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September 07, 2020 HUMAN RIGHTS

Surprise Billing: A Window into the U.S. Health Care System

by Thomas L. Greaney

The phenomenon known as “surprise billing”—and the inability of policymakers to address the problem—offer some insights into the complexities and foibles of our health care system. Surprise medical bills are unanticipated charges from clinicians not in the network of a patient’s insurance plan—so called “out-of-network” (OON) providers. The “surprise” typically occurs when a patient obtains care from a hospital or ambulatory care facility that is a member of the patient’s insurance network but during the visit receives some services from an OON provider and subsequently receives a “balance bill”—a charge reflecting the difference between what the provider charges and what the patient’s insurance plan will pay.

Surprise billing is not uncommon. By some estimates, as many as one-fifth of all emergency room visits involve out-of-network care. One study estimates that out-of-network billing raises the cost of specialty physician care for employer-sponsored health insurance by approximately 3.4 percent or $40 billion. Zack Cooper et al., Out-of-Network Billing and Negotiated Payments for Hospital-Based Physicians, 39 Health Aff. 24 (2020). Moreover, the costs of surprise billing to individuals can be daunting. Examples of anesthesia and pathology balance bills exceeding $20,000 have been cited in legislative hearings; and air ambulance charges in six figures have been observed. Needless to say, such debts can be devastating. Indeed, studies have shown that medical debt is the leading cause of personal bankruptcies. Equally concerning is the effect that the uncertainty associated with surprise billing may have. Individuals aware of the risk of receiving large bills not covered by their insurance may forgo or delay needed care. 

Studies have shown that medical debt is the leading cause of personal bankruptcies.

Studies have shown that medical debt is the leading cause of personal bankruptcies.


Causes of Surprise Billing

The reason surprise billing occurs is traceable to the way commercial insurance plans contract with health care providers. Insurers negotiate with hospitals and physicians, typically offering to those that discount their fees “preferred provider” status that entails incentives for patients to choose them because the insurer imposes lower copayment responsibilities on its beneficiaries. But some clinicians, especially those with few competitors in their markets, are able to charge more than insurance plans will pay and choose to remain OON. Further, in a number of specialties such as radiology, pathology, emergency medicine, and anesthesiology, whose services are not actively “shopped” by patients or their insurers, it is common for hospitals to rely on OON clinicians. Hence, unsuspecting patients who have chosen an in-network hospital and surgeon may find themselves “balanced billed” by an OON specialist they never chose.

Why do hospitals go along? Given the high concentration in many physician specialty markets, they have little choice but to contract on terms that the limited number of competitors offer. In addition, over 90 percent of hospital markets are also highly concentrated, which lessens incentives to aggressively control costs, especially when many of those costs are borne by patients. Finally, some studies suggest that hospitals, especially for-profit hospitals (which have higher incidences of contracting with for-profit specialty management firms) benefit from the tendency of OON doctors “compensating” the hospitals by ordering greater numbers of services that are billed by and paid to the hospitals. Zack Cooper, Fiona Scott Morton & Nathan Shekita, Surprise! Out-of-Network Billing for Emergency Care in the United States (NBER Working Paper 23623).

Notably, surprise billing does not occur in government-sponsored programs such as Medicare, Medicaid, and veterans’, care, which pay fixed fees to providers. It is also important to note that most health care providers post high “billed charges” (list prices) for their services but discount those fees significantly in negotiations with commercial insurers. However, where providers can avoid lowering those list prices, the payment differentials are extreme. For example, the fees anesthesiologists and emergency medicine providers charge to commercial insurers are approximately five times greater than Medicare pays for equivalent services.

Legislative Remedies

A remarkable bipartisan consensus has emerged in agreement that legislation is needed to fix the surprise billing problem. A few states have passed comprehensive laws, and a number of bills with broad bipartisan support have been introduced in Congress. Less remarkable is the fact that a consensus on the details of the remedy has not yet emerged. However, the COVID-19 crisis has generated attention to the issue and has spurred passage of state and federal legislation, executive orders, and regulatory measures limiting (but not eliminating) patient costs for pandemic-related diagnoses, testing, and treatments. See Jack Hoadley et al., States Can Prevent Surprise Billing for Patients Seeking Coronavirus Care (Commonwealth Fund, April 29, 2020); Katie Gudiksen, The Crisis of COVID-19 Heightens the Need for Surprise Billing Protections, The Source on Health Care Competition and Price (April 20, 2019).

