How Will Legislation Ending Surprise Medical Bills Affect U.S. Healthcare Costs? 
Erasing a stain on our medical system, and reducing costs as well—by how much?
On Thursday May 9, I was watching one of the business TV channels to learn about the status of our trade war with China, and the anchor announced that President Trump was about to speak. I stayed on the channel to listen, and, surprise! The first sentences Trump pronounced had nothing to do with China, and everything to do with surprise medical bills: “This must end. We’re going to hold insurance companies and hospitals accountable…this will be something that will have a big impact…” the president said. He provided few details, although he hinted that exposing these abusive billing practices through transparent pricing would be part of the solution.
Ending surprise medical bills; transparent healthcare prices: This is like motherhood and apple pie, who could be against this? So my mind quickly turned out to the “how:” Our president wants to abolish surprise medical bills, and it is fair to assume this initiative will meet with enthusiastic bi-partisan support in Congress. Both the U.S. Senate (Republican-led) and the House of Representatives (Democratic-led) are already working on laws to end surprise medical billing. These bi-partisan legislative efforts are led by Congressmen Frank Pallone (D-N.J.) and Greg Walden (R-OR) in the House, and by Senators Bill Cassidy (R-LA) and Maggie Hassan (D-NH) in the Senate. What will be the impact of such legislation on healthcare costs? It is worth looking at a few scenarios, because fixing U.S. healthcare costs is like the proverbial finger in the dike. Costs get controlled in one area of our extraordinarily complex health system, and, pronto! They pro-up somewhere else in the system. We did not spend $3.5 trillion on health care last year(18% of our GDP), or close to $11,000 per capita, by accident…
Scenario #1—“Sunlight is the best disinfectant.” Congress passes a bi-partisan bill, signed by President Trump, mandating transparency in medical bills, foremost in cases that involve out-of-network billing. Pricing transparency, principally when coupled with healthy competition, does lead to lower prices in most industries. But U.S. health care is not just any industry. Competition has atrophied in the health insurance sector, with most states having only a couple of payors, and large areas enjoying no competition at all among insurers. Competition across state lines remain an elusive dream…And hospitals are consolidating, slowly but surely, increasing their ability to raise prices. So such a bill would be unlikely to have much impact in reducing health care costs, if any. Want a couple of examples? Our galloping drug prices are no secret—they are actually quite transparent, nothing like confusing and after the fact out-of-network bills. Yet this transparency has not prevented pharmaceutical costs to increase year after year in our country, relentlessly. And price transparency is effective if customers actually have a choice. Think about it: A patient going to the ER is essentially captive. She or he may think that making a nearby hospital that happens to be in-network the default emergency choice protects against out-of-network costs. Once in the ER, when wounds are treated, stitches sewed, nobody thinks about the possibility that the attending physician could not belong to one’s insurance plan—this hospital is in-network for me! And even if we did, what is there to do? “Please un-stitch me, I want to go to another hospital?” This is not going to happen, hence the possibility of surprise out-of-network bills.
Scenario #2—“Protecting the patient.” Here, our government gets more involved, and decides that price transparency is not enough. So our legislators tackle the surprise medical bills problem head-on from the patient standpoint, and vote in a bi-partisan manner to require that private insurers reimburse in full patients afflicted by out-of-network physician charges. President Trump signs this legislative bill. Voila! Problem resolved. Well, not quite: While it is very laudable to protect patients directly from unexpected out-of-pocket bills, this solution is very unlikely to lead to actual cost reductions in our healthcare system. Why? Because it will be relatively easy for insurance companies, for the most part operating with limited competition (they enjoy duopolies in most states), to recoup their losses. Private insurers could easily increase their in-network premiums to cover the increased amounts they would have to pay their members in the out-of-network instances of care. Insurance companies have all the relevant data and statistics to calibrate precisely how much their premiums would need to increase to compensate for the losses they would incur under such legislation. This is an excellent example of the potential resistance shown by our healthcare system to cost cutting initiatives that are not thoroughly thought out, with “what if?” scenarios analyzed exhaustively.
Scenario #3—“Billing regulation.” This is the case where Washington DC gets serious about this issue, and devises a thoughtful and effective plan, based upon a sound analysis of the issue at hand. Nine states have already passed laws to control out-of-network charges, including California, where these charges are capped at 1.25x the equivalent Medicare rate. However, such local efforts have a limited scope because they cannot cover employer provided insurance plans, which are covered by federal law. So Congress has to act, and pass sweeping legislation that focuses on billing regulation, barring out-of-network or independent billing outright, or at least setting a limit on out-of-network charges equal to a multiple of the equivalent Medicare rate. The draft legislation circulating in the House has some elements of this: It would require insurers to consider all ER charges as in-network emergency care, in essence capping out-of-network charges at their in-network equivalent. It would also abolish so-called “balance billing,” where patients are asked to fork out the difference between the hospital charges and what the insurer says it is paying.
