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Part 2: In No Surprises Act, Arbitration Design Is Key to Realizing Expected Savings

A new federal law ending surprise billing could lower premiums by up to 1% and reduce the federal deficit by $17 billion over the next decade, but thoughtful implementation is necessary.

A hospital room
A doctor and nurse confer inside a room used for flu patients at a Georgia hospital in January 2018. (Robert Ray/The Associated Press)

This is the second of a two-part series on implementation of the No Surprises Act, a bill banning surprise medical billing. Read Part 1: Fulfilling the Surprise Billing Ban’s Promise to Lower Costs for Consumers, Employers, and Taxpayers

In addition to protecting patients from predatory surprise medical bills, the newly passed No Surprises Act has the added potential to lower consumers’ health care costs and reduce the federal deficit by billions.

Yet, if poorly designed, the federal law could fall short of driving down health care costs, or worse, push costs upward, reinforcing the need for thoughtful implementation of the law, which is set to go into effect Jan. 1. We previously outlined our recommendations for implementation to maximize consumer protections and savings.

The law has the potential to meaningfully lower costs for patients and families and generate savings. The Congressional Budget Office (CBO) estimated that the No Surprises Act will lower premiums by up to 1% and reduce the federal deficit by $17 billion over the next decade by lowering the federal costs associated with subsidizing private insurance directly and through tax preferences. The total premium savings to consumers and employers are even greater.

The CBO’s scores, along with evidence from states and research on the effect of surprise billing on provider payments, offer insight into the aspects of the law that lower costs — and the implementation decisions that are likely to push costs upward. In particular, the arbitration process used to determine payments for out-of-network services — and the guidance the arbiter considers in their decision — will influence whether the No Surprises Act achieves its intended savings.

Surprise billing increases health care costs for everyone — not just those that receive surprise bills.

Allowing providers to balance bill patients for out-of-network care increases what consumers pay in two ways. First, patients who — through no fault of their own — receive care from a provider outside their insurance network are exposed to unexpected and potentially large out-of-pocket costs for that care. These bills typically come from providers the patient has no choice in selecting, such as an emergency room physician or anesthesiologist.


Amount by which the No Surprises Act will reduce the federal deficit

Second, even when these providers join insurance networks, their threats to go out-of-network allow them to charge patients more for in-network services. This lucrative tactic gives the subset of providers who can engage in surprise billing undue leverage in their negotiations with insurers, resulting in higher payments. For example, the prices that anesthesiologists charge privately insured patients for in-network services are on average more than 3.5 times higher than what Medicare pays for the same service. These in-network rates tend to be much higher than for specialists who are not in the position to leverage surprise billing as a profit-generating tactic because they would lose patients if they stayed out of network.

The higher prices certain physicians extract by exploiting this market failure are ultimately passed on to consumers and employers in the form of higher premiums — increasing health care spending for people with employer-sponsored insurance by about $40 billion each year.

The No Surprises Act saves money by lowering the excessive payments certain physicians receive, and lowering average rates — which are inflated by outlier providers who surprise bill — toward the median in-network rate.

In recent years, CBO scored multiple pieces of legislation proposing different solutions to address surprise billing. A consistent theme emerged across the bills that saved money — savings result from CBO’s assumption that the physicians most likely to surprise bill would be paid less for out-of-network care because they would no longer be able to exploit this market failure. This reduces their ability to demand excessive in-network rates that far exceed what’s typically negotiated between providers and insurers, resulting in lower premiums and reduced health care spending.

CBO’s savings assume that average payments for both in- and out-of-network services converge toward median contracted rates because — and only if — what physicians can receive out-of-network is reduced toward median contracted rates as well. Median contracted rates tend to be lower than current average in-network rates, which are inflated by outlier physicians who use surprise billing to increase their payments. These lower rates result in lower premiums for consumers and employers.

The newly passed No Surprises Act has the potential to lower consumers’ health care costs and reduce the federal deficit by billions.

Whether payments converge toward the median, preserving the law’s savings, will depend heavily on the guidance provided to the arbiter and the information they consider when determining out-of-network payments.

