Why a Contract-Based Solution to Surprise Billing Is Best for Taxpayers and Patients

After being mentioned in an article in The Hill earlier this week, NTU’s position on fixing surprise medical bills received criticism, with some claiming that our advocacy on the matter is a “farce” because the incumbent federal benchmark proposal we oppose would reduce the federal deficit $25 billion over 10 years (according to the Congressional Budget Office).

While we believe reasonable people can agree that surprise billing is a major policy concern and disagree on the ideal way to fix it, the criticism unfairly characterizes NTU’s work on the issue. We also believe the best way to move the conversation forward is to continue to articulate why our preferred solution, a contract-based alternative (also called the in-network guarantee in some circles) is good for both patients and taxpayers.

It’s Not Just About the Top-Line CBO Score

One point made by stakeholders who disagree with NTU is that the Lower Health Care Costs Act, supported by leaders in the Senate Health, Education, Labor, and Pensions (HELP) Committee and the House Energy and Commerce (E&C) Committee, reduces the deficit by $25 billion over 10 years. One suggestion is that NTU, as the Voice of America’s Taxpayers, should naturally support this approach because it reduces the deficit.

Assuming the top-line figure is correct, a deeper dive into the CBO score highlights some of our broader concerns about the federal benchmark.

As a reminder, surprise bills usually occur in one of two scenarios: when a patient receives out-of-network emergency care, or when a patient receives care at an in-network facility but is seen by out-of-network doctors. In these scenarios, insurance may cover some amount of the bill, but doctors or hospitals can still send patients a “balance bill” for the rest of what they charged for items and services.

Lawmakers have proposed several options for fixing surprise billing at the federal level. The benchmark option supported by HELP and E&C would set the rates that out-of-network physicians earn from insurers, for care at facilities that are otherwise in-network for a patient. Their proposal would set that rate at the “median contracted rate under the applicable plan or coverage … for the same or a similar service that is provided by a provider in the same or similar specialty and in the geographic region in which the service is furnished.”

CBO estimates that provision would reduce federal spending by $1.1 billion over 10 years and raise federal revenues by $23.8 billion over the same period. This is because insurance premiums would decline in both the marketplaces and in employer-sponsored insurance (ESI). This in turn allows the federal government to spend less on subsidies in the marketplace, and employers to put more compensation into taxable wages than tax-exempt health insurance. Importantly, CBO estimates that “more than 80 percent of the estimated budgetary effects of title I would arise from changes to in-network payment rates” (emphasis ours). In essence, the benchmark takes money from doctors (both in-network and out-of-network) and directs it to insurers, who can then decrease premiums, which then decreases federal subsidies for insurance and increases federal revenues from wage income.

Doctor groups have warned that a benchmark will give insurers significant leverage over them in contract negotiations, and that the resulting decline in both in-network and out-of-network rates would lead some providers to exit the market. This could lead to shortages, particularly in rural and/or poor areas that already struggle to attract and retain doctors.

Providers’ preferred solution of government-led arbitration has some flaws as well (more on that below), but stakeholders in the surprise billing debate should not take a top-line CBO score as the only factor that matters in choosing between serious policy options.

One more point worth noting: while it’s important that policymakers pursue legislation that reduces the deficit, rather than raising it, the current surprise billing debate on Capitol Hill is not about reducing the federal deficit. Lawmakers are looking to use a surprise billing fix to pay for a temporary extension of various federal health programs, and some see the benchmark as the most attractive option because it raises the most money. Based on the current legislative context alone, lawmakers would likely be reducing the deficit to immediately raise it again.

Government-Led Arbitration Is Also Not Ideal

Providers tend to prefer a process called independent dispute resolution (IDR), or arbitration, where billing disputes between doctors and insurers would be worked out in front of a third party expert. While federal and state lawmakers have proposed or enacted several different kinds of IDR regimes, CBO and the Joint Committee on Taxation (JCT) have said that “the IDR process would be likely to result in larger payment rates to providers.” This is one of the reasons why hybrid benchmark-IDR proposals have been scored by CBO as producing less in savings for the federal government than the benchmark alone, and why legislation with just IDR (and no benchmark) is projected to actually raise the deficit $15 billion over 10 years.

It is somewhat easy to see why. The IDR-only legislation from Rep. Raul Ruiz (D-CA) tells arbitrators to include as a factor in their decision making (emphasis ours):

the usual and customary cost of the item or service involved, determined as the 80th percentile of charges for comparable items and services for the specialty involved in the geographical area in which the item or service was furnished, as determined through reference to a medical claims database[.]”

This is modeled after New York’s IDR legislation. Loren Adler, the Associate Director of the USC-Brookings Schaeffer Initiative for Health Policy and a surprise billing expert, explains why this is an issue:

“The biggest concern raised about NY’s arbitration process is the state’s guidance that arbiters should consider the 80th percentile of billed charges (as calculated by FAIR Health, an independent insurance claims database) when determining the final payment amount. Providers’ billed charges, or list prices, are unilaterally set, largely unmoored from market forces, and generally many times higher than in-network negotiated rates or Medicare rates. And telling arbiters to focus on 80th percentile of charges—that is, an amount higher than what 80% of physicians charge for a given billing code—drives this standard still higher.”

If the benchmark is taking money from doctors and giving it to insurers, and IDR is taking money from insurers and giving it to doctors (depending on how the process is designed), then how are both taxpayers and patients best protected? The benchmark could harm patients if it adversely impacts access to care, and IDR could harm patients and taxpayers if it leads insurers to charge higher premiums, so how can the government solve surprise billing in the fairest way possible?

