Battling the Chargemaster: A Simple Remedy to Balance Billing for Unavoidable Out-of-Network Care

The authors propose a simple legal mechanism to combat chargemaster abuses and encourage provider price competition. This solution is superior to prevailing legislative and regulatory responses to surprise out-of-network bills.
Published Online: April 28, 2017
Barak D. Richman, JD, PhD; Nick Kitzman, JD; Arnold Milstein, MD, MPH; and Kevin A. Schulman, MD
ABSTRACT

Objectives:
To develop an effective legal mechanism to combat chargemaster abuses and to facilitate price transparency.

Study Design: Applying legal doctrines to out-of-network (OON) billing disputes.

Methods: We reviewed rudimentary contract law and examined the law’s handling of contracts where prices have not been specified in advance. These cases are the controlling authority to guide courts, handling of surprise and OON billing problems. We then compared legal remedies that correct OON billing abuses to prevailing legislative and regulatory approaches.

Results: Our analysis suggests that providers have no legal authority to collect chargemaster rates from surprise and OON billing abuses. A proper application of contract law can end such abuses and would facilitate superior pricing incentives to other strategies designed to end balance billing disputes.

Conclusions: Chargemaster rates on uninsured and OON patients impose significant financial burdens on the vulnerable, distort medical prices, and inflate healthcare costs.  Applying rudimentary contract law to these practices offers a solution that is simpler and more effective than other administrative and legislative schemes recently adopted in several states. It will prevent providers from hiding behind a convoluted hospital pricing system, encourage the development of attractive narrow-network insurance products, and shield urgently sick individuals from the dread of medical predation. Patients and payers should know that they are under no obligation to pay surprise bills containing chargemaster rates, and state attorneys general can use the law to prevent providers from pursuing chargemaster-related collection efforts against patients.

Am J Manag Care. 2017;23(4):e100-e105
Takeaway Points

Many healthcare providers seek to collect exorbitant chargemaster rates from uninsured and insured out-of-network patients. These efforts impose significant burdens on financially vulnerable patients and hinder efforts to create affordable narrow-network insurance plans.
  • Contract law does not support the collection of chargemaster rates, which have little relation to either actual costs or market prices. Instead, proper contract law supports imputing market-negotiated rates.
  • Applying these well-recognized legal principles to the complex world of out-of-network billing provides a simpler and less costly approach than those recently adopted in some states to combat the distortive effects of chargemaster billing.
Over the last several years, numerous articles in the lay press have documented one of the most disturbing practices in the healthcare system: providers billing exorbitant charges to the nation’s most vulnerable patients. These patients are those who either lack insurance or who have the misfortune of requiring services rendered by an out-of-network (OON) provider, usually in emergent circumstances, and the prices charged are neither approved nor seen by patients in advance. The resulting medical bills—euphemistically described as “surprise bills”—place significant and sometimes ruinous burdens on patients’ lives.1

These patients are more than just collateral damage to skyrocketing healthcare costs. Recent examinations of OON billing reveal that inflated charges are often part of a deliberate strategy by providers to apply negotiation leverage against insurers. The primary tool in this strategy is the notorious “chargemaster,” a master file built within hospital information systems that contains a comprehensive listing of prices for all billable services. Inflated chargemaster charges have been used tactically both to secure higher payments from Medicare and private payers and to threaten insurers seeking to create affordable insurance offerings through narrow networks. The viability of narrow networks, which are one of the few health insurance innovations associated with gains in affordability and quality of care, depends on successfully battling the chargemaster.

Within the past 2 years, several state policy makers have taken notice and enacted legislation designed to curtail chargemaster collection efforts. A handful of states have protected healthcare consumers by enacting “balance billing” legislation that prohibits providers from charging patients for deficiencies between chargemaster prices and an insurer’s reimbursement, while others have required insurance companies to shelter plan members from these deficiencies. Some states have gone further to set payment rates for certain OON charges either by statute or special administrative mechanism, and some states have approached the problem more gingerly by introducing efforts to bring transparency to provider pricing.

However, these state solutions—to use a medical analogy—treat the symptoms of chargemaster abuses without addressing the underlying problem. They prohibit the worst abuses, but they neither recognize that the root cause is unilateral price setting nor do they empower consumers to counteract unilateralism with a market response. We propose a simpler and better approach to stemming the growing role and distortive power of the chargemaster, one that requires neither additional legislation nor regulatory changes and yet preserves market incentives to craft more affordable insurance products. We illustrate how payers and patients can invoke rudimentary common law principles to challenge inflated chargemaster charges, replace inflated charges with amounts that instead reflect prevailing market prices, and correct some of the health sector’s worst market failures.

