Saving surprise medical billing legislation

Before the August recess, Congress seemed poised to pass legislation addressing surprise medical billing. However, as a result of intense lobbying, Congress may not deal with the problem at all — and if they do, they are unlikely to use the best approach.

Surprise medical bills usually involve out-of-network emergency or ancillary physicians such as radiologists, anesthesiologists, pathologists, assistant or consulting surgeons and hospitalists. These providers have no prior relationship with their patients because they are called in by the hospital to provide care during the patient’s treatment. As a result, these doctors do not contract directly with patients. Rather, they are usually employed by a physician-staffing company owned by a for-profit private equity or venture capital firm whose profit model includes surprise balance billing. The physician-staffing firm contracts on behalf these providers with hospitals. These doctors depend on hospitals, not insurers, to provide them with their patients.

Because these doctors do not contract with patients, their right to receive payment from patients is based on a legal doctrine called quasi contract; an obligation imposed by law in the absence of a real contract to prevent an unjust enrichment. It would be unfair to allow the patient to receive care without payment. But, since there is no real contract with the patient, these doctors are not entitled to their “billed charges”; rather, they are entitled only to the reasonable value of their services, which is far less than their “charges.”

Nevertheless, these providers often attempt to recover their exorbitant charges by sending surprise balance bills to patients. Surprise bills occur when the patient either has not entered into a contract with a specific doctor, and therefore did not expect to receive a bill from them, or when the patient is taken by EMS to a hospital that is not within the patient’s insurance network. As noted above, even though patients are not legally obligated to pay any more than the reasonable value of the care they have received, many patients feel obligated to pay surprise balance bills — and many others are threatened or sued if they refuse to pay.

All of the legislation under discussion would prevent doctors from sending surprise balance pills to patients. However, the proposals differ in the method they propose to determine how much surprise providers should be paid — in other words, how to determine the reasonable value of the care provided. Notwithstanding doctors’ claim that their charges represent reasonable value, none of the legislation being discussed suggests paying billed charges.

One approach suggests basing reasonable value on the amount that Medicare would pay. Medicare rates, however, are sometimes considered to be below reasonable value. As a result, it has been suggested that 125 percent of the Medicare rate should be considered reasonable value. Another approach uses the average in-network rates as a basis to determine reasonable value. In-network rates are the rates agreed to by those doctors who sign contracts with commercial insurance companies.

However, because emergency and ancillary physicians do not contract directly with patients and do not depend on attracting patients by becoming in-network with insurers, the bargaining power of their for-profit, hedge fund-owned physician-staffing firms is too strong and has produced in-network reimbursement amounts that are unreasonably high.

For example, emergency and ancillary doctors can (and do, as a business model) simply refuse to go in-network with any insurer and still be assured of a supply of patients provided by their hospitals. Moreover, because they are not in-network, these doctors often plan to maximize their profit by balance billing, threatening and/or suing out-of-network patients to recover excessive charges. This upsets patients and causes dissatisfaction with their insurance provider and may cause them to switch to a different insurer. To avoid this, insurers often agree to excessive reimbursements with these physicians. As a result, using existing in-network reimbursement amounts as a proxy for reasonable value for these doctors is not a good solution. 

The best solution is called an in-network guarantee. Under this approach, if the patient is in-network with the hospital where treatment is provided (or if the patient was taken to an out-of-network hospital by EMS) all providers will be paid the amount they would have been paid if they had been in-network with the patient’s insurer. 

Under this approach, emergency and other ancillary physicians can protect themselves from unreasonably low reimbursement rates by refusing to practice at hospitals that agree to in-network reimbursement rates that are too low. This approach protects patients and requires negotiation and agreement among hospitals, emergency and ancillary physicians, and insurance companies. Hospitals cannot function without emergency and ancillary physicians, these physicians cannot function without hospitals, and insurers can’t sell policies without being in-network with hospitals. 

Because all of these market participants have relatively equal knowledge, market power and incentive to negotiate, these negotiations will result in reasonable market-based reimbursement amounts. 

Some proposals also include an independent dispute resolution (IDR) process that is available to either providers or insurers. If an IDR process is adopted, it must direct the arbiters not to consider billed charges when determining reasonable value, create a presumption that reasonable value lies between 100 and 200 percent of the Medicare reimbursement amount, and require publication of the IDR results.

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.