This analysis is part of the USC-Brookings Schaeffer Initiative for Health Policy, which is a partnership between Economic Studies at Brookings and the University of Southern California Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings. USC-Brookings Schaeffer Initiative research on surprise medical billing was supported by Arnold Ventures.
After years of debate, Congress coalesced around legislation to end most surprise out-of-network billing as 2020 drew to a close, including the No Surprises Act in the year-end omnibus spending bill.
Starting January 1, 2022, it will be illegal for providers to bill patients for more than the in-network cost-sharing due under patients’ insurance in almost all scenarios where surprise out-of-network bills arise, with the notable exception of ground ambulance transport. Health plans must treat these out-of-network services as if they were in-network when calculating patient cost-sharing. The legislation also creates a new final-offer arbitration process to determine how much insurers must pay out-of-network providers. If an out-of-network provider is dissatisfied with a health plan’s payment, it can initiate arbitration. The arbitrator must select between the final offers submitted by each party, taking into consideration several factors including the health plan’s historical median in-network rate for similar services.
The root market failure that created the surprise billing problem is that patients lack meaningful choice of provider for certain services. In emergencies, patients can unavoidably end up at an out-of-network facility or being treated by out-of-network physicians. For elective care, patients choose their facility and principal physician, but typically not their anesthesiologist, assistant surgeon, or other ancillary provider; yet these ancillary providers contract with insurers separately from the facilities they practice at (and typically separately from the principal physician). As a result, emergency and ancillary clinicians are guaranteed a steady flow of patients regardless of their network status, creating an out-of-network billing option unavailable to specialties that typically derive patient volume from being in-network.
The law’s prohibition of surprise out-of-network billing addresses this market failure, preventing providers from using leverage derived from the ability to surprise bill to extract high prices. With respect to services delivered at in-network facilities, policymakers could likely have stopped there and allowed payment for these services to be determined through negotiations among payers, facilities, and clinicians. But, for out-of-network emergency services and air ambulance services, barring surprise out-of-network billing creates a need for some sort of price support because these providers are required to treat any patient regardless of ability to pay and thus have no other leverage to draw on in negotiations with payers. The law’s arbitration process fills that role.
Setting these payments exclusively via arbitration is a departure from initial proposals advanced by the Senate Health, Education, Labor, and Pensions Committee and the House Energy and Commerce Committee in 2019, which would have instead directly specified a “benchmark” payment rate equal to the median in-network rate for similar services. Using arbitration was a key demand of provider groups, who likely hope that they will be able to extract higher prices via an arbitration process. The particular version of arbitration used in the final bill is also somewhat more provider-friendly than the version in an earlier bill approved by the House Ways and Means Committee, in that it expands eligibility for arbitration and requires arbitrators to consider certain provider-friendly factors drawn from a May 2019 arbitration proposal put forward by a bipartisan group of Senators.
Despite these concessions to providers, the No Surprises Act likely still represents a net win for patients and consumers more broadly. Critically, patients will no longer be at risk of large surprise out-of-network bills when receiving emergency care or elective procedures or being transported by an air ambulance. Eliminating the leverage certain providers derived from the ability to surprise bill patients has the potential to reduce contracted prices in certain specialties—and thereby premiums. Whether that occurs in practice will depend on whether the Biden administration is able to implement the law’s arbitration process in a way that keeps providers from using that process to extract prices higher than those they receive today, something that will surely spur vigorous lobbying activity in the months to come.
Taking into account this uncertainty and the administrative costs of arbitration, the Congressional Budget Office estimates that the No Surprises Act will reduce commercial insurance premiums by between 0.5% and 1%, saving taxpayers $17 billion over ten years and saving consumers about twice that much between reduced premiums and cost-sharing.
The remainder of this blog focuses primarily on the details of the law’s protections for patients, how payment for affected out-of-network services will be determined, and how the new federal protections interact with existing state law. We also briefly discuss the key implementation challenges, though a separate blog will delve into the implementation choices the administration will face in greater detail.
How Broad is the Protection from Surprise Bills?
