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Adding Arbitration to Congress’ Fix for Surprise Billing Will Lead to Higher Premiums for Patients

The move, supported by private equity firms and physician groups, increases costs and shifts them to consumers, the Congressional Budget Office concludes, creating a new loophole in the health care system.

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One thing that everyone seems to agree on in the debate about fixing surprise out-of-network billing is that patients should be protected, but some approaches to the problem simply shift costs for consumers from surprise medical bills to higher premiums.  

Earlier this year, there appeared to be bipartisan, bicameral support for an approach that required insurers to pay providers a locally based market benchmark in certain out-of-network situations.  The Senate Health, Education, Labor and Pensions (HELP) Committee voted out legislation that set the benchmark at the median contracted rate in a geographic area. The House Energy & Commerce Committee seemed poised to pass similar legislation when, at the last minute, an amendment was accepted adding arbitration to the legislation.  

Here’s how it would work: In the case of an emergency at an out-of-network facility or a procedure at an in-network facility, if a patient saw an out-of-network provider, their insurer would be required to pay that provider the local median contracted rate. But if a provider was unhappy with that amount and it was above a certain threshold, that provider could then take the insurer to arbitration, allowing an independent arbiter to decide the payment amount. 

Last week, the Congressional Budget Office (CBO) released their estimate of the House Energy & Commerce legislation and provided valuable insight into the impact of adding arbitration to the surprise billing fix, something private equity firms and physician groups support. Here are some key takeaways from their estimates:

Consumers pay the cost of arbitration.

Proponents of arbitration have argued that it can be designed in a way that only the party that loses the arbitration pays. For example, if the arbiter sides with the provider, the insurer will pay.  But in the end, the only ones who really pay are consumers. The CBO estimated that the addition of arbitration to the legislation reduced the premiums savings to consumers by 25 percent. Regardless of who pays the bill for the arbitration process, “CBO and JCT (Joint Committee on Taxation) expect that those costs would be passed on to enrollees in the form of higher premiums.”   

Arbitration will lead to higher payments to providers.

Given that the legislation now requires insurers to pay the bill for out-of-network services in specific instances, there is only an incentive to go to arbitration if a provider thinks they can get more. As it's set up now, the legislation essentially guarantees that providers who go to arbitration get the median contracted rate plus some additional amount. The CBO noted in their estimate that arbitration “would likely result in larger payment rates to providers.” And given the administrative burden of arbitration, we think it’s likely that many small, independent physicians will accept the benchmark rate, while larger practices, particularly those backed by private equity, may turn arbitration into their new business model.   

Arbitration gives providers, particularly those with higher rates, even more negotiating leverage.

There are a lot of dynamics at play in a negotiation between insurers and providers. One dynamic is market power, and there has been consolidation by both insurers and providers to improve their market position. But some providers — especially those that are facility-based and that patients often do not get to choose — can also use the threat of going out-of-network to demand even higher in-network prices. This business model does not work for most physicians, such as primary care doctors. If they aren’t in the network, they can’t see patients. But an anesthesiologist in a hospital sees patients regardless — their network status has no bearing on demand from patients. By adding arbitration to the legislation, the CBO thinks some providers will have even more leverage. Those providers can extract higher in-network prices by threatening to go to arbitration. Surprise billing is a market failure. A benchmark corrects that market failure, but by adding arbitration, Congress could essentially undermine its own fix.  

Arbitration doesn’t fix surprise billing — it just shifts those ‘surprises’ to premiums.

The CBO thinks a benchmark approach, if set below average rates, would save consumers money, but adding arbitration to the legislation reduces the savings. That raises the question: Without a benchmark, does arbitration actually result in savings? Reps. Raul Ruiz (D-Calif.) and Phil Roe (R-Tenn.), who are physicians, have been pushing an arbitration-only approach modeled after New York’s legislation. In a leaked email, the CBO said the legislation would cost “double-digit billions.” Arbitration is not a solution for surprise billing. If anything, it just patches one loophole in the health care system and creates a new one.