Emergency medical care is an exception to the general principle of market exchange, whereby services are voluntarily bought and sold, with sellers competing on price. Under federal law, hospitals are required to treat patients that arrive needing emergency medical treatment, regardless of their ability to pay—but allowed to subsequently charge whatever they wish.
In recent years, medical providers have increasingly exploited this arrangement by threatening exorbitant charges for out-of-network emergency care in order to force insurers to agree to generous reimbursement terms across the board. Patients have frequently been caught in the crossfire, and forced to pay large “surprise bills” for emergency care by hospitals or doctors who remain out of network.
Emergency care is necessarily an unfree market, but it is a small and discrete part of healthcare, accounting for less than 7 percent of hospital spending. Ending the right of providers to fill in a blank check for emergency medical procedures would directly help some of the most vulnerable patients, who are being subject to exorbitant bills. But it would also prevent providers from leveraging this exceptional situation to undermine price competition for the bulk of hospital services.
The seemingly narrow issue of payment for out-of-network emergency care therefore has broader significance. The rising cost of healthcare is often discussed as a general phenomenon afflicting medical services, but the problem is primarily a matter of medical costs and expenditures most closely tied to hospital care.
According to a recent study in Health Affairs, whereas between 2007 and 2014 inpatient hospital prices increased by 42 percent and outpatient hospital prices rose by 25 percent, inpatient physician prices increased by 18 percent, and outpatient physician fees increased by only 6 percent. Over the same period, while many expensive new drugs have become available, the price index for existing drugs increased by only 2 percent.
Much attention has been paid to the responsibility of hospital mergers for this trend, but prices at hospitals with local monopolies average only 12 percent more than those at facilities with four or more local competitors. By contrast, prices for equivalent services can be three times higher at different facilities within the same hospital market.
What gives hospitals such pricing power, if it isn’t just market share? A major factor is the current billing rules for emergency care.
Congress enacted the 1986 Emergency Medical Treatment and Labor Act (EMTALA) to require hospitals to treat and stabilize the condition of patients arriving at emergency departments, regardless of their insurance coverage or ability to pay. Yet, this legislation imposed no limit on the amount that hospitals and clinicians could then bill patients for the care they received—even if treatment began while they were unconscious.
The main constraint on hospital prices is normally the ability of insurers to steer patients to in-network facilities with which they have negotiated better rates. Yet this constraint is all but absent for emergency-care situations in which patients must often seek treatment at the nearest possible facility. Knowing that patients will expect their insurers to cover emergency-care costs, hospitals have increasingly used the threat of exorbitant out-of-network bills for emergency care to negotiate more generous reimbursement arrangements (high fees without constraints on volumes) for in-network elective care.
A similar dynamic has become clear among clinicians who frequently treat emergency patients. According to a recent Brookings Institution study, whereas physicians in general contract with insurers at an average of 128 percent of Medicare rates, those in specialties able to impose out-of-network emergency bills are able to drive a harder bargain: with emergency physicians billing an average of 306 percent and anesthesiologists billing 344 percent of Medicare rates. This has yielded a phenomenon known as “surprise billing,” where out-of-network providers of emergency care bill enormous amounts in excess of charges covered by insurers—leaving individuals to pay the balance. Most shockingly, this may even happen for out-of-network clinicians practicing at in-network hospitals.
As a solution to this specific problem, scholars from the Brookings Institution and the American Enterprise Institute recently recommended prohibiting clinicians from independently billing for emergency, ancillary, and hospitalist services—a reform which would make hospitals responsible for paying them and collecting reimbursement by affiliating with insurance networks. As the patient has little say over which emergency-care physicians, anesthesiologists, or pathologists will bill for services incident to their care, and hospitals have control over who operates within their walls, such a proposed reform makes a lot of sense.
Yet a broader reform is required to remedy the incentive for hospitals to themselves threaten emergency-care patients with exorbitant charges. Various legislative proposals regulating out-of-network bills for emergency care were introduced in the last Congress, and congressional staff have been working to develop reforms which could pass this year.
One prominent idea is an approach that has already been employed by some states—to subject out-of-network rates for emergency care to independent arbitration. This seems appealing because it does not appear overly prescriptive or rigid; but it is really just a form of buck-passing rather than an actual solution. Instead of having legislators weigh trade-offs in consultation with insurers, hospitals, patient groups, and research organizations, it would simply require judges with no healthcare staff, expertise, or relationships with effected stakeholders to improvise consequential decisions with complex unintended consequences. The administrative costs of appealing fees could be substantial, and under the pressure of interest-group lobbying, such an arrangement may inadvertently lead to payments drifting upwards.
A similar danger is involved in proposals to establish default out-of-network rates based on averages or percentiles of in-network rates: Hospitals may be able to inflate their permitted out-of-network reimbursements by manipulating in-network payment arrangements.
The best approach is rather to cap the rates that hospitals are allowed to charge for various out-of-network emergency-care services at a specified proportion of Medicare rates. Scholars at the Brookings Institution have recommended a tight cap of 125 percent of Medicare rates, under the belief that this could immediately improve insurers’ negotiating power with respect to reimbursements over elective care, and hence substantially drive down hospital costs.
Yet, such a cap would likely decimate hospital revenues overnight, and is therefore likely to be impractical. Nonetheless, a looser cap of 150 percent of Medicare rates (or higher for some specialties) would serve to protect patients from surprise bills greatly in excess of charges covered by their insurer, while preventing hospitals making use of the threat of out-of-network price gouging to cripple the ability of insurers to negotiate reasonable in-network payment arrangements.
A cap limited to out-of-network fees for emergency care could hardly be more different in spirit from proposed single-payer or all-payer reforms, which propose to effectively set a comprehensive floor on payment rates for all medical services—elective as well as emergency; in-network as well of out-of-network.
By eliminating hospitals’ default right to fill in a blank check for emergency care (whose provision is already mandated by federal law) a cap on out-of-network emergency charges would in no way restrict market forces from shaping the delivery of elective care (which accounts for over 93 percent of hospital spending). Providers could still insist on their preferred reimbursement arrangements before agreeing to deliver elective care, and insurers could still negotiate discounts from preferred networks of providers. Nor would such a cap restrict the freedom of hospitals and insurers to agree to better terms of contract to pay for emergency care in-network.
In fact, restoring balance to the default arrangement for out-of-network emergency care could encourage more reasonable payment agreements more broadly—by preventing hospitals from threatening exorbitant out-of-network bills to drive up reimbursement rates and veto cost-controls in payment arrangements across the board.
Editor’s Note: This piece was originally published by Economics21 at the Manhattan Institute.