The new surprise billing protections apply to all commercially insured patients (since public insurance programs like Medicare, including Medicare Advantage, and Medicaid already include protections from surprise bills) and to almost all out-of-network services where surprise bills are a common occurrence (with the main exception being ground ambulances). Specifically, the law bars out-of-network providers from billing patients more than in-network cost-sharing amounts for:
- All out-of-network emergency facility and professional services;
- Post-stabilization care at out-of-network facilities until such time that a patient can be safely transferred to a different facility;
- Air ambulance transports, whether emergency or non-emergency in nature;
- Out-of-network services delivered at or ordered from an in-network facility unless the provider follows the notice and consent process described further below.
Under the notice and consent process, an out-of-network provider must notify a patient of its out-of-network status and obtain the patient’s written consent to receive out-of-network services more than 72 hours before the service is delivered. The goal of such an exception is to allow patients who wish to do so to choose an out-of-network provider when a substantive choice exists. The law also establishes that there is no notice and consent exception allowed for services where patients are typically unable to select their specific provider. This “no exception group” is defined as any service relating to emergency medicine, anesthesiology, pathology, radiology, neonatology, diagnostic testing, and those provided by assistant surgeons, hospitalists, and intensivists. The Secretary of Health and Human Services (HHS) has the option to add to this list over time and to remove certain advanced diagnostic laboratory tests.
Insurers will be required to treat all these services as in-network for purposes of patient cost-sharing, deductibles, and out-of-pocket limits. Further, the legislation prescribes that when the patient’s cost-sharing obligation takes the form of coinsurance (i.e., a specified percentage of the allowed amount), that obligation must be based on the “qualifying payment amount,” which is described further below but is generally the insurer’s historical median in-network rate for the relevant service.
How is Insurer Payment for Surprise Out-of-Network Services Determined?
While it is possible to leave payment for most of these services to market negotiations between health plans, facilities, and clinicians, most state laws and federal proposals impose a minimum out-of-network payment requirement on health plans, either directly by specifying a “benchmark” payment or indirectly by creating an arbitration process. The No Surprises Act uses arbitration, as described below.
In the case of a surprise out-of-network service, the No Surprises Act requires that health plans make an initial payment to the provider (or transmit a notice of denial) within 30 days of the date the service is delivered but makes no prescription as to the amount of the payment. Of note, the so-called “greatest of three” rule that currently prescribes a minimum payment for out-of-network emergency services will cease to exist because the No Surprises Act sunsets the provision of the Affordable Care Act (ACA) that the rule was promulgated under starting in 2022. (The No Surprise Act sunsets this ACA provision because the new protections under the No Surprises Act largely supersede the ACA protections.)
If an out-of-network provider is dissatisfied with the insurer’s initial payment, the provider can trigger a 30-day “open negotiation” process, after which it can initiate binding, “final offer” arbitration if no resolution is reached. Both sides make a final payment offer (which can differ from both the insurer’s initial allowed amount and the provider’s initial charge), and the arbitrator must choose one of those two payment amounts, with the idea being that this incentivizes more reasonable offers. In practice, though, what matters most is how an arbitrator determines which offer is more “reasonable.”
The No Surprises Act instructs arbitrators to consider several factors:
- The “qualifying payment amount,” which, as described further below, is generally the insurer’s median in-network rate for similar services in that geographic region as of 2019, inflated forward by the Consumer Price Index for All Urban Consumers (CPI-U);
- Demonstrations of good faith efforts (or lack thereof) to reach a network agreement and any contracted rates between the two parties during the previous four years;
- Market shares of both parties;
- Patient acuity; and
- The level of training, experience, and quality of the clinician, or the teaching status, case mix, and scope of services offered by the facility.
For air ambulance services, the arbitrator is also instructed to consider:
- The ambulance vehicle type; and
- The population density at the pickup location.
The arbitrator can also request, or either party can offer, any other relevant information. However, the arbitrator is prohibited from considering the provider’s billed charges (a unilaterally set list price, which tends to be extremely high), usual, customary, and reasonable rate benchmarks (which tend to be based on charges), and Medicare or Medicaid payment rates.
The Secretaries of HHS, Labor, and Treasury are required to establish a process to certify arbitrators who have relevant expertise and do not have conflicts of interest. The health plan and provider must jointly agree upon an arbitrator from that group, or else it falls to the federal government to select the arbitrator. Each arbitrator can set its own fee, which the losing party must pay. Both parties will also be charged an administrative fee set to compensate the federal government for its costs to administer the process.
