Resolving Payment Disputes Between Insurers and Providers
To help inform policymakers as they debate a range of patient protection options, we have identified key considerations for addressing surprise medical bills. These considerations are informed by policies already adopted in more than half of states. One key consideration is how to resolve payment disputes between insurers and providers.
NOTE: Congress recently enacted the federal No Surprises Act, a new federal law that protects patients from surprise medical bills in all states. These comprehensive new protections went into effect in 2022 and protect patients from surprise medical bills for emergency services (including air ambulances) and non-emergency services provided at an in-network facility. Patients’ out-of-pocket costs will be limited to the costs they would have paid if they had received services from an in-network doctor, hospital, or other health care provider. The considerations here may continue to be relevant (especially for state policymakers interested in pursuing separate protections) but we recommend that readers learn more about the No Surprises Act here.
Resolving Payment Disputes Between Insurers and Providers
One of the most challenging, but important, considerations for policymakers is how to resolve payment disputes between insurers and medical providers (while holding patients harmless). Most commonly, policymakers have turned to a payment standard, a dispute resolution process (such as arbitration), or some combination of these two approaches. (We summarize state approaches to a payment standard and dispute resolution in two posts for The Commonwealth Fund.)
The option that policymakers choose can affect market negotiations between insurers and providers. For example, requiring insurers to pay out-of-network providers based on current in-network rates may affect decisions by health care providers to participate in plan networks (or not). This could, in turn, make it more difficult for hospitals to staff emergency departments and operating rooms.
At the same time, policymakers should consider the impact on health insurance premiums and overall health costs. For example, a payment standard or dispute resolution process that results in providers receiving a payment close to their billed charges will increase the cost of health care, while a standard or dispute resolution process that results in payments closer to average in-network rates will keep costs stable or even create savings.
Policymakers should carefully consider the advantages and disadvantages of the following types of payment mechanisms:
Policymakers can opt to prohibit surprise medical bills for patients but not prescribe how providers will be paid. In theory, not selecting a payment mechanism allows the insurer and the health care provider to come to an agreement about what the rate should be on their own. Although this is an option, the lack of a payment mechanism can lead to ongoing disputes between health care providers and insurers.
Policymakers may consider a payment standard to ensure that insurers fairly compensate providers. These payment standards could range from requiring insurers to pay out-of-network providers at a set percentage of Medicare rates, at median in-network rates, at “usual and customary rates” (also referred to as “billed charges”), or at a more general “commercially reasonable rate.” State payment standards are summarized here.
Payment standards are easy to administer, reduce uncertainty, and help ensure prompt payment to providers. Depending on the actual rate established, a payment standard could also help keep health price inflation in check. On the other hand, setting a rate that accurately reflects market conditions, quality, and provider experience can be difficult. A rate set too high could increase premiums and create incentives for providers to be out-of-network. A rate set too low could create financial difficulties for some physicians or make it more challenging to recruit certain specialties to work at hospitals or other facilities.
In general, insurers have favored a payment standard based on its simplicity, especially when the payment standard is based on existing in-network rates. Conversely, providers have opposed a payment standard, unless it is based on their billed charges. New data suggests policies to address surprise medical bills could reduce premiums by 1 to 5%.
In selecting a payment standard, policymakers should consider whether they have the data they need. A Medicare-based payment standard requires no additional data while a payment standard based on market rates may require access to reliable, accurate third-party data such as a benchmarking database or an all-payer claims database.
State policymakers may require health care providers and insurers to engage in a dispute resolution process, such as arbitration, to establish out-of-network payment rates. Most states that have adopted a dispute resolution process report that this process is rarely used. This suggests that the process itself creates an incentive for insurers and providers to negotiate with one another and reach a private settlement. State dispute resolution processes are summarized here alongside a qualitative analysis of state dispute resolution processes in Colorado, New Jersey, Texas, and Washington.
One advantage of dispute resolution is that parties can present case-specific information for a particular medical service, leading to a rate that might better reflect the circumstances. Dispute resolution also avoids the prospect of a government-set payment standard. On the other hand, dispute resolution is administratively burdensome compared to a payment standard, resulting in higher costs and delays in provider payments. Depending on how the arbitration system is designed, the dispute resolution process could result in price inflation or cuts in provider revenue.
Policymakers must also make key decisions about how to design a pre-dispute resolution process, how the parties initiate dispute resolution, the finality of the arbitrator’s decision, which party pays for the process, and other process considerations. Policymakers may also see value in guidance that could ensure that rates are not set too high or too low.
In general, insurers have argued that arbitration is burdensome and creates incentives for providers to inflate their charges. Conversely, providers have mostly argued that arbitration is a fairer method to determine payment than a government-set rate, especially when it falls below providers’ billed charges.
Policymakers are increasingly combining 1) a requirement that insurers make a minimum payment to providers; and 2) a time-limited dispute resolution process that leads to arbitration if necessary. This blended approach could rely primarily on a payment standard while creating a limited dispute resolution option for selected cases (e.g., when the bill exceeds a dollar threshold). Alternatively, the model could rely primarily on a loose payment standard (e.g., requiring insurers to pay a commercially reasonable rate) while establishing a dispute resolution process if the provider is dissatisfied with that rate.
A blended approach could reduce concerns about the administrative burdens of arbitration (assuming most providers are willing to accept the initial minimum payment), while appeasing providers concerned about an inadequate payment standard (assuming the initial minimum payment is set at a reasonable level).
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Our goal is to help policymakers adopt comprehensive surprise billing protections for patients. Policymakers and staff can contact our team about a specific question or with a broader request for technical assistance. Our experts are available to review materials and consult on policy solutions.