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A Remedy for Exorbitant Hospital Bills

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A Remedy for Exorbitant Hospital Bills

October 3, 2018

The cost of hospital treatment is responsible for many of the shortcomings of American healthcare. It has driven up insurance premiums and the share of the population uninsured—and even well insured individuals sometimes must pay exorbitant bills. This is in part because a growing number of hospitals are using emergency patients as a bargaining chip to drive up their fees.

The recent case of Drew Calver, a 44-year-old Texas high school teacher, is a good example. Calver suffered a heart attack and was rushed to St. David’s Medical Center in Austin, where he was assured that the procedures he received would be covered by insurance, even though the facility was not in his insurer’s network of providers. For treatment that independent experts suggested should cost between $25,000 and $40,000, the hospital charged him $165,000. His insurance reimbursed $56,000—leaving him to pay a bill of $109,000.

The cost of hospital treatment is responsible for many of the shortcomings of American healthcare.

Patients with major emergency needs do not have much ability to compare prices and shop around, and are therefore vulnerable to inflated out-of-network costs that are not covered by their insurers. In fact, they may find themselves with an out-of-network doctor and surprise uncovered bills, even when treated at in-network hospitals. In Texas, 23 hospitals that were members of the state's three largest insurers had no in-network Emergency Department physicians available to their enrollees. A recent study by Zack Cooper, Fiona Scott Morton, and Nathan Shekita of Yale University suggested that ambushing price-insensitive emergency patients with surprise out-of-network bills has become a core strategy for some providers to force insurers to raise their payment rates.

States have taken different approaches to addressing this problem. For cases where a patient receives care from an out-of-network physician at an in-network hospital, California limits out-of-pocket costs to average in-network levels. That legislation, passed in 2017, also restricts the ability of physicians at in-network hospitals to bill more than the insurer pays for such services at similar in-network hospitals. New York caps out-of-pocket costs for out-of-network providers at in-network rates for emergency care. It also requires insurers to reimburse providers at reasonable rates and establishes an arbitration process to settle disputes.

Texas also has a law regulating out-of-network out-of-pocket costs, but state-level laws do not apply to healthcare plans whose expenses are financed directly by employers, such as the one in which Calver was enrolled. Known as ERISA plans, they cover about half of Americans and are exempt from state regulation. Republican Senators Bill Cassidy, Chuck Grassley, and Todd Young, along with Democratic counterparts Michael Bennett, Tom Carper, and Claire McCaskill, have therefore proposed a bipartisan bill to address the situation.

Their proposal would allow states to regulate out-of-network fees paid by ERISA plans, but also establish a default set of rules that would apply if states do not act. Under these rules, out-of-network hospitals would be required to notify patients of potential costs associated with care subsequent to the stabilization of the patients’ conditions. Insurers would be required to cover all costs so that out-of-pocket expenses for emergency care from out-of-network providers or out-of-network services at in-network hospitals do not exceed expenses associated with in-network providers. The law would require these insurers to reimburse out-of-network hospitals and physicians by at least 125 percent of the average amount allowed by private insurers at similar providers.

This proposal addresses a real problem, and rightly seeks to protect vulnerable patients without infringing on markets that can operate freely and competitively. Yet, the details of the bill are deeply flawed.

The underlying problem is that hospitals have the power and incentive to price-gouge patients admitted in emergency situations. While appearing to constrain hospital reimbursement claims, the bill may actually require insurers to pay out-of-network providers more than they currently do to those that are in their preferred networks. This will only cripple the already-weak negotiating power of insurers in trying to get good rates from hospitals—the phenomenon currently most responsible for driving up America’s healthcare costs.

The underlying problem is that hospitals have the power and incentive to price-gouge patients admitted in emergency situations.

Under the bill, the out-of-network rate floor—125 percent of the average amount allowed by private insurers—will become a key source of leverage in negotiations over in-network hospital rates. As this occurs, the average will likely increase rapidly over time. While the legislation rightly seeks to inform patients of more cost-effective treatment options post-stabilization, it subverts this goal by giving out-of-network hospitals an incentive to define stabilization broadly.

The bill in its current form would also undermine ERISA, which provides a safe haven from extractive state taxes and regulations advanced for the benefit of provider interest groups. By allowing states to regulate the out-of-network payment arrangements of ERISA plans, the bill will weaken the negotiating leverage of health plans over hospitals, potentially unwinding ERISA protections for these plans’ procurement arrangements altogether.

As an alternative to the approach recommended by the Senators, the Yale study’s authors recommend requiring hospitals to sell emergency medical care to insurers as a package that includes physician services in the same networks. That would indeed be a good idea, but there is little chance that Congress would enact such a reform, which could suddenly impose enormous costs on hospitals. Nor would it do anything to fix the problem of bills at out-of-network hospitals, as was faced by Drew Calver.

The Senators clearly hope that the problem of surprise billing can be remedied as a discrete issue. But because out-of-network payment arrangements influence bargaining over fees, they are very hard to reform without pervasively impacting hospitals, physicians, or insurance markets. But since neither Republicans nor Democrats are happy with the existing state of affairs, there may be some common ground and potential for bipartisan reforms.

Emergency care is largely an unfree market, in which neither patients nor providers have the liberty to shop around. Greater regulation of payment for the delivery of major emergency procedures may make it possible to liberate competition for elective care. This could be done by restructuring assistance to hospitals as lump-sum subsidies for uncompensated emergency care and capping fees for out-of-network emergency services at a percentage of Medicare’s administratively fixed rates. Such an approach would protect patients from the risk of exorbitant hospital bills without threatening the solvency of essential institutions, or undermining the ability of insurers to negotiate good rates for the bulk of care.

Greater regulation of payment for the delivery of major emergency procedures may make it possible to liberate competition for elective care.

While comprehensive price regulation arrangements would serve to truncate quality and access to care, capping prices for a subset of emergency care procedures at essential facilities would protect patients and limit the moral hazard that public assistance for emergency care has generated. It would also give hospitals an incentive to limit the scope of the regulated pricing. Indeed, if connected to reforms of network adequacy laws, certificate of need laws, and other restrictions on competition for elective care, addressing surprise hospital bills could provide the opening for the most essential healthcare reform that America needs.

The Senate bill was advertised as a discussion draft and, despite its flaws, identifies reasonable general principles for reform. The issues involved are politically complex and entangled, but the rules under which hospitals and insurers currently negotiate payment are unlikely to be sustainable for much longer.

Chris Pope is a senior fellow at the Manhattan Institute.

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