The requirement that the parties bear the cost of arbitration is an important incentive for each to pursue a negotiated settlement and thereby avoid the administrative cost of arbitration. Administrative costs may loom large in practice because out-of-network providers are only allowed to batch up to 30 days of claims to the same issuer for a single arbitration case, and it must be the case that “such items and services are related to the treatment of a similar condition.” The higher the administrative costs relative to the dollars at stake in any particular case, the greater the benefit of settlement.
We note that providers may have to wait for some time to secure payment through arbitration. Taken together, the “open negotiation” period described above, the time the law allots for the selection of an arbitrator, and the time allotted for the arbitrator to rule ensure that it will take more than one month (and potentially more than two months) to obtain payment through arbitration. Further, a provider must then wait another 90 days before initiating a new arbitration proceeding with the same issuer for similar services. This time lag may slightly reduce the leverage a provider receives from the option to pursue arbitration and thus slightly reduce the risk that arbitration increases contracted rates.
Qualifying Payment Amount
The “qualifying payment amount” plays a substantial role in the structure of the No Surprises Act. Patient cost-sharing limits for surprise out-of-network services are based on this metric and public reporting of arbitration awards is required to be presented as a percentage of this amount. It also appears to be intended to be the central factor considered by arbitrators.
The qualifying payment amount is defined as the median of contracted rates for a given service in the same geographic region within the same insurance market (i.e., nongroup, fully-insured large group, fully-insured small group, or self-insured group) across all of an issuer’s health plans as of January 31, 2019, inflated forward in perpetuity by the CPI-U. The law lays out special rules for instances where an insurer was not present in a particular market or did not cover a particular service in 2019.
Regular audits, including in response to complaints, are intended to make sure that insurers properly calculate their median contracted rates as prescribed.
A final notable feature of the arbitration process established under the No Surprises Act is that it requires HHS to publicly report the outcomes from all arbitration cases quarterly on its website. Providing clear information on what the parties can expect from arbitration may help encourage settlement. It can also offer policymakers an opportunity to adjust if typical arbitration awards or the volume of arbitration (and associated administrative costs) end up being higher than desired.
How will the No Surprises Act affect health care costs?
Arbitration for surprise bills can potentially affect health care costs through three main channels. First, it creates new administrative costs – both the fees associated with each arbitration case and the staff time and resources devoted to managing the process – a portion of which is likely to be passed through to premiums. Second, the arbitration outcomes themselves (i.e., the ultimate prices paid to providers for the services in question) directly impact health care costs.
Third, and most consequentially, the payment providers expect to be able to obtain if they pursue arbitration can affect their leverage when negotiating with payers over in-network payment rates. For emergency and air ambulance services, it is reasonable to expect contracted rates to settle no lower than expected arbitration payment (minus the financial and hassle costs of using the process) since providers have no reason to agree to less than they can receive by going to arbitration. For ancillary services provided at in-network facilities, payers may be able to negotiate somewhat lower prices because insurers have some ability to steer patients away from facilities where clinicians demand high prices for ancillary services, but a higher expected arbitration award would still be expected to translate into higher contracted rates. Some of us have discussed these dynamics at greater length here and here.
This means that using arbitration to settle surprise billing disputes can lead to prices higher than those that would have been paid without surprise billing legislation if awards end up being highly-favorable to providers, as they have been under some existing state systems. However, the high arbitration awards seen in states like New York and New Jersey seem to arise primarily because arbitrators base determinations on the 80th percentile of provider charges, a metric that is many times higher than in-network prices. Notably, none of the existing state arbitration systems tied to average in-network rates (and with no reference to charges) appear plagued by the same inflationary outcomes.
It is therefore reassuring that median in-network rates are the first, and most concrete, point of guidance to arbitrators. Historical in-network rates are, however, only one of several factors that arbitrators are supposed to consider, so there remains some risk that arbitrators will ultimately place substantial weight on other factors. For example, if arbitrators base determinations on previously contracted rates, another criteria the law directs arbitrators to consider, that would benefit large physician groups who previously leveraged surprise billing into high contracted rates and could undermine any savings from the bill. As we discuss below, the administration likely has tools to keep the arbitration process from becoming unmoored in this way through its role in certifying arbitration entities and selecting the default arbitrator, but it must choose to use them. Moreover, required public reporting will provide visibility into whether arbitration awards start to diverge from median in-network rates.