Despite the flurry of attention to surprise billing generated by the COVID-19 crisis and the seemingly strong support for reform that existed even prior to the pandemic, finding a permanent solution remains an uphill battle. First, although state legislatures have adopted a variety of reforms addressing surprise billing even prior to the COVID-19 crisis and many are considering additional, broad-based remedies, a significant obstacle inhibits the efficacy of state-level change. The Employee Retirement Income Security Act (ERISA), which has long blocked states from effectively controlling health care costs, bars states from imposing restrictions on self-funded employer health plans. Because these plans constitute some 60 percent of all employer-sponsored insurance, state remedies will necessarily prove inadequate. Second, federal and state laws dealing with COVID-19 care are for the most part limited to pandemic-related testing and treatments. Whether the momentum of change will carry over to more sweeping reform is uncertain. Finally, as discussed in the following sections, devising an effective legislative remedy involves some complex trade-offs that have engendered sharp disagreements among stakeholders.

Scope of Reform Proposals

One thing that almost all federal reform proposals have in common is a prohibition against patients being forced to pay balance bills. Most would ban balance billing and cap patient responsibility to the amount they are required to pay under their policies’ in-network cost sharing. That, it turns out, is the easy part. Complex and hotly contested issues involve how to resolve disputes between insurers and providers concerning the amount and circumstances under which OON providers should be paid.

A threshold issue is determining when surprise billing should be regulated. Some proposals impose restrictions only on the most common problematic settings, such as emergency care and services provided by OON specialists at in-network hospitals. Others would expand regulation to reach ambulatory surgical centers (ASCs), ambulances, air transport services, and ambulatory clinics. An argument can be made that even broader protections are necessary. For many patients, a central problem is not that they unwittingly obtained care from an OON provider, but that they do not have sufficient access to in-network clinicians or facilities. Although many states purport to regulate the “network adequacy” of health insurance plans, those laws are notoriously underenforced and may not take into account whether patients are given accurate and usable provider directories (studies show they are not). Further, one-size-fits-all adequacy standards are inherently unlikely to address the practical obstacles to finding in-network providers, such as transportation, appointment availability, and language barriers.

Setting Appropriate Payment Rates

Undoubtedly the most contentious issue in debates over surprise billing protection has been establishing a mechanism to determine how much OON providers should be paid. Two approaches have been suggested: benchmark rates and binding arbitration. The former sets a fixed payment rate for each specialty, such as 125 percent of Medicare payment rates or the average reimbursement commercial insurers pay to in-network providers. Under the latter method, which is used in several states, appeal to an independent arbitrator to determine the appropriate amount of reimbursement may be available. Several states employ “baseball-style” arbitration in which the arbitrator must choose between the level proposed by the health plan and the provider, a process that theoretically drives reimbursement closer to what would occur under a market-driven approach.

Complicating the issue is the fact that the method for setting reimbursement will strongly affect providers’ incentives to join, or to resist joining, insurance plan networks. Setting OON payment levels too low, such as equivalent to payments for in-network providers, will encourage providers to resist joining networks. This would undermine the competitive dynamic of the American health system, which depends on negotiated prices between providers and payers to establish efficient and high-quality rival networks. Stripping insurers of their ability to offer preferred provider status in exchange for price concessions from providers would significantly distort such bargaining. Notably, the option of remaining OON also affects payment to in-network providers as well. Having an option to resist discounting creates bargaining leverage that lifts all boats—in-network as well as OON. Furthermore, OON rate regulation that employs benchmarks or sets arbitration standards using existing commercial payment levels tends to lock in excessive provider fees rather than establishing a market to determine the appropriate level of reimbursement.

