s charge (akin to a list price) and what the insurer paid—a practice known as balance billing. The bill the patient receives is called a “surprise” bill.
Until recently, surprise billing was common. Economists have estimated that about one in five emergency room (ER) visits may have resulted in an out-of-network bill. Similarly, it is estimated that one in every five elective surgeries—even if conducted at an in-network facility with an in-network primary surgeon—includes an out-of-network provider.
These surprise bills can be large, and their size has grown substantially over time. For example, my research has shown that, between 2014 and 2017, the average potential surprise bill for out-of-network medical care received at an in-network ambulatory surgery center grew 81 percent, from $814 to $1,483. In the case of air ambulance services, surprise bills are even larger: in the years 2016–2017, the average potential surprise bill exceeded $20,000.
Can you describe some of the economic reasons that lead certain out-of-network providers to surprise bill?
For ER physicians and certain facility-based specialties (e.g., anesthesiology), patient volume is driven by the patient’s choice of facility, or by the facility the patient is transported to in an emergency. That volume is largely insensitive to whether those specialists are in the patient’s network. Similarly, patients cannot decline an air ambulance in an emergency, and air ambulance carriers cannot choose which patients to transport when dispatched in an emergency.
Patients’ inability to choose an in-network provider in certain situations, such as emergency care or ambulance services, creates incentives for a potentially lucrative out-of-network billing option. Indeed, economists have found that many out-of-network providers have opted to set high billed charges—that is, high list prices—for the services that patients are unable to avoid.
Notably, high out-of-network charges can also lead to higher in-network rates. Economists have found that when some providers are able to set high charges without negatively impacting their patient volume, they can in turn charge relatively high in-network rates to health insurers. My coauthors and I have shown that some providers’ ability to surprise bill causes upward pressure on in-network rates. Historically, this has also translated into higher health insurance premiums for patients.
Have any policy actions been taken to address surprise billing?
Surprise billing, especially as practiced by certain physician specialties, has caught the attention of policymakers. In December 2020, Congress responded by passing the No Surprises Act (NSA), which took effect on January 1, 2022. The law prohibits out-of-network providers from billing patients for more than the in-network cost-sharing due under their insurance. The law also creates a final-offer arbitration process to determine how much insurers must pay out-of-network providers. Arbitrators must consider several factors when deciding the amount that insurers must pay, including the health plan’s historical median in-network rate for similar services.
Before the NSA was passed, several states had already enacted their own laws, intended to protect consumers from surprise bills. Yet under these laws, patients were still vulnerable to indirect harm in the form of higher premiums. This is because, while state laws might have prohibited out-of-network providers from billing patients directly, physicians could often still leverage their out-of-network billing option to extract high payments from insurance companies. As a result, while patients would not receive the surprise bill, they could still face higher health insurance premiums due to insurers having to pay high out-of-network costs. The NSA was enacted to break this cycle: curtail surprise billing while also reducing—or at least not increasing—insurance premiums.
Have there been legal challenges to such policy actions?
National and state provider groups have recently filed lawsuits against federal regulators challenging the NSA’s arbitration process. These groups include the American Medical Association, the American Hospital Association, and the Association of Air Medical Services.
Specifically, the legal challenges center on the NSA’s rule that arbitrators should consider health plans’ historical median in-network rates for similar services when determining how much insurers must pay out-of-network providers. The provider groups challenging this NSA rule make two main allegations. First, they allege that anchoring on these in-network rates will harm providers, who will receive below-market rates for their services. Second, they allege that patients’ access to in-network providers will decrease because the NSA’s rule for determining out-of-network rates will also lead to significantly lower in-network rates. This, in turn, would allegedly decrease network access if providers cannot accept these rates.
Is there economic evidence to refute the legal challenges to the NSA and similar state policies?
Yes. I assess these issues in several coauthored amicus briefs submitted to the U.S. district courts that are examining provider groups’ challenges to the NSA.
First, as my coauthors and I explain, there is no economic evidence that the historical median in-network rate—to which the NSA’s arbitration process anchors—will typically be lower than the fair market value of providers’ services. As noted earlier, the leverage that some providers derived from the threat of surprise billing actually inflated in-network rates. This is particularly true for services where patients do not have a meaningful choice over their provider. Put another way, the in-network prices paid to providers with scope for surprise billing were already higher than would have existed in a well-functioning market. Because the NSA’s arbitration process will rely on prior in-network rates, it largely “locks in” those higher rates.
Second, there is no economic evidence that the NSA will reduce providers’ network participation. On the contrary, the NSA is likely to increase network participation, by providing clear guidance to arbitrators about how to make decisions. In addition, administrative costs are likely to be significantly lower with a network agreement than without one. This means that the parties will expect to benefit from reaching a network agreement at a price close to what they expect to be paid without a network agreement. Indeed, as my research has shown, immediately after California implemented a surprise billing law in 2017, the share of services delivered out-of-network by affected specialties declined by 17 percent.
Perhaps most important, anchoring out-of-network provider payments to historical median in-network rates will likely reduce insurance premiums. The fact that arbitration decisions would average close to the historical median contracted rate will drive out-of-network payments toward this rate. Insurers would refuse to pay much more than the price expected to emerge from arbitration, and providers would refuse to accept much less. Premiums, in turn, would decline because the historical median is not influenced by the very high prices negotiated by a minority of providers.
In sum, the economic evidence indicates that the NSA will help keep insurance premiums steady—or even lower them—without limiting patients’ access to in-network providers or reducing providers’ payments to below-market rates.
