How to avoid giving more power to health insurers.
President Trump has urged Congress to protect patients from ‘surprise medical bills.’ Congressional leaders are eager to comply. But alas their currently favored ‘cure’ would be worse than the disease. On this issue, lawmakers should stop, take a deep breath, and rethink.
What’s a surprise medical bill? It’s a bill for a service you never authorized (or authorized mistakenly based on inaccurate information), or for an unreasonably high amount.
Although few Americans actually receive such a bill in any given year, receiving a large one can be traumatizing. The mere possibility has driven the issue of surprise bills to the top of voters’ list of health-care worries. Politicians are responding.
But there are better and worse ways to address it. Unfortunately, a bipartisan bill approved on June 26th by the Senate Committee on Health, Education, Labor, and Pensions (HELP) embraces a particularly bad way.
The bill would impose harmful price controls and shift more power to health insurance companies. If enacted, it would diminish patients’ access to care.
Happily, there’s a better way. To understand why it’s better, it helps to understand the causes of surprise bills, and the range of possible cures.
Surprise bills occur because not every health care provider is in every health insurance plan’s network of contract providers. In-network providers agree to provide services for a plan’s enrollees at pre-negotiated, discount rates. Out-of-network providers are free to charge what the market will bear.
In most states, an out-of-network provider can ‘balance bill’ a patient directly for whatever amount the patient’s insurer won’t cover.
The most common kind of surprise bill arises in a hospital emergency department, where it’s typical for anonymous, out-of-network physicians to provide costly care to a patient who has no real ability to consent or negotiate.
The good news is most providers these days are in most insurance networks. And most hospitals have figured out ways to shield their patients from balance bills. But gaps do remain.
Any legislation to end surprise bills should ideally reflect free-market principles. Specifically, it should: 1) minimize market distortions, 2) maintain a level playing field between insurers and providers, 3) respect providers’ freedom of contract, and 4) honor the states’ primary role as insurance regulators under our Constitution.
In this area, policy makers have four basic options:
- Network reform: Force doctors and hospitals to participate in every insurance network.
- Contract reform: Force doctors and hospitals to agree on a single, package price that must go to the insurer, not the patient.
- Government price-setting. Force doctors and hospitals to accept arbitrary, government-set prices.
- Arbitration: Force providers and insurers to resolve their billing fights through some form of independent dispute resolution.
Obviously none of these options is ideal, from a free-market perspective. Of the four, the last (arbitration) is arguably ‘least worst.’
The Senate HELP bill aggressively embraces the third option (government price-setting), and in an especially harmful way. It would require out-of-network providers to accept the median in-network rate for local providers of the same type. That’s a problem because, by definition, half of any group is always above the median. Using the median as the benchmark gives insurers a powerful incentive to terminate or lapse every contract that includes a rate above that level. Inexorably, the maximum reimbursement rate will ratchet downward. Eventually, like a limbo bar, it will be so low that doctors will be forced to walk away.
Happily, there is a better way, an alternative approach that can end surprise bills without harming patients’ access to care. It consists of two elements:
1) A market-based default payment. Instead of the median rate, the benchmark would be set at the current average rate paid to all similar providers in the area, or alternatively at the individual provider’s most recent contracted rate, if a contract has ever existed. Insurers would have to pay this default rate to out-of-network providers, up front.
2) Baseball arbitration. If either party were dissatisfied with the default payment, they could take their dispute to so-called baseball arbitration, in which both parties would present a first-and-final offer and then a neutral arbitrator would choose one of the two offers without change.
Because the default payment would be based on average real-world rates, it would reflect market negotiations and could adjust with market forces rather than just going down. And because the baseball arbitration process would incentivize disputants to moderate their demands, it would tend to produce market-like prices.
We know this model works. New York state enacted a similar reform in 2014. Since then, according to a major study, surprise medical bills have almost disappeared without causing a negative change in cost trends. Few disputes go all the way to arbitration.
A Better Way
Congressional leaders should stop, take a deep breath, and rethink their bipartisan ‘cure’ for surprise medical bills. Instead of handing all power to insurance companies, we should take a cue from New York and let states adopt a market-friendly approach that eliminates surprise bills without diminishing patients’ access to care.