In December 2020, Congress passed the No Surprises Act (NSA) to protect patients from surprise medical bills. While patients have reaped the benefits since implementation, initial data from CMS revealed that providers are winning three-fourths of cases in the newly-created arbitration process to resolve payment disputes. When they win, they receive payments triple the median in-network rates. As a result, costs are rising for employers and, ultimately, patients who will have to absorb higher premiums.
Background
Congress passed the NSA in December 2020 with the primary intention of saving patients from unexpected medical bills.These surprise bills were often the result of a patient unintentionally receiving a service from an out-of-network provider, often occurring in emergencies when patients cannot choose their provider. Now, patients are not responsible for most forms of surprise bills and instead only pay in-network cost-sharing in those instances. Early indications are that the measure is working as intended. A recent survey of stakeholders found that the legislation protects patients from the most pervasive forms of surprise billing. However, the legislation also intended to curb rising healthcare costs and establish fair payment between providers and insurers for out-of-network services.
With patients removed from the middle of the dispute, the bill also had to stipulate what insurers would pay providers for the out-of-network care. The NSA required that providers and payers undergo a baseball-style arbitration process, also known as final offer arbitration, to determine payment resolution The independent dispute resolution (IDR) process works like this: The health plan makes an initial offer to the out-of-network provider. The provider can initiate an open negotiation if they want a better offer. If the health plan and provider cannot agree on a reasonable payment in their negotiation, the provider can initiate the arbitration process. An arbitrator will then choose one of the two offers which will become the final payment amount.
To ensure fair payment and contain costs, Congress set a Qualified Payment Amount (QPA) that arbitrators should consider when weighing the offers, and represents the median contracted rate for each service. However, the legislation did not specify how arbitrators are supposed to use the QPA in their final decision. The Biden Administration later issued guidance to require arbitrators to use the QPA as a primary consideration in decisions, but a Texas judge struck down the rule. As a result, arbitrators can equally consider many factors in determining fair payment, beyond just the median in-network rate for that service. A more modest version of the rule, which would add predictability to the arbitration process, is being litigated, with the 5th Circuit having heard oral arguments in February 2024.
Increasing costs for employers and patients
A recent report from the Centers for Medicaid and Medicare Services (CMS) revealed that providers won 77 percent of the cases they took to arbitration in the first half of 2023. The law took effect in 2022, but the IDR process only began in April 2022, so results from the first two quarters of 2023 provide the best look to date at how the process is working.
Providers are winning over three-fourths of cases, and in the second quarter of 2023, they also received a median amount of 322 percent of the QPA — triple the median in-network rate. On the other hand, when the payer won in arbitration, they received 100 percent of the QPA (the typical rate for an in-network service). Because the arbitrator can only select between two offers, this process depends on the designated parties submitting reasonable offers in the first place. The initial results make clear that providers are asking for significantly more than the median in-network rate and typically receiving it. For example, in the 2nd quarter of 2023, the median prevailing offer for surgeries was 567 percent of the QPA.
Beyond the results, the type of providers choosing to go to arbitration also reveals a concerning trend. Approximately two-thirds of the initiating parties in cases going to arbitration are private equity-backed provider groups. These groups have a strong incentive to add revenue to pay down debt quickly and the resources to pay administrative fees and argue their case. While some private equity-backed firms credit the NSA with pushing them into bankruptcy, the data indicates that some large private equity-backed provider groups are taking advantage of the arbitration system to extract high payments from insurers.
With insurance companies losing out to providers in arbitration, employers and, ultimately, patients bear the financial repercussions. In the case of expensive in-network providers, insurers would usually either raise premiums to pay for the higher rates or remove the higher-cost providers from their network. Because these negotiations are often about services from doctors that patients do not choose, such as emergency physicians, insurance companies have less leverage in bargaining with providers. Insurers and employers are primarily dependent on the results of the arbitration process since they cannot plausibly exclude these providers from their network. Because insurers are losing 77 percent of cases, with providers receiving triple the median in-network rate, they will likely be forced to raise premiums.
The early numbers from CMS differ from the Congressional Budget Office (CBO) projections. Under the assumption that arbitrators would use the QPA as a main factor in decisions, the CBO projected that the NSA would reduce premiums by around 1 percent and reduce the federal deficit by $17 billion over ten years. However, the CBO produced over 100 informal estimates and noted in a presentation in early March that estimates varied depending on which side arbitrators favored and how the process affected in-network prices. In their highest projection, the CBO estimated that the NSA could increase the federal deficit by about $50 billion.
