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Battling the Chargemaster: A Simple Remedy to Balance Billing for Unavoidable Out-of-Network Care
Barak D. Richman, JD, PhD; Nick Kitzman, JD; Arnold Milstein, MD, MPH; and Kevin A. Schulman, MD

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

Barak D. Richman, JD, PhD; Nick Kitzman, JD; Arnold Milstein, MD, MPH; and Kevin A. Schulman, MD
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.
The most comprehensive approaches to solving surprise bills have come from New York and California. The New York law, which came into effect on April 1, 2015, bans balance billing from OON emergency services and establishes an independent dispute resolution for providers and health plans to settle on a fee for OON services performed.21 California is similar and also establishes a default charge of 125% of Medicare reimbursement for surprise physician charges for in-network care.22 This administrated negotiation approach is comparable to surprise billing laws in Illinois and Florida, and other states have used similar approaches to resolve OON bills in other contexts. In Michigan, for example, state statutes limit automobile insurers’ responsibility to pay only “reasonable” and “customary” charges for healthcare expenses required of insureds.23,24  Similar regulatory schemes have also been established in the worker’s compensation context, requiring insurers to reimburse providers only a “fair and reasonable reimbursement amount [to] . . . ensure that similar procedures provided in similar circumstances receive similar reimbursement.”25 This administrative solution, however, imposes significant transaction costs to achieving solutions. Patients with surprise bills must be aware of the regulatory remedies and submit substantial paperwork before triggering protections. These bureaucratic hurdles not only prevent many consumers from receiving adequate protection, but they also dull providers’ exposure to price competition. Alternative dispute resolution might offer effective mechanisms for finding compromise prices to resolve particular disputes, but those prices are not felt in the marketplace.

The seriousness and pervasiveness of surprise bills encouraged the National Association of Insurance Commissioners in November 2015 to update its Model Act to institute additional consumer protections. The new Model Act, which is represented as a “compromise among all of the participating stakeholders,” reflects New York’s effort to increase transparency and sponsor provider-payer mediation.26 It requires health carriers to offer accurate network directories to warn patients before they seek OON care and provides a mediation process for providers and payers to resolve disputes over OON remittances. In addition, influential think tanks have focused on problems from surprise bills, with one recently recommending (in what amounts to a full frontal attack) a combination of federal, state, and private interventions.27 The Model Act has not yet been passed by any state, nor have federal policy makers responded to the call to action, but these recent efforts reveal the pressing need to find a solution to surprise bills. Meanwhile, the diversity of legislative activity reveals that legislators have not yet arrived at an adequate policy.

A Better Solution: Rudimentary Contract Law

Despite this legislative activity in many states, protecting consumers from surprise OON bills requires neither new legislation nor new regulatory mechanisms. To the contrary, consumers are already protected by current law—bedrock, rudimentary contract law—and require only its proper application to end harmful chargemaster practices.

Contract law offers not only a promising solution, but a better one. It has the virtue of simplicity. It does not create a new fiduciary duty or consumer protection. It neither expands the reach of a federal statute nor limits the reach of state regulatory power. It avoids the imposition of a new regulatory apparatus. And perhaps best of all, it triggers market solutions to address healthcare costs. A contract law solution empowers the very parties who currently are being exploited by OON charges.28

In the accompanying eAppendix, we detail our legal analysis, which concludes that providers do not have a legitimate legal claim to collect chargemaster charges. This analysis is in line with a growing chorus of legal scholars seeking to end chargemaster abuses.29-31 The key motivation is that mutual assent is at the core of commercial transactions. Chargemaster prices, in contrast, are prices that neither patients nor payers accepted in advance nor are they prices to which payers would ever assent.  Instead, the law entitles providers, as one court ruled, to “the average amount that [the provider] would have accepted as full payment from third-party payers such as private insurers and federal healthcare programs.”32 The law therefore entitles providers to collect no more than prevailing negotiated market prices for any OON services.

This leads to a stark conclusion: providers have no legal authority to collect chargemaster charges that exceed market prices for OON services, and thus neither patients nor payers are under any obligation to pay such chargemaster prices. Consistent efforts to enforce this interpretation of contract law would go far in addressing abuses. Moreover, judges, public law enforcement officials, and private attorneys can use this interpretation to combat abusive or harassing efforts that providers pursue to collect such charges. And, perhaps most important, payers that form narrow provider networks can be confident that they will not have to pay extortive chargemaster prices if their insureds require emergency OON care.