It’s essential that the median in-network rate be the central factor used to determine out-of-network payments in arbitration to generate the $17 billion in savings that have already been used by Congress to offset the cost of other spending priorities included in the end-of-year legislation passed in December.

This rate is referred to as the “qualifying payment amount” (QPA) in the No Surprises Act. The QPA determines the amount patients pay for out-of-network services, limiting their out-of-pocket costs in these cases, in addition to driving the premium savings estimated by CBO.

Allowing arbitration outcomes to systematically exceed the QPA will undermine the law’s projected savings.

In addition to median contracted rates, arbiters can consider other factors in their decisions, such as the physician’s training or experience, patient acuity (the severity of a patient’s condition), and the market shares of the insurer and provider. Without clear guidance, there is a risk that the subset of physicians and their private equity owners who’ve been profiting from surprise billing will use the additional factors beyond the QPA to argue for higher payments.

If arbitration outcomes are allowed to systematically exceed the QPA, the No Surprises Act’s protections will put less downward pressure on excessive prices negotiated for in-network services than CBO assumed, failing to realize the projected savings and reduction in premiums for consumers.

The Biden Administration’s guidance on the No Surprises Act should instruct arbiters to prioritize the QPA in their decisions unless there are extenuating circumstances that are clearly documented and supported by data. The guidance should also clarify that arbitration outcomes can go up or down from the QPA. The QPA should not become the floor for arbiter’s decisions.

3.5 vs. 1

Average amount that in-network anesthesiologists charge privately insured patients vs. patients using Medicare

The legislative text appears to support the QPA as the primary factor for consideration in arbitration. The QPA is clearly defined in a separate section of the legislative text. The other factors are noted but not defined in any detail. In addition, patients’ cost-sharing for out-of-network services is based on the QPA, and the law requires reporting of arbitration decisions based on their divergence from the QPA.

State experience and the CBO’s score of an earlier provider-friendly bill from Rep. Raul Ruiz, D-California, and Rep. Phillip Roe, R-Tennessee, offer a cautionary tale of the importance of the guidance given to the arbiter, illustrating what happens when arbiters anchor their payment determinations to inflationary factors, such as charges.

Like the No Surprises Act, the Roe-Ruiz bill relied solely on arbitration to determine out-of-network payments. However, it was modeled after the New York State law and instructed arbiters to consider the 80th percentile of providers’ billed charges. CBO estimated this would increase federal costs by $15 billion over 10 years assuming a similar effect to New York State’s law.

While the No Surprises Act bans the consideration of billed charges – a good step – this demonstrates the importance of carefully designing the information the arbiter can consider in their decision and developing guidance that ensures that arbiter decisions ultimately drive toward the QPA. The guidance should limit the arbiter’s use of the other factors to avoid systematically pushing payments above the QPA.

Clear guidance to the arbiter to prioritize the QPA will also increase predictability and minimize the costs of arbitration, which are ultimately paid by consumers.

Clarifying that arbiters should prioritize the QPA in their decision has the added benefit of minimizing arbitration costs that could offset these savings. Arbitration adds administrative costs and complexity to the system. As CBO has noted, these costs are passed on to the consumer, resulting in higher premiums. This occurs regardless of whether the insurer or the provider pays the cost of any given arbitration dispute.

The Biden Administration can minimize these costs by creating a predictable arbitration process. Prescriptive guidance on how arbiters should weigh the various factors when determining payments for out-of-network services is a key factor in ensuring predictability. Given the number of factors arbiters can consider and their vague definitions, arbitration outcomes could otherwise vary considerably from case to case, and arbiter to arbiter. Instructing the arbiter to prioritize a single factor – the QPA – unless there is compelling evidence to support deviating from it will help produce stable arbitration outcomes.

Predictability will minimize the use of arbitration and its associated administrative costs. Providers and insurers will have a good sense of where arbitration decisions will land, encouraging them to settle out-of-network payment disputes independently and form networks whenever possible.


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