Federal legislation focusing on billing regulation would affect principally emergency room (ER) services at hospitals, where it is estimated that 20% of physicians services nationwide lead to out-of –network charges, on average double what private sector insurers typically pay and four times as high as Medicare rates. Ancillary services that charge out-of-network rates at an even higher rate, such as ambulance services, could be included in such legislation. The main advantage of focusing on billing regulation is that this is the best way to protect patients from these surprise bills. Under this type of legislation patients gain a valuable protection against large potential out-of pocket costs that can be devastating to low income families. The private sector insurers will like such legislation too, since at the very least it will remove a source of much adverse PR to them. Hospitals may end-up paying less for ER physicians, many of them outsourced from companies that employ large number of them. The biggest losers in this situation will be ER physicians, for whom the ability to charge much higher out-of-network rates is a significant source of additional income relative to what they would be paid if they were hospital employees, in-network for insurers covering the same hospital. How would these superbly trained (they are in essence multi-specialty doctors that can treat all sorts of medical accidents and injuries) physicians react? Most likely by petitioning their hospitals and the insurers for higher in-network payments. The result of these negotiations would vary across the country, depending on the ER doctors’ competitive power vis-à-vis of local hospitals. That power is high in cities where there is an abundance of hospital choices: For example, in San Francisco we have no less than five major systems operating within the confines of our city: Dignity Health; California Pacific (Sutter Health); Kaiser; San Francisco General; and UCSF. At the other end of the economic spectrum, hospitals in rural areas where it is hard to attract talented professionals could suffer too. In areas dominated by a single major hospital system, such as UPMC in Pittsburgh, it would be easier for the hospital system to lower ER physician rates.
Overall, one can easily imagine that a share of the savings enjoyed by patients could creep-out in other areas of our health system, most likely in higher insurance premiums paid by the same patients. Leaving this aside in a most optimistic scenario, by how much would legislation ending surprise medical billing reduce our $3.5 trillion health care costs? For this high level, order of magnitude type of calculation, I will focus on ER visits, which represent the bulk of these surprise bills. Yes, they appear in a few more areas, like ambulance services, but to compensate I will assume that these savings from the ERs do not creep up elsewhere in the system. The Center for Disease Control and Prevention (CDC) statistics tell us that there were 145 million ER visits last year. Assuming, as seen above, that 20% of these led to a “surprise” bill, 29 million ER visits were affected. Estimates of the average for such bills range between $800 and $1,500, and bringing them down from 4x to 1.25x of the relevant Medicare rate would lower them to about $350, or $800 cost saving per such ER visit. Health system cost savings would then amount to 29M x $800, or about $23 billion—again in the most optimistic scenario. This is a large number, but it represents a mere 0.65% of our total healthcare spending, and only 2% of hospital costs. For reference, we can use another area targeted by Trump and most of our elected representatives, the galloping pharmaceutical prices. Our spending on medical drugs reached $333 billion last year—more than twice per capita relative to any other developed countries. We all know what needs to be done there: eliminating the absurd clause within Medicare Part D that does not allow Medicare, the largest purchaser of drugs in the country, to negotiate prices directly with pharmaceutical companies; and allowing the import of lower-priced drugs from reputable countries such as Canada, Germany, and Japan. The Trump administration has already proposed to allow the import of lower cost pharmaceuticals in certain areas of Medicare, and also allow the states much wider latitude in allowing such imports. If such initiatives only yielded a 7% saving in drug costs, that would already match the above $23 billion achieved in the best of cases by legislation ending surprise medical billing. If one day (fingers crossed!) our spending on medical drugs per capita becomes more aligned with what other developed countries pay, we are looking at savings ranging from $150 to $200 billion, almost an order of magnitude more than what we achieve with surprise medical billing.
Is ending surprise medical bills a good thing? Yes, absolutely, since such bills are a stain on the fairness and transparency of our medical system. Will such legislation be popular? Yes, because surprise medical bills can do genuine financial harm to those affected by it—remember, about 50% of Americans do not have the cash at hand to face an unforeseen $1,000 bill. Will it lead to some cost reductions in U.S. healthcare? Yes. Will it put a serious dent in our total health system costs? Not even close. To achieve this, we need a comprehensive system reform, rather than isolated initiatives.
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