Schaeffer Solutions: Protecting Patients from Surprise Medical Bills

Surprise balance billing occurs when patients receive large medical bills for out-of-network care they did not choose. Research suggests these scenarios occur fairly often, leaving millions of Americans vulnerable to large and unforeseen medical expenses.

This case study focuses on the role of the USC-Brookings Schaeffer Initiative for Health Policy and the Schaeffer Center in analyzing and advancing solutions to protect patients from surprise medical bills. Through sophisticated analysis of claims and arbitration data, the Schaeffer experts created an evidence-based playbook to help federal and state policymakers tackle the market distortions that lead to surprise billing.

Ultimately, policymakers heeded the call, adopting the historic No Surprises Act in December 2020. With timely analysis, peer-reviewed publications, media engagement and briefings, the Schaeffer Center is the go-to resource for insight on policy to end surprise balance billing.

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Informing the Debate: Identifying the Market Failures

Surprise medical bills cause financial hardship for millions of Americans. Surprise bills typically arise in circumstances that a patient cannot control, such as in a medical emergency or when care is provided by an out-of-network physician (such as an anesthesiologist, radiologist, pathologist, or assistant surgeon) in an in-network facility. Research suggests about 20% of emergency department visits and 9% of elective inpatient admissions involve at least one provider who is out of network. Surprise out-of-network bills can result in thousands of dollars in unexpected expenses. Unexpected medical bills top the list of healthcare expenses that Americans are afraid they will not be able to afford.

Schaeffer researchers have long focused on solutions to surprise out-of-network bills. In 2016, Paul Ginsburg, Loren Adler and colleagues authored an extensive report that summarized existing data, identified policy solutions, and called on federal and state policymakers to enact new protections. Building off this report, Schaeffer experts systematically quantified the market failures that lead to out-of-network bills over the next few years.

Adler, Matthew Fielder and colleagues explained the link between provider charges and surprise medical bills and why out-of-network billing is lucrative for certain providers in a widely-cited white paper. Negotiations between insurers and providers are typically driven by a price-volume tradeoff: a provider accepts a lower per-service reimbursement in exchange for a higher volume of patients driven to it by the health plan. But these tradeoffs break down for certain providers where patient volume is unaffected by whether a provider is in-network or not. For example, patients have little choice over the emergency or ancillary provider they see, and insurers have limited ability to steer patients to in-network providers. This scenario incentivizes these providers to remain out-of-network and increase revenue by separately billing patients—or to demand much higher in-network rates from insurers, which increases premiums.

“As long as providers can charge whatever they please, the problem [of surprise medical billing] won’t go away.”

-Loren Adler in Kaiser Health News

Schaeffer experts helped quantify this market failure, showing that emergency and ancillary providers charge much higher relative rates than other specialists. For instance, anesthesiologists, emergency physicians, and radiologists had average in-network rates of 344%, 306%, and 200% of Medicare rates. In comparison, all other physicians reported average in-network rates of only 128% of Medicare rates. A separate Schaeffer analysis further confirmed these results, showing that specialists that can send surprise out-of-network bills to patients charge notably higher amounts relative to Medicare rates than other specialties. Worse still, these rates have risen rapidly over time: average charges for emergency medicine and anesthesiology grew at 6.7% and 4.4% annually from 2012 to 2017.

The high rates charged by these providers affect everyone, not just those who receive a surprise out-of-network bill. This is because insurers pay full charges to out-of-network providers about 24% of the time. When insurers pay full charges, patients do not face a surprise medical bill, but this increases costs for insurers who, in turn, increase premiums for enrollees. Published in the American Journal of Managed Care, Erin Duffy and colleagues found 12% of insurer medical spending went to providers who commonly send surprise medical bills. If payments for these services were reduced, health insurance premiums could drop by up to 5.1% with savings of up to $38 billion for those with private health insurance.

“Policies that weaken the provider leverage that stems from the current ability to surprise bill patients should shift some leverage from providers to payers during in-network payment negotiations. Consumers’ premiums are derived from how much plans pay, so if plans pay less, premiums may decrease.”