A Comparative Assessment

Contract law sets a clear baseline for what may be collected, and prevailing data resources can enable courts to calculate appropriate market prices with little difficulty (see eAppendix). A common law solution therefore lucidly demarks what patients and payers owe providers for OON care without costly litigation or cumbersome administrative procedures. It also encourages providers to be transparent with their prices, for higher prices are attainable only if providers obtain assent from payers in advance.

For these reasons, empowering courts to resolve surprise billing disputes—and to set the rules that govern surprise billing—is preferable to relying on new legislation. Although state policy makers are to be lauded for addressing chargemaster abuses, none of the 4 prevailing strategies—increasing transparency, prohibiting balance billing, requiring insurers to cover OON costs, and providing mediation—offer specific advantages from relying on courts applying contract law. This is because chargemaster and OON charges are pernicious not just because they allow providers to exploit a moment of vulnerability or a temporary information failure, but because they impose enormous dynamic costs as well.

An effective policy response to OON billing will not just protect patients from surprises, but is also how patients can benefit from the market. Laws that place a simple ban on balance bills from providers do not incentivize efficient providers to price competitively, join narrow networks, or encourage patients toward efficient care. Reciprocally, laws that obligate insurers to cover their patients’ bills might provide patients with temporary salvation, but because they retain the potential for extortive billing, patients are likely to pay the inflated bills indirectly through higher insurance premiums. Thus, regulatory bans, whether they impose residual costs on insurers or on providers, fail to harness market forces that encourage price competition and quality improvements.

Administrative efforts to define reasonable reimbursement rates, whether through administrative fiat or through dispute resolution mechanisms, aim to mimic what a court would do in imputing market prices. If designed properly and executed efficiently, they could reflect what reasonable parties would have agreed to had there been an opportunity for meaningful bargaining. But administrative procedures are subject to due process safeguards and introduce transaction costs and delays that court proceedings do not. More significant, administrative structures introduce the significant risk of enshrining the sentiments of entrenched stakeholders, whereas courts are much less prone to capture by special interests. For these reasons, administrative solutions would fail to address the dynamic costs of surprise bill strategies, and if used in conjunction with court solutions, they would interfere with and thereby undermine the many benefits of invoking contract law remedies.

The Table summarizes our comparative assessment of these alternative strategies.

CONCLUSIONS

Chargemaster abuses from OON and emergency care inflict serious financial harm to the most vulnerable while undercutting the functioning of healthcare markets and the creation of valuable insurance products. At the same time, they present straightforward questions of contract law and lead to a simple conclusion: providers are entitled only to collect prevailing negotiated prices for OON services, and patients and payers are under no legal obligation to pay higher chargemaster charges.

Applying this interpretation of contract law will prevent providers from hiding behind a convoluted hospital pricing system, will encourage the development of attractive narrow network insurance offerings, and will shield urgently sick people from the dread of medical predation. State legislators are to be congratulated for recognizing that chargemaster abuses require attention. But rather than seeking legislative solutions, they should pursue court remedies that correct both the immediate and the long-term dynamic harms caused by chargemaster strategies.

Creators of narrow-network plans should be emboldened by our conclusions, and we particularly urge the legal community to take our conclusion to heart.  Public law enforcement officials have an opportunity to give immediate relief to constituents who are routinely injured by chargemaster abuses. For example, a state attorney general who announces a commitment to enforcing contract law in chargemaster disputes would both protect vulnerable patients and bring some clarity to healthcare prices. Providers will know that subversive pricing strategies will be ineffective, and that they instead must forthrightly disseminate and obtain assent to their prices in a transparent market. 

Author Affiliations: School of Law (BDR, NK), Fuqua School of Business (BDR), and School of Medicine (KAS), and Duke Clinical Research Institute (KAS), Duke University, Durham, NC; Clinical Excellence Research Center, Stanford School of Medicine, Stanford University (AM), Stanford, CA.

Source of Funding: None.

Author Disclosures: Mr Kitzman reports no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Concept and design (NK, AM, BDR, KAS); acquisition of data (NK, AM, BDR, KAS); analysis and interpretation of data (NK, AM, BDR, KAS); drafting of the manuscript (NK, AM, BDR, KAS); critical revision of the manuscript for important intellectual content (NK, AM, BDR, KAS).

Address Correspondence to: Barak D. Richman, JD, PhD, Duke University School of Law, PO Box 90360, Durham, NC 27708. E-mail: richman@law.duke.edu.
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