Researchers: Billed charges shouldn’t be used to settle surprise billing disputes

Under New Jersey's final-offer arbitration system, median arbitration award was 5.7 times median in-network price. Researchers say use of billed charges leads to high awards.

When the Congress finally passed legislation to end surprise billing in December, it settled on a final-offer arbitration process for settling cases when providers and health plans can’t agree on amount to be paid for an out-of-network service. Final-offer arbitration, which is used to settle pay disputes in major league baseball and by certain unions and employers, means the arbitrator must select the amount proposed by the provider or health plan; there’s no compromising on a middle amount.

States have also set up final-offer arbitration for settling surprising billing disputes. In this month’s issue of Health Affairs researchers reported the results of a study of New Jersey’s final-arbitration system that showed the median arbitration award in 2019 was 5.7 times higher than the median in-network price for the same procedure. Even when health plans won the arbitration, they paid, at the median, 1.76 times the median in-network price.

Moreover, Benjamin Chartock, an associate fellow at the Leonard Davis Institute of Health Economics at the University of Pennsylvania, and his colleagues found that 85 (5%) of the 1,695 cases in their study had awards that were 25 times the median in-network price and nine cases settled at prices that more than 100 times the median in-network price. They found that 82 of the 85 awards that were 25 times larger than the median in-network price were cases when the provider’s final bid was picked by the arbitrator and that most (72) of those cases were from plastic surgeons, general surgeons or orthopedists.

Chartock and his colleagues note that arbitrators in New Jersey are shown and instructed to consider amounts that are the 80th percentile of billed charges and that they found evidence that the 80th percentile level “may have served as a strong guidepost for arbitration decisions.” They noted the mean arbitration decision in New Jersey was 107% of the 80th percentile of billed charges.

One of the major policy debates about eliminating surprise billing and settling disputed bills is whether to use arbitration (which is generally favored by providers) to settle the disputed bills or to use a benchmark instead that would be tied to, say, a percentage of the Medicare rate.

Chartock et al. say regardless of whether the method to resolve disputes is arbitration or some kind of benchmark, federal and state policy makers “should recognize that any reliance on any reliance on provider charges, either to define an out-of-network benchmark or as guidance given to arbitrators for consideration can induce perverse incentives that maybe harmful to the market.” In their conclusion they amplify on the point: “Arbitrators should be prohibited from considering provider charges, which are unilaterally set, are largely untethered by market forces, and tend to be extremely high.” Instead, they said arbitrators should look to commercial in-network prices and Medicare payments for guidance.

Under the New Jersey surprise billing law, insurers make payments to providers and the patients are not supposed to pay more in cost-sharing amounts that they would if they had been cared for by an in-network provider. Arbitration is triggered if the difference between the insurer’s payment and the provider’s bill is more than $1,000.