Addressing Surprise / Excessive Medical Bills as a Health Policy Issue
Gary K. Ko, CFA
President, California Medical Billing Advocates
Research Fellow, UCSF / UC Hastings Consortium on Law, Science & Health Policy
Medical Debt is One of the Leading Causes of Personal Bankruptcy in the U.S
Prior to the Affordable Care Act (ACA), medical debt was one of the leading causes of personal bankruptcy in the United States. Himmelstein et al. found that “61.1% of all bankruptcies in 2007 were medical; 92% of these medical debtors had medical debts over $5000, or 10% of pretax family income”[i]. President Obama, in his 2009 address to Joint Session of Congress, stated that “the crushing cost of healthcare … causes a bankruptcy in America every 30 seconds”[ii]. The ACA improved insurance coverage for the American population and reduced uninsured rates, mostly through expansion of Medicaid to many low-income individuals, and providing market place subsidies for individuals and families from 138% to 400% of Federal Poverty Level (FPL). Nationally, the uninsured rate of the non-elderly population dropped from around 17% pre-ACA to around 10% post ACA[iii].
Since many states did not expand Medicaid coverage, the magnitude in the reduction of uninsured rates vary widely across states. The Commonwealth Fund conducted a study that compared the reduction of uninsured rates from 2012 – 2016 among California / New York (full expansion of Medicaid to <138% FPL for adults), Florida (<33% FPL for adults), and Texas (<18% FPL for adults)[iv]. All four states provided market place subsidies from 138% to 400% of FPL. States that expanded Medicaid saw significant reduction in uninsured rates: California’s uninsured rate fell from 22% in 2012 to 10% in 2016, while New York’s uninsured rate well from 15% in 2012 to 7% in 2016. Florida, which was less lenient in Medicaid qualification (<33% FPL for adults) but provided market place subsidies, saw some reduction in uninsured rate from 25% in 2012 to 16% in 2016. Texas, which did not expand Medicaid, saw only minor reduction in uninsured rate from 29% in 2012 to 25% in 2016. Given the wide variation in coverage expansion among states, the uninsured remains a policy issue post ACA.
Although the national uninsured rate significantly declined post-ACA, the rate of bankruptcies due to medical debt did not analogously decline. In a follow up study by Himmelstein et al.[v], “the share of debtors reporting a medical contributor before the ACA’s January 1, 2014 implementation (65.5%) and after implementation (67.5%) was similar … both of these figures are close to the 62.1% estimate from the 2007 survey…”. One possibility may be due to the trend of increasing cost-sharing and high out-of-pocket spending by patients.
Trend of Higher Cost-Sharing Leads to Financial Hardship
Most people in the US access the healthcare system through insurance. They pay an up-front premium to the insurance company that allows risk sharing with a pool of other people paying premiums. These pooled premiums are used by the insurance companies to pay the aggregate incurred medical expenses of the pool, while retaining part of the pooled premium for operating expenses and corporate profit. Since most people are healthy most of the time, the risk sharing mechanism enables the pooled premiums to pay for expenses for the relatively small number of people who incur significant medical expense, while everyone in the risk pool is covered.
In most U.S. health insurance plan designs, the insured is responsible for part of the medical expense (cost-sharing) in addition to the premiums paid. Cost-sharing is mostly comprised of patient co-pays (up-front fee to access healthcare services), co-insurance (a percentage of the medical cost that the insured is responsible for), and deductible (the amount in which the insured is responsible for until the insurance company starts paying its share of costs). Most plans limit the financial liability of the insured by having an out-of-pocket maximum, the dollar amount after which the insurance company pays for all costs. Cost-sharing is designed to align the incentive of the insured with the payer – by having some financial “skin in the game”, the insured is likely to be more prudent with their healthcare utilization.
Despite the ACA, cost-sharing grew much faster than premiums and wages, due to the penetration of high deductible health plans (HDHP). Within the employer sponsored insurance population, average deductibles (a proxy for cost-sharing) increased by 82% from 2009 to 2017[vi], while average annual premium grew by 45%[vii], and median household income only grew by 5.5% over the same period[viii]. 51% of workers with single coverage faced a deductible of over $1000 in 2017, compared to 22% in 2009[ix]. 57% had an out-of-pocket maximum of over $3000 in 2018, compared to 31% in 2009[x]. The average out-of-pocket maximum is $3822[xi], relative to median household income of $60,336[xii]. Out-of-pocket costs continues to grow significantly faster than wage growth and take up an increasing share of household budgets. This trend is likely to continue.
ACA Expanded Coverage, but many were Underinsured.
While the ACA had led to historic gains in coverage, the trend of higher cost sharing caused a significant increase in the underinsured. According to the Commonwealth Fund, “people who are underinsured have high deductibles and high out-of-pocket expenses relative to their income. For lower-income families, this means spending 5% or more of income on healthcare, while for higher-income families it means spending 10% or more”[xiii]. It is estimated that 56 million Americans are underinsured in 2018. Underinsured rate rose to 29% in 2018 from 23% in 2014. 28% of adults receiving insurance through their employer are underinsured. 41% of underinsured adults reported deferring medical care due to cost, while 47% had difficulty paying their medical bills and debt[xiv].
