Surprise Billing Arbitration Favors Providers, But Rates Are High

January 13, 2021 - An out-of-network surprise billing solution in New Jersey favors providers, paying them significantly more than in-network prices for the set of services in dispute, according to a new Health Affairs study.

New Jersey implemented a final-offer arbitration system to resolve payment disputes between payers and out-of-network providers arising from surprise medical bills. In the arbitration system, a third-party entity selects either the payer’s or the provider’s final offer and cannot choose a different amount that will be paid to the provider.

“We need to understand how arbitration to resolve out-of-network billing disputes is working in practice,” Erin Trish, associate director of the USC Schaeffer Center for Health Policy & Economics and senior author on the study, says in a press release. “It is important to protect patients, but we also need to avoid a solution that provides perverse incentives and ultimately increases spending.”

Trish and colleagues evaluated 1,695 cases that resulted in arbitration decisions in New Jersey in 2019. They then linked administrative data from New Jersey arbitration cases to Medicare and commercial insurance claims data.

Relatively few cases resulted in arbitration, but the ones that did tended to generate award amounts that were significantly higher than typical in-network payment amounts, the study found.

READ MORE: Provider Groups Leery of New Surprise Billing Legislation

The mean arbitration award was $7,222, which was nine times higher than the median in-network price for the same service. The median award amount was also nearly six times higher at $4,354.

Providers also won 59 percent of decisions, with health plans prevailing in the remaining 41 percent.

But even when health plans “won,” they still generally paid well over the median in-network prices, according to the study.

Nearly a third (31 percent) of cases decided in arbitration were for amounts over ten times the median in-network price.

Compared to Medicare rates, the mean and median arbitration awards were about 12.8 and 8.5 times greater, respectively. About 45 percent of cases were awarded at amounts more than ten times what Medicare would have reimbursed providers.

READ MORE: Surprise Billing Price Controls Decreasing Care Quality in CA

New Jersey state law sets “relatively broad guidance” for the factors third-party arbitrators should consider when making their final payment determinations, researchers explained.

Some factors influencing a payment determination may include the level of training, education, and experience of the healthcare professional; the provider’s usual charge for comparable services provided in network and out of network; and the circumstances and complexity of the particular case.

In practice, though, arbitrators in New Jersey are given the eightieth, ninetieth, and ninety-fifth percentiles of both charges and allowed amounts based on data collected and compiled by FAIR Health. And these have driven payment determinations, researchers found.

The study suggested that the eightieth percentile of billed charges is a “strong guidepost” for payment determinations resulting from arbitration.

The mean arbitration decision for the cases studied was 107 percent of the eightieth percentile of billed charges for the same set of services, the data revealed. But the average was “buoyed” by very high awards relative to the eightieth percentile of charges and the median award was about 24 percent below the eightieth percentile.

READ MORE: Surprise Billing Action Needed, But Hospitals Urge Congress to Wait

Additionally, 67 percent of payment determinations were awarded to the party that bid closest to the eightieth percentile of charges, with a sensitivity analysis mitigating potential measurement error pushing that win rate over 90 percent.

“Basing arbitration decisions on an inflated list price, and the 80th percentile at that, is a surefire way to increase healthcare costs,” says Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy and co-author of the study.

The authors agree that, if states rely on arbitration to resolve out-of-network surprise billing, then arbitrators should be prohibited from considering provider charges. Instead, arbitrators should be given information about commercial in-network prices and Medicare payment rates for the services under dispute, they argue.

The Consolidated Appropriations Act, 2021 passed by Congress on Dec. 21, 2020, calls for the implementation of a surprise billing arbitration process.

However, the law requires decisions to be based on average in-network prices for services, among other factors, and bars arbitrators from uses physician and hospital billed charges.

The authors suggest that lawmakers and administrators of the new process will “need to pay particular attention to the details when implementing the arbitration system.”

“While state laws will supersede the federal protection for the health plans they regulate, states such as New Jersey that instruct arbitrators to consider provider charges should strongly consider adopting the more consumer-friendly version of arbitration established in the federal law for their entire state,” says Adler. “Such a decision could result in substantial savings for state residents and avoid the bureaucratic nightmare of two parallel arbitration systems running in a state.”