– Erin Duffy, PhD

To show that surprise out-of-network bills are pervasive, Schaeffer experts analyzed settings where little prior data existed. Analyzing claims data for millions of privately insured patients, Erin Duffy and colleagues found that 8% of episodes at in-network ambulatory surgery centers resulted in a potential surprise bill (from providers such as anesthesiologists and certified registered nurse anesthetists) averaging about $1,500 in 2017, up from about $800 in 2014. In a separate study, researchers found that 40% of helicopter air ambulance rides resulted in a potential surprise bill averaging about $20,000. One reason for high charges? Private equity companies dominate the air ambulance market. Private equity-owned helicopter air ambulance companies—which account for 64% of the Medicare market—had a standardized average charge of $48,250 (7.2 times what Medicare would have paid) compared to $28,800 (4.3 times what Medicare would have paid) for other types of companies. A similar trend was observed in the fixed-wing air ambulance market.

Elevating and Assessing the Policy Solutions

These studies made clear that a robust public policy response was needed to address the market failures that contribute to surprise out-of-network bills. Schaeffer experts proposed a range of federal and state solutions to help guide policymakers in doing so. From early calls for federal protections to emphasizing that solutions not be tied to provider charges, their research has been at the forefront of advancing surprise medical bill solutions that protect patients, promote functional markets, and keep healthcare costs down. Many of these proposals contributed to the adoption of the No Surprises Act.

Beyond developing original policy solutions, Schaeffer scholars played a critical role in analyzing federal and state policy options. This included quantitative analysis of state approaches that informed federal debates over the appropriate mechanism to resolve payment disputes. For example, in response to dueling industry analyses about the impact of California’s law on surprise medical bills, Adler and colleagues analyzed California claims data and observed a decline in the frequency of out-of-network care, which suggested that more providers were seeing patients on an in-network basis. Although additional analysis is needed, these findings contradicted providers’ claims that insurers’ networks had diminished as a result of the payment standard approach included in California’s law. Separate Schaeffer analyses of state laws in New Jersey and New York showed that explicitly linking arbitration to the 80th percentile of provider charges may inflate the amount that out-of-network providers receive from insurers, thereby increasing premiums and health care costs.

“We need to understand how arbitration to resolve out-of-network billing disputes is working in practice. It is important to protect patients, but we also need to avoid a solution that provides perverse incentives and ultimately increases spending.”

-Erin Trish, PhD

In addition to this quantitative analysis, Schaeffer fellows briefed policymakers on Capitol Hill and analyzed a range of federal legislative proposals to address surprise medical bills. These analyses summarized the various bills alongside expert commentary about each bill’s benefits and shortcomings. For instance, multiple analyses helped draw attention to concerns that arbitration-style approaches would lead to higher costs and deficits. Together, this work helped cement these experts as among the foremost experts on federal surprise medical bill proposals.

Policy Solution: No Surprises Act

In December 2020, the federal No Surprises Act was passed by Congress and signed into law. This law will go into effect in 2022 and applies to all types of comprehensive private health insurance, including employer-based group health plans. Patients will be protected from surprise medical bills sent by an out-of-network provider for emergency services and non-emergency services at in-network facilities. These protections extend to air ambulances but not ground ambulances.

To resolve payment disputes, insurers and providers will use an arbitration process. In contrast to prior legislative proposals, the No Surprises Act did not include a specific payment standard—such as an insurer’s median in-network rate—upon which to resolve payment disputes. It does, however, bar arbitrators from explicitly considering providers’ charges and includes several other important guardrails to prevent abuse of the arbitration process and help keep health care costs down.

By the Numbers:

studies, blog posts and op-eds

major media mentions

citations in federal documents

On the Horizon: The Future of Surprise Medical Bill Protections

Much attention will now turn to rulemaking by the Biden administration to implement the No Surprises Act. Federal officials will be responsible for defining key elements of the arbitration process, collecting data, establishing consumer complaint mechanisms, and publicly reporting on the law’s impact on premiums and network dynamics.

At the same time, state policymakers will likely reassess existing protections to determine whether, and the extent to which, state law is preempted by the No Surprises Act. State leaders may also face industry pressure to revise existing payment standards to either align with the No Surprises Act or establish a more stringent payment standard. States without existing protections will question whether to move forward with new protections and whether and how to fill gaps left by federal law, such as addressing surprise medical bills for ground ambulances.

Given the stakes for patients and overall healthcare spending, timely commentary and clear-headed analysis from Schaeffer experts will be critical to the successful implementation of the No Surprises Act and a deeper understanding of its impact on market dynamics. Policymakers and the media, among others, will continue to look to the Schaeffer Center for evidence-based analysis of these complex issues and what the changes will mean for patients and the broader healthcare system.