Still, without specific direction on using the QPA, the latent cost containment issues included in the NSA were predictable. New York passed balanced billing legislation in 2014, including an arbitration process for resolving payment disputes. Over four years, the arbitration process also favored providers, with health plans only winning 13 percent of cases. Additionally, in cases where providers won, they received payments up to 50 percent higher than the “usual and customary rate (UCR).” Similar to the NSA, one of the core issues with cost containment in New York was the guidance given to arbitrators. In this case, the UCR benchmark that arbitrators were supposed to consider was set at the 80th percentile of billed charges, pushing the standard for payment even higher.
Administrative costs and backlog
The volume of cases brought to arbitration from providers has been higher than many predicted, including the CBO and the Departments tasked with implementation (Departments of Health and Human Services, Labor, and the Treasury). The Departments noted that the caseload in the first half of 2023 was 13 times higher than initially expected. Now, due to the unexpected volume and ongoing litigation hurdles, the IDR process has a backlog of around 300,000 cases as of June 2023.
With extensive and growing caseloads, policy experts argue that the IDR process could generate hundreds of millions in administrative fees annually. In the first half of 2023, CMS collected $16.2 million in administrative fees and spent $58.9 million on IDR entity compensation and other expenditures. An October 2023 proposed rule from the Biden administration would address the caseload and fee structure by streamlining the process and slightly reducing administrative fees. President Biden’s 2025 budget includes an additional $500 million over the next five years for NSA implementation. However, making a process that gives providers higher payments more efficient and less prohibitive could result in even more cases going to arbitration.
With cases increasing each quarter, costs will continue rising until the arbitration process reaches a plateau where insurers and providers have a mutual interest in avoiding arbitration and can agree to terms on their own. Brookings analysts argue that without a reliable benchmark or collective certainty about the reasoning for IDR outcomes, cases will likely continue to rise until they hit an equilibrium where expectations are clear. With early decisions strongly favoring providers, that equilibrium would likely be much higher than the median rate, pushing the QPA standard even higher over time.
Looking ahead
President Biden’s 2025 budget includes expanding the No Surprises Act to ground ambulance services. The NSA protects patients from surprise bills resulting from air ambulance services but does not cover ground ambulances. A potential expansion of the NSA this year or next would allow lawmakers to revisit and address the payment resolution process.
There are several ways to rework the payment resolution process. While resolving payment disputes via arbitration is unnecessarily costly and cumbersome, some reforms would reduce costs and lead to more reasonable payments while keeping the arbitration process in place:
- Center the QPA in arbitration: Congress should require arbitrators to use the QPA as the most critical consideration in determining payment resolution. A district judge struck down the 2021 HHS rule that would have implemented a similar change on procedural grounds, arguing that the rule conflicted with the “terms” of the NSA. If lawmakers were to add this change in statute, the same legal challenge would no longer be relevant. Making the QPA the preeminent consideration would put downward pressure on costs by moving payments closer to the median in-network rate and adding more predictability to the process.
- Prevent consideration of previous or existing contracted rates: Arbitrators should not be able to take contracted rates that providers have with insurers into account when determining payment amounts. Because large provider groups have additional leverage in negotiations with insurers, they are more likely to have higher contracted rates for certain services that are involved in arbitration. One explanation for provider reimbursements being triple the median in-network rate is that providers are using previously contracted rates as a factor in their decision. Considering those rates in arbitration undermines the goals of fair payment and spending reduction.
Still, the most cost-effective and efficient solution would be to benchmark rates and remove the arbitration process entirely. In the CBO’s evaluation of the bill, they made clear that using arbitration instead of a stated benchmark for resolving disputes would reduce savings. Congress already created a market-based rate with the QPA that, if used, would reduce costs by requiring providers to pay the median in-network rate. Directly specifying the amount insurers owe for a given out-of-network service would also remove the arbitration administrative costs for both the federal government and healthcare entities. But in light of the political challenges inherent in removing a federal process like IDR, reforming the existing arbitration process is more likely.
We must continue to offer patients additional protections from surprise bills. Still, the NSA’s unintended consequences on employers and taxpayers requires Congressional action. The NSA’s potential expansion gives Congress a critical opportunity to fix the payment resolution process and prevent providers from using the system to extract higher payments from health plans.