In light of these implementation risks, there is significant uncertainty regarding the net effects that the legislation will have on health care costs. If arbitrators largely base determinations on median in-network rates, the law should exert some downward pressure on health care costs and premiums. But if arbitration outcomes end up more favorable for providers, the legislation might result in no savings or even potentially increase costs. Weighing these possibilities (and variations in between), CBO estimates that the No Surprises Act will result in a little less than a 1% reduction in premiums, on average nationwide, and $17 billion in budgetary savings over the next ten years.
How Will the New Law Interact with Existing State Surprise Billing Laws?
Many states have existing laws regulating surprise out-of-network billing. For the most part, the new federal law will simply supersede state laws. This has a couple of key implications. Notably, because the Employee Retirement Income Security Act (ERISA) generally bars states from regulating self-insured group health plans, existing state laws only protect people enrolled in fully-insured health plans, whereas the new federal law will encompass self-insured plans too. Similarly, many state laws do not prohibit surprise bills from out-of-network hospitals for emergency services, and the new federal law will ensure that surprise billing protections extend to those services in all cases.
Existing state laws will continue to matter in two cases, however. First, to the extent that existing state laws place requirements on providers or insurers that go beyond what is required under the new federal law, those requirements will remain in place. Second—and potentially quite important— the new federal law specifies that the amount fully-insured plans must pay providers for surprise out-of-network services will continue to be governed by state law in states that have a surprise billing protection on the books, rather than by the arbitration procedure under the new federal law.
States with existing surprise billing laws may wish to consider adopting the federal payment rules for all plans rather than retaining their existing rules for fully-insured plans. Doing so would avoid the administrative complexities of running two different systems to determine payment for surprise out-of-network services. These administrative efficiencies might be particularly large for states running their own arbitration systems, where two arbitration systems with different rules would now run in parallel. In states with laws that specify higher payments to providers and thus lead to higher premiums for consumers (including Connecticut, Georgia, Minnesota, New Jersey, New York, Texas, and Virginia), adopting the new federal rules could also reduce premiums for state residents.
Looking Ahead to Implementation
As we have alluded to above, while the legislation lays out the broad architecture of the arbitration process, certain important details are left to the federal agencies implementing the law (the Departments of HHS, Labor, and Treasury). While the legislative text tightly constrains the agencies’ options in some instances, there are other areas where the agencies will have substantial discretion to select the best approach. Together, these implementation decisions will play an important role in making sure that the law functions well in practice.
Much of this rulemaking will need to move quickly, as final rules to define the qualifying payment amount are due by July of this year and all the rules surrounding the arbitration process must be finalized by the start 2022.
The implementation questions generally fall into three buckets:
- Breadth of surprise billing ban: The first involves the breadth of the protections against surprise billing. This includes deciding whether to expand the list of specialties barred from balance billing out-of-network patients at an in-network facility even if they obtain patient consent, as well as whether to make exceptions to the balance billing ban for certain advanced diagnostic lab tests that patients might want to use even knowing they will be billed out-of-network.
- Details of the median in-network rate calculation: A second set of decisions is needed to delineate the specifics of the median in-network rate calculation for insurers. This includes deciding at what geographic level insurers are required to make these calculations and precisely how to implement the rules for dealing with new carriers, newly-covered services, or services where an insurer has an insufficient number of provider group contracts to meaningfully calculate a median (and what constitutes “insufficient”).
- Mechanics of the arbitration process: A final set of important decisions must be made with regard to the mechanics of the arbitration process. Regulators will need to specify how certification of arbitrators will work and, potentially most consequential, how the federal government will select an arbitrator if the parties fail to agree on one. They will also need to consider whether to offer guidance to arbitrators on how they should act on the law’s direction to “consider” the listed factors, particularly factors whose relationship to the “appropriate” price for the service may be unclear, like the parties’ market shares.
They will also need to decide whether arbitrators should be permitted to make decisions separately for each service in dispute or whether the arbitrators should be required to choose between the insurer and provider final offers for the entire batch of services together, as well as the breadth of different types of services that can be combined in a single arbitration case.
A subsequent blog post will address many of these implementation questions if greater detail.
Disclosures: The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.