These figures are highly troubling in the context of the average American family’s financial profile. According to the Federal Reserve, 40% of adults would not be able to pay for a $400 unexpected expense at all, and 60% would not be able to pay without borrowing or selling assets[xv]. In 2017, “over one-fifth of adults had major, unexpected medical bills to pay, with a median expense of $1200. Among those with medical expenses, 37% have unpaid debt from those bills… Over one-quarter of adults went without some form of medical care due to an inability to pay”[xvi].
Extrapolation of these figures to the Bay Area suggests that this is a significant issue. According to 2010 U.S. Census data[xvii], there are 2.6 million households and 7 million individuals in the Bay Area. Assuming conservatively that there is at least one adult in each household, the survey results by the Federal Reserve suggest that 20% or 520,000 Bay Area households has received an unexpected medical bill in a given year, with 37% or 175,000 Bay Area households going into debt from those bills. With a median expense of $1,200, the total dollar amount of surprise medical bill is up to $624 million, and unpaid debt of $231 million.
Medical Debt has Long Lasting Detrimental Impact to Economic Wellbeing
Unpaid medical bills will eventually be sold to a collection agency, at which point they become medical debt. The collection agency can report this medical debt to the credit agencies, which will have a large impact to the credit score. Just one collection account can cause a good credit score to drop 50 to 100 points, and medical debt is no exception[xviii]. Once on the credit report, medical debt can remain on the report for up to 7 years from the original delinquency date. Credit agencies have adjusted their policies to not display medical debt until they are 180 days past due, in order to give more time for individuals to resolve issues through their insurance and / or providers. Additionally, some credit agencies have adjusted their credit score algorithms to assign less weight to medical debt[xix]. Nevertheless, medical debt has the potential to negatively impact credit profile and scores.
A low credit score affects multiple aspects of a person’s private and public life, including many that don’t involve borrowing. First, getting a loan or credit (like utilities and cell phone) will become more difficult or impossible, and even when approved will likely come with higher interest rates and adverse terms (like a deposit requirement). Second, it will be harder for the individual to apply for a rental lease. Third, many employers require a credit check for job application and / or security clearance. Fourth, many insurance companies include credit score in determination of premiums. Since medical debt is considered as normal debt and can remain on the credit report for up to 7 years, it can have a long-lasting detrimental impact to the individual’s life.
Reduce or Eliminate Medical Bills before they become Medical Debt
The damage to the consumer has already begun by the time medical bills have been reported to collection agencies. At the very least, the consumer will be subject to debt collection that will likely cause mental strain. Furthermore, abusive collection practices can lead to far worse consequences. The really long-lasting detrimental impact occurs when the collection agency eventually reports the debt to the credit agencies, where adverse effects on everyday life can last up to 7 years. Therefore, it is much more beneficial to reduce or eliminate medical bills before they become medical debt.
Generally speaking, healthcare providers bill for services based off of a list price, commonly referred to as chargemaster. Depending on who is ultimately responsible for the patient’s financial obligation, the service provider will apply different billing schedules. For patients covered by government insurance like Medicare and Medicaid, the provider bills at reimbursement rates set by the government. For patients covered by insurance and are in-network, the provider bills at a contracted discount rate relative to the chargemaster price. For patients who are uninsured or out-of-network, the provider bills the chargemaster price due to lack of a contract, and collects as much as they can from the patient.
Due to the dysfunctional U.S. healthcare reimbursement system, the dollar amount of the medical bill sent to the patient is often grossly inflated, and has little correlation with how much the provider expects to receive as fair reimbursement for that service. In the case of balance billing, many of these bills may not be legal depending on whether the patient is protected by state laws. Finally, medical bills sent to patients often contain numerous errors. These are potential intervention points in negotiating reduction or elimination of medical bills, before they become crippling debt.
First Intervention Strategy: Negotiating charity care or discounted rate in medical services for uninsured / underinsured patients.
Reimbursement for U.S. healthcare services is based on a patchwork of contracts between payors and providers. Providers start with a list price of charges for services, commonly known as chargemaster. Payors negotiate discounts from the chargemaster price through in network contracts. The chargemaster is often vastly inflated and is commonly used as a tactic by providers to apply negotiation leverage against payors, since payors and patients risk incurring inflated charges by being out of network. According to a study by USC / Brookings Institute[xx], chargemaster rates range from 200 – 400% higher than Medicare allowable rates. For most Americans who are covered by insurance, chargemaster pricing is meaningless because they pay the discounted rate negotiated by their insurance companies. However, there are three categories of patients that are subject to inflated chargemaster prices:
The uninsured: They do not have access to negotiated discount rates since they do not have insurance.