The Contract Alternative: No Government Thumb on the Scale

Both benchmark supporters and opponents want to eliminate surprise billing and take patients out of the middle. We believe the best way to do so is by banning providers from balance billing patients without having government put its thumb on the scale for insurers (through the benchmark) or doctors (through arbitration).

One option, proposed by the Cato Institute’s David Hyman and the American Enterprise Institute’s Ben Ippolito, is a contract-based alternative. The terms are relatively simple: providers would no longer be able to balance bill patients at hospitals that are otherwise in-network for those patients. Insurers would not be able to contract with hospitals that do not guarantee all of their providers would be in-network. However, doctors would have a choice: they could agree to receive all payments from the hospital they work at, which would be wrapped into the facility fee hospitals charge insurers, or the doctors could contract separately with the same insurers as the hospitals they work at. This option affords out-of-network doctors some flexibility that neither the benchmark nor arbitration offer, while preserving for insurers some leverage over payments that they lose under IDR.

A proposal almost identical to this one showed up in the Senate HELP Committee’s first draft of the Lower Health Care Costs Act, in the form of an in-network guarantee. The idea that the contract-based alternative is not viable isn’t supported in reality, as legislators have clearly been considering this solution for some time.

The contract-based alternative is preferable because it is agnostic when it comes to government favoring one part of the private health care sector over another. It relies on a modest adjustment to existing law, rather than setting up a new regime that would control prices (the benchmark) or heavily dictate the terms of those prices (IDR with “80th percentile” guidance). Most important of all, it removes the worry of surprise bills for patients while avoiding the pitfall of requiring government bureaucrats to determine the price of care.

Some opposed to this approach have correctly pointed out that the contract-based alternative leaves unaddressed how to handle situations when a patient is balance billed after visiting an out-of-network emergency room. Health policy experts Doug Badger and Brian Blase have a thoughtful approach to this issue in a paper they published last month, “A Targeted Approach to Surprise Medical Billing.” They would (emphasis theirs):

Prohibit balance billing and require reasonable reimbursement. Facilities and providers could not balance bill for any emergency services, as defined in EMTALA. Insurers would be required to provide facilities and providers with reasonable reimbursement for such services, as defined in existing regulations (45 CFR 147.138(b)(3)(i)).”

While their proposal includes some degree of rate-setting, we believe Badger and Blase exercise prudence by limiting their benchmark to the narrow case of out-of-network emergency care (and by expanding their benchmark beyond just the in-network median).

Paying for Extenders

We believe that the contract-based alternative on its own will pay for at least one year of health extenders. CBO estimated that five months of health extenders in the end-of-year spending package would result in around $2.6 billion in additional spending over the decade. Though we do not have access to any CBO cost estimate for health extenders for the remainder of FY 2020 and all of FY 2021, it’s safe to assume a cost of between $8 billion and $9 billion ($2.6 billion for five months, extrapolated to just over 16 months for the rest of FYs 2020 and 2021, equals around $8.5 billion). CBO scored the in-network guarantee as saving the federal government $9 billion over a decade, just enough to pay for health extenders.

However, additional options identified by the CBO may produce additional savings, and represent relatively low hurdles for lawmakers compared to broader health reform:

  • Lower the safe harbor threshold for state taxes on health care providers from six percent of net patient revenues to five percent: $15 billion in 10-year savings. Currently, states have a “safe harbor” to collect up to six percent of a Medicaid provider’s net patient revenues, often “returning the [higher] collected taxes to those providers in the form of higher Medicaid payments” that are matched between 50 and 85 percent by the federal government. These provider taxes have been called a “scam” by stakeholders across the political spectrum, and CBO estimates that just reducing that safe harbor to five percent would save the federal government $15 billion over 10 years.

  • Reduce the percentage of allowable debt that Medicare reimburses hospitals from 65 percent to 45 percent: $12 billion in 10-year savings. Currently, Medicare reimburses hospitals and other facilities for up to “65 percent of allowable bad debt”; that is, “unpaid and uncollectible deductible and coinsurance amounts for covered services furnished to Medicare beneficiaries.” While some argue that this provision prevents hospitals from shifting those bad debts onto private payers, others point out that Medicare does not provide the same reimbursement option to “doctors or other noninstitutional providers, so this option would reduce that disparity.” Simply reducing the percentage of allowable debt to 45 percent would produce $12 billion in savings.

  • Redesign Medicare Part D benefit: $34.6 billion in 10-year savings. While a bigger picture item, Medicare Part D benefit redesign already has bipartisan momentum through the Grassley-Wyden Prescription Drug Price Reduction Act (PDPRA). Currently, Medicare Part D pays for 80 percent of an enrollee’s prescription drug costs beyond the catastrophic threshold of $8,139.54; the enrollee pays five percent and the plan pays 15 percent. The PDPRA would lower the catastrophic threshold to $3,100; beyond that point, Medicare would pay 20 percent of an enrollee’s prescription drug costs, the plan would pay 60 percent, and drug manufacturers 20 percent (the latter in the form of rebates). While this plan may not be 100 percent of what NTU wants to see from Medicare Part D redesign, it would protect beneficiaries and taxpayers while reducing the deficit by $35 billion over 10 years.

These are just a few ideas with the potential for bipartisan support. We are confident that lawmakers could collaborate on additional ideas to pay for health extenders if the contract-based alternative, provider tax reform, allowable bad debt reform, or Part D redesign do not fit the bill.

Ultimately, we appreciate the shared mission of stakeholders to end surprise billing, protect patients, and make health care more affordable for all payers. We share the same goals as many people who disagree with us on this issue, even as we differ on the best strategies and tactics for getting there. NTU will continue to work with stakeholders on an alternative that we believe has not received enough attention on Capitol Hill, and believe Congress should act as soon as possible to solve the surprise billing issue.