Almost everyone hates surprise medical bills, except perhaps those doctors, hospitals, clinics and labs that profit from them. Surprise medical bills occur when patients unknowingly receive medical care from physicians and therapists, or in hospitals, clinics and labs that are not in the provider networks of a patient’s health plan. When out-of-network provider fees exceed health plans’ in-network usual & customary rates, patients often must pay the outstanding balance. The medical establishment refers to this practice as balance billing.
Surprise medical bills are a problem all across the country. A recent survey of hospital patients in 37 states found nearly 100,000 inpatients had received a surprise medical bill from at least one out-of-network provider. Only about half of states have any kind provisions to protect patients from surprised medical bills. Moreover, nearly two-thirds of workers with employee coverage have it through a self-funded employer. Self-funded employee health plans are regulated under federal law, rather than by the states. Thus, state laws to protect patients from surprise medical bills does nothing to protect more than half of workers with employee health benefits.
Lawmakers are trying to put a stop to surprise medical bills. There are several proposals in Congress to address surprise medical bills at the federal level and many states are looking for solutions as well. Texas is about to send a bill to the governor granting patients additional protections from surprise medical bills. However, time is running out for many state legislative sessions. The Texas bill passed only two days before Texas’ end-of-session deadline.
There are a lot of misconceptions surrounding the cause of surprise medical bills. Physicians sometimes argue that surprise medical bills are the result of restrictive, narrow health plan networks. The evidence does not bear this out. Health plans establish networks by negotiating standard contractual fees with providers in return for steering plan members (i.e. patients) to them. For example, patients often select primary care providers, OB/GYN and dermatologists based partly on their respective network participation. However, the arrangement breaks down when patients are unable to choose their ancillary providers. Ancillary providers work inside facilities (hospitals, clinics or labs) and are chosen by the facilities rather than patients directly. Patients have no control over the anesthesiologist who treats them during surgery. Nor can patients select the pathologist who examines specimens or radiologists who interpret scans. Patients also have no say over the emergency room physician when needing emergent care.
Participating in a network is unlikely to result in additional business for ancillary providers because it is facilities, not health plans, that drive customers to them. There is no ongoing, doctor-patient relationship; once inside the hospital, patients have no control over who perform services for them. As a result, many ancillary physicians purposely refuse to join provider networks, hoping to collect fees many times higher than the usual and customary fees reimbursed by health plans. Under the balance billing business model, this is a feature, not a bug.
Economists point to this type of price gouging as a form of market failure. In normal markets, consumers compare prices and select the purveyor of goods and services they desire at a given price. Prices are transparent because suppliers complete for customers on price, quality or other amenities. This is not the case for ancillary providers who patients cannot chose. Imagine a motorist whose car breaks down on the highway. Tow truck drivers know they must compete for drivers’ business. Because the stranded motorist can call numerous towing companies, their fees will be competitive. However, let’s assume the city contracts with towing companies to remove stalled cars on the highway and motorists have no choice in the matter. If the city allows the towing companies to charge whatever they wish, the towing fees will be much higher than in a market where tow trucks are competing for customers on price. A similar price gouging phenomenon happens with providers who work inside the hospital.
The consensus among many economists and health policy analysts is that balance billing is a form of market failure that is unfair to patients and should be banned. In addition, patient cost-sharing should be limited to in-network rates when treated by out-of-network providers whom patients were powerless to avoid. Out-of-network physician fees should be reimbursed by health plans at some standard ratio of what either Medicare pays or what private insurers pay in-network physicians. Some states also use arbitration to settle fee disputes between providers and health plans if an agreement cannot be achieved.
A controversial method that has merit would be to pay the ratio of what private insurers pay compared to Medicare rates for the same services. Private insurers pay about 130 percent, on average, of Medicare physician fees. If ancillary physicians thought fees that are 130 percent of Medicare fees were too low, they would be free to negotiate additional compensation from the hospitals, clinics or labs where they work. Facilities where ancillary providers work are the logical entities to negotiate additional compensation because they steer business to them.
Independent physicians should be free to form relationships with patients outside provider networks, if both parties agree, the arrangement is not coercive and is established well in advance of care. However, no ancillary providers should not get a free pass to gouge their patients, employer health plans or insurers. The methods mentioned above would fairly compensate ancillary providers without allowing them to unfairly profit from market failure.
Devon M. Herrick, PhD is a health economist and former hospital accountant. He has written about public policy for 20 years.
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