Washington is taking notice of an important problem: hospital price gouging of unsuspecting patients. The No More Surprise Medical Bills Act of 2018, introduced last month by Democratic Sens. Maggie Hassan and Jeanne Shaheen of New Hampshire, followed a bill offered earlier this year by six senators, the bipartisan Protecting Patients from Surprise Medical Bills Act, and one in the House, the Fair Billing Act of 2017, introduced by Rep. Michelle Lujan Grisham (D-N.M.).
The primary focus of these legislative efforts is medical bills that occur when an insured patient is treated by an unknowingly out-of-network (OON) facility or doctor. The patient is surprised to be billed for costs not covered by insurance. For example, in an emergency, a patient may be transported to an OON hospital, or a patient may select an in-network facility and later learn that out-of-network doctors were involved in his or her treatment.
{mosads}Some states have passed legislation addressing this issue. However, for privately insured patients enrolled in self-insured health plans commonly offered by big employers, these state laws do not apply because of preemption by the Employee Retirement Income Security Act (ERISA). Thus, federal legislation is important.
Surprise billing is unfair because patients lose the benefit of having insurance. This unfairness results from the poorly understood and pernicious chargemaster pricing system that allows hospitals to charge vastly different prices for the same medical care. For example, assume the hospital’s list price — the “chargemaster price” or “billed charges” — is $500 for a particular service. Medicare would pay the hospital about $100 for that service, and the hospital has agreed to accept from private health insurers, known as in-network insurers, about $160 in full payment for the same service.
One of the most important benefits of having in-network insurance is that the price is the contracted rate of $160, and any amounts owed by the patient (such as co-insurance) are based on this amount. In addition, hospital contracts with insurance companies prohibit balance billing.
When a patient receives out-of-network treatment, the hospital demands the entire $500 list price. Even if the patient’s insurance company pays some out-of-network amount (even if it were $160) the hospital demands that the patient pay the balance of $340. This hospital price gouging is unfair to all self-pay patients, and not just to patients receiving surprise OON bills.
Hospital list prices are set at exorbitant levels to extract higher reimbursements from insurance companies. The marketplace does not accept list prices, and virtually no one knowledgeable about hospital billing would ever agree to pay them.
The No More Surprise Medical Bills Act of 2018 is not broad enough, because all self-pay patients need protection. However, a companion bill from Sen. Shaheen would apply to all self-pay patients — those out-of-network and the uninsured. While this bill does not directly prohibit surprise bills, it more importantly strikes at the heart of the chargemaster-based pricing system by establishing a method for determining a fair price for medical care. As a result, all self-pay patients, including surprise OON patients, would be protected from price gouging.
Unfortunately, this bill allows states to choose among three options to set the price: 125 percent of the Medicare rate, 80 percent of the “usual and customary rate” (UCR) based on a provider’s billed charges, or the insurer’s in-network contracted rate for the service. The first option is reasonable, but the second two should be eliminated and replaced by another option. UCR chargers are simply another name for list or chargemaster prices — and these prices are excessive, set unilaterally by hospitals and not accepted by the marketplace. They should play no role in establishing the price of medical care. There is no percentage that can be applied to charges to ensure a reasonable price.
For emergency care, the Medicare-based rate should apply because there is no market for emergency care; patients exercise no choice. For elective non-emergency care, another option should be added: the average contract rate accepted by the hospital from in-network insurers, as long as there are at least three in-network insurers.
This option would allow hospitals to continue to set their non-emergency prices at any level they wish, but to enforce them against patients only if the marketplace accepts and pays those prices. It also would have the beneficial effect of encouraging providers to join insurers’ networks.
Another reasonable approach to establishing the price is binding arbitration, which a number of states use. A potential problem with arbitration is the increased administrative expense associated with it. Some bills address this problem by requiring that the arbitration results be made public. This type of arbitration is a good alternative, as long as the arbiters are instructed to consider negotiated in-network rates and Medicare rates, but not provider charges in any form.
George A. Nation III is a professor of law and business at Lehigh University in Pennsylvania. His recent research concerns health care policy with a focus on restoring competitiveness in the marketplace.