The Problem: The Chargemaster and OON Bills

Most Americans use insurers as intermediaries to negotiate rates for healthcare services in advance with providers, and when an insured patient receives care, the provider is paid rates that are fully detailed in a contract between the provider and the patient’s insurer. This arrangement benefits from the opportunity for providers and payers to negotiate deliberately, without emergency conditions and with the knowledge of prevailing market prices and costs of service.

When patients require or unknowingly receive care from providers who have not entered into a contract with their insurers (so-called OON care), or when patients are uninsured, providers typically charge rates in accordance with their chargemaster. The chargemaster and similar charge strategies are responsible for exorbitant prices for emergency care (eg, the $500 stitch),2 for OON physicians serving as consultants and “drive-by” doctors (eg, the $117,000 medical bill from an unknown doctor),3,4 and for charging more to the uninsured than to the rest of the population. "The rules are completely crazy,” concedes one provider.5

The chargemaster has been described as the “central mechanism for the revenue cycle” of hospitals, but its defining feature is that it is “devoid of any calculation related to cost” and is not based on market transactions.6 It lies in stark contrast to alternative billing and accounting systems that take cost into consideration, such as accounting systems that assimilate multiple factors in determining the cost of providing medical services and generating prices that reflect those costs.7

Because chargemaster prices are calculated without regard to costs, and because of the underlying complexity of hospital pricing and billing practices, hospitals have resorted to chargemaster price inflations to meet financial demands. Hospital accounting experts agree that hospital billing practices “encourage manipulation of the [chargemaster] to maximize revenue”8 and have created a “legal fiction” that now serves as the basis of billing uninsured and OON patients.9 In determining the amount that providers accept from third-party payers, “[c]hargemaster rates, in reality, serve as nothing more than the [hospital’s] starting point for negotiations.”10 A hospital spokesperson, when speaking about the hospital’s chargemaster rates, said “[t]hose are not our real rates . . . most people never pay those prices.”6 In addition to inflating prices paid by private insurance, higher hospital chargemaster rates also manipulate Medicare reimbursements. By using chargemaster prices to charge substantially more for Medical Severity–Diagnosis Related Groups, even when patients have similar lengths of stay as those in all other hospitals, hospitals can generate higher outlier payments under Medicare’s inpatient prospective payment system.11

For these reasons, hospitals typically set chargemaster prices several times higher than prices in negotiated contracts. One study found that chargemaster prices are 2.5 times what most health insurers pay and more than 3 times hospitals’ actual costs.12 Another study found that the first 30 to 74 minutes of critical care delivered by a California provider could cost an OON patient as much as 2897% of what Medicare would have paid for the same services,13 and a new survey shows that health plans and patients routinely receive charges from OON physicians that range from 118% to 1382% of amounts paid by Medicare.14 An influential series of articles in The New York Times highlighted these abusive billing practices, such as charging $2200 for 3 stitches on a patient’s knee, $1700 for a dab of skin glue to close a cut on a child’s head, and more than $36 for a single Tylenol pill with codeine.1-3

Current State Responses

Although federal law offers few remedies against surprise balance billing and similar chargemaster strategies, many state policy makers have appropriately recognized that surprise OON bills cause genuine hardship to patients, impose unnecessary complexity to an already burdensome world of hospital billing, and pose a major threat to the availability of affordable narrow-network insurance plans.15 The state approaches have varied, but their assorted elements can be categorized into 4 distinct strategies—although some state efforts have pursued several elements simultaneously.16

The least interventionist approach has been to bring transparency to healthcare prices and the consequences of obtaining OON care. Although insurers are generally obligated to inform their subscribers of the financial consequences of going out of network, some states additionally require insurers to provide accurate network directories, publicize both summary and specific information on the costs of receiving care out of network, and alert consumers at the point of service of network participation. These policies go in hand with other state efforts to bring transparency to healthcare costs, including the growing effort to assemble all-payer claims databases that will allow patients to compare prices for common services between in-network and OON providers.17 Some insurers have also established their own independent systems to inform both plan members and the general public of the costs associated with medical care by certain providers.18 However, while greater transparency is desperately needed in the health sector, these efforts will stem surprise bills in only the most avoidable circumstances and do little to stop the most harmful abuses, including surprise bills from emergency care or from OON physicians consulting for in-network hospitals.

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