Taking the ‘surprise’ out of medical billing

The political stars seem to have aligned to make real progress on medical billing abuse a tantalizing possibility. In Congress last week the Senate Health, Education, Labor and Pensions Committee (HELP) passed the Lower Health Care Costs Act. The act has many important parts, but let’s focus on the long overdue solution it provides for the pernicious problem of surprise medical billing.

Possibilities, of course, are not realities and already there is an impressive array of providers and insurers invested in preserving the status quo and determined to prevent real change. The act should become law as soon as possible, and without any further watering-down of its important provisions. Coverage for ground ambulance charges should be added to the bill.

Surprise medical billing, one type of balance billing, occurs when a patient receives care from a provider the patient did not choose. Balance billing is broader, including situations where patients choose, for whatever reason, to receive care from a provider the patient knows is out-of-network.

In surprise medical billing, there is no contract between provider and patient. In fact, there is no prior relationship between the parties. Typically, the patient has never met the provider who sends the bill. For example, a patient may choose a surgeon and hospital that are both in-network, but many weeks after surgery receive a bill from an assistant surgeon the patient has not met who is out-of-network.

To really understand the pernicious nature of surprise billing one needs to understand provider pricing. Providers set list prices, in something called a charge description master (CDM), and these prices often are grossly excessive — purposely set at an exorbitant level to gain negotiating leverage with commercial insurance companies. That is, they are set not to be paid, but to be discounted. Nevertheless, when a patient is out-of-network, the provider can demand its CDM price from the unfortunate patient.

For example, one assistant surgeon, who had never met the patient, sent a bill for $117,000 to the patient. This was the assistant surgeon’s list price; the price typically paid to the surgeon for this type of work was about $5,850.

Given the nature of surprise billing, the proposed law does not limit freedom of contract between doctors and patients or prohibit providers from setting their own prices. Setting an exorbitant list price is easy, but finding customers willing to contract at that price is unlikely unless there is some trick. If patients knew the list price they would never agree to pay it.

In health care the trick is that providers don’t tell insured patients the price beforehand. Providers rarely, if ever, state a specific price in their contracts with patients. Nevertheless, providers claim that patients owe the list price. Legally, this is incorrect because the patient never agreed to pay that price. 

Legally, when parties contract without agreeing to a specific price, courts must provide the price based on fair-market value. That is the price at which the goods or services typically are transferred in the community. In the health care context, fair-market value is the amount the hospital or other provider typically receives as payment for the care provided.

Most patients don’t know their legal rights and many struggle to pay these outrageous bills. When patients are sued by providers or their collection agencies, they either mistakenly acknowledge that they owe the amount claimed, because they think they do, or fail to respond to a summons and lose by default.

The Senate’s proposed law protects patients by providing for payment to surprise providers at no more than the median in-network rate in the geographic area where the care is provided. In other words, the act provides the same result as litigation would without the added time and expense of going to court.

The best solution — network matching — was part of the original bill but was eliminated because of intense lobbying. Providers still are not happy and would prefer an arbitration solution. Arbitration is less attractive because of its unnecessary bureaucracy and expense, but if it is adopted, the arbitration awards must be transparent by being made public and not kept secret.

However, if the lobbyists are successful and arbitration is selected then arbitrators should be instructed to consider in-network payment rates and Medicare reimbursement amounts, rather than “charges” (CDM rates) to determine a fair price. Also, arbitration awards should be made public.

Because the proposed law applies only to surprise bills, and most of the care provided is not surprise care, insurers still have great incentive to create broad, comprehensive networks of providers. An insurer with no network would have a difficult time selling insurance since all of its customers would be subject to balance billing except for surprise bills. The act will not cause undue disruption to the health care market.

To be clear, providers would continue to have the ability to enter into contracts with patients at any price, as long as they can get the patient’s agreement up front to pay the specific price desired. Nothing in the act would prevent this because, when a patient freely and knowingly agrees to the price, there is no surprise medical bill.

George A. Nation III is a professor of law and business in the Perella Department of Finance at Lehigh University. Prior to his academic career, he practiced corporate and commercial law in Philadelphia. His recent research concerns health care policy and pricing.