A further unintended consequence is the possibility that reform will enhance incentives for consolidation of provider networks. California, for example, which saw reduced payments, decreases in surprise bills, and increases in the number of in-network providers after establishing benchmark regulation, has also experienced significant provider consolidation among specialties providing OON care. Loren Adler et al., California Saw Reduction in Out-of-Network Care from Affected Specialties after 2017 Surprise Billing Law, Health Aff. Blog (Sept. 26, 2019). While many factors are responsible for such consolidation, OON providers confronted with sharply lower benchmark reimbursement will be motivated to consolidate in order to enhance their bargaining power as they become in-network providers. A related concern is that if prices are set at a low level in some markets, provider de-participation from networks and consolidation will result in overly narrow networks, thus restricting choice and access for some patients in those markets.

The approach of requiring binding arbitration has been controversial. Some studies show that arbitrators tend to favor providers, while others show significant cost savings and reduced out-of-network billing. One study also found lower payments to in-network emergency department providers, presumably resulting from increased competition. The regulatory standards the arbitrators must consider in making their decisions are also an important ingredient in any reform. For example, New York requires arbiters to consider the 80th percentile of provider payments in making their determinations—a standard likely to maintain high levels of OOP payments.

Bolder Options

Both reform methods are administratively complex and costly. An alternative, albeit more aggressive, approach is “networking matching” which would mandate that every facility-based provider at an in-network facility contract with every health plan that their facility contracts with. The most straightforward approach would be to require hospitals and insurers to contract for a package that includes both facility and physician services. Zack Cooper et al., Loren Adler et al., Network Matching: An Attractive Solution to Surprise Billing, Health Aff. Blog (May 23, 2019). Facility-based providers, such as emergency physicians, anesthesiologists, and pathologists, typically have contractual relations with their facility and therefore the three-party contracting among payers, physicians, and facilities would generally not be administratively burdensome. Most important, it would align the interests of physicians and hospitals or ASCs while protecting patients from balance billing. Looked at from an economic perspective, by compelling facilities to buy physician services, the reform would create market exchanges for ancillary physician services that otherwise have been lacking.

A related approach is to compel service payment “bundling,” which would require insurers to pay a single fee for both hospital and physician services. Like network matching, this would induce hospitals to contract with specialty physicians and to negotiate the package of services with payers. Indeed, there is considerable experimentation in both commercial and Medicare payment arrangements to encourage such arrangements. For example, Medicare has begun to reconfigure physician reimbursement so as to provide strong incentives for contracting through entities that provide physician, hospital, and other ancillary services.


Surprise billing has placed large, unanticipated financial burdens on many patients who have health insurance and has likely caused some to forgo needed services. Most reform proposals deal effectively with patient costs by requiring that insurers hold their beneficiaries harmless from copayment responsibilities caused by such bills and prohibiting OON providers from balance billing. But legislation must also address the large systemic distortions caused by surprise billing. The option of not joining a network confers leverage that serves to raise in-network provider prices and undermines competitive contracting between providers and payers.

Given the complexity of insurer-provider contracting and the large sums at stake, it should come as no surprise that the reform has been hard to come by. While the undertakings of states to address the issue have provided useful guidance about the relative benefits and detriments of possible approaches, those efforts are severely constrained by federal preemption under ERISA. Most of the bills under consideration in Congress would rely on rate setting using benchmark pricing or arbitration. While these approaches would offer protection for patients currently subject to balance billing, they would fail to replicate prices that a competitive market would produce. Although government and commercial insurers are increasingly paying providers for the value of entire episodes of care, which would be a better solution, those changes are moving slowly. The nation may have to settle for what it can get, as wholesale reform of health care contracting and delivery does not appear to be on the horizon.

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Thomas (Tim) L. Greaney

Visiting professor of law at UC Hastings College of Law

Thomas (Tim) L. Greaney is a visiting professor of law at UC Hastings College of Law in San Francisco and Distinguished Senior Fellow with the UC Hastings/UCSF Consortium on Law, Science & Health Policy. He is also Chester A. Myers Emeritus Professor of Law at Saint Louis University School of Law, where he served as director of the Center for Health Law Studies. His research focuses on the application of antitrust law to the health care sector, health care financing, and health care law and policy.