Patients who see out-of-network providers: They do not have access to negotiated discount rates since there is no contract between the provider and their insurance company. This often occurs in emergency situations where the patients do not have a choice to see an in-network provider.
The underinsured: While they have insurance coverage and have access to negotiated discount rates, they cannot afford to pay the high deductibles.
Health policy fails to address this problem because U.S. healthcare reimbursement is a free market system based on contracts. Healthcare providers are free to set their chargemaster prices and negotiate discounts with the insurance companies. This leads to a high degree of variability in chargemaster prices for similar services in local markets, and opacity in actual prices paid by payers and patients. For the vast majority of the population that are covered by commercial or government insurance, they have access to discounted contract rates and are thus not affected. For the small minority of the population who are uninsured or out of network, they are exposed to risk from being charged at the inflated chargemaster rate. Unfortunately, there is currently no policy solution at the federal level. The ACA was meant to expand insurance coverage for the entire nation through Medicaid and Health Insurance Exchanges, until the Supreme Court ruled that states had the option to not expand Medicaid. Current protection of this population is dependent on state law, specifically whether the state had enacted patient protection laws. For the states that had established such laws, they usually only require providers to have a charitable policy with eligibility usually tied to FPL, with varying levels of relief. Furthermore, patients are often not aware of the existence of such charitable policies, as providers are incentivized to maximize revenue through inflated pricing. While it is understandable that the government does not want to interfere with free market-based contract negotiations, the varying patchwork of state level protection for patients without contracted discount rates leads the very real problem of surprise medical bills. The patients exposed to chargemaster pricing are likely to be the most financially vulnerable population in the nation. A reimbursement system that charges the highest rates to the most vulnerable is inherently inequitable and unjust.
CALMBA will deploy a combination of financial, legal, and medical methods to negotiate medical bills down to reasonable levels. The initial effort will focus on California, but the infrastructure is theoretically scalable nation-wide.
Second Intervention Strategy: Assisting patients with balance billing by out-of-network providers
When insured patients see an out of network provider, either in an emergency or non-emergency situation, they are often billed at vastly inflated rates due to the lack of a contract between the provider and the insurance company. This is often used as a negotiation tactic by providers to get better reimbursement. The out-of-network rate has no economic basis and is artificially inflated for negotiating leverage with the insurance company, but often lead to large surprise medical bills for patients.
The prevalence of visits leading to potential out-of-network surprise medical bills is significant:
1 in 5 emergency visits has the potential to result in out of network charges[xxviii];
1 in 10 chance during elective procedure where the patient is seen by out of network radiologist[xxix];
50% of ambulance rides and 69% of air ambulance rides were out of network[xxx].
Furthermore, the prevalence of out-of-network surprise medical bills is similar among different insurance plan designs, with 7.8% for HMOs. (Health Maintenance Organizations), 10.4% for POS (Point of Service), and 9.0% for PPO (Preferred Provider Organizations)[xxxi]. Surprise billing can occur regardless of network design.
Typically, physicians enter into network contracts with insurance companies in order to trade lower price for higher volume due to patient preference from network plan designs. However, this dynamic does not apply to specialties where the patient does not have the chance nor choice to choose alternative in-network providers. These are often facilities-based specialties where the physician(s) contract with the hospital directly to provide services. Even when a patient chooses an in-network facility, the providers that care for them may be out-of-network. For these physicians, there is little incentive for them to enter network contracts with insurance companies, therefore they are often able to bill at much higher out-of-network rates. These physician specialties typically include emergency room physicians, anesthesiologists, radiologists, pathologists, assistant surgeons, hospitalists, and neonatologists.
According to a study by the USC / Brookings Institute[xxxii], specialties with the highest rate of surprise out-of-network billing typically get paid significantly higher contracted rates relative to Medicare payment rates compared to other specialties.
Facilities-based physicians (specialties with high rates of surprise bills)
Emergency Room physicians receive 250 – 300% of Medicare;
Radiologists receive 200% of Medicare;
Anesthesiologists receive 350% of Medicare;
All other physicians (as baseline comparison)
Non-emergency / non facilities-based physicians receive 115 – 200% of Medicare;
Office Visits provided by specialists receive 117% of Medicare;
Average payment for physicians nationwide is 118% of Medicare.
While Medicare payment rate is not necessarily an accurate reflection of the actual cost in delivering service, the consistent discrepancy in significantly higher rates across specialties most often involved with out-of-network surprise bills is difficult to justify. These statistics reflect the economic reality of aggressive billing practices by these specialties due to a breakdown in normal market dynamics.
Health plans differ in how they reimburse for out-of-network services, but they are usually based on a percentage of one of two fee schedules: the usual and customary rate (UCR), and Medicare[xxxiii]. Most of the time, the payment by health plan is significantly lower than the out-of-network billing rate by the provider. Since there is no contract between the health plan and the provider, the health plan is not required to pay the full billed rate by the provider. Patients are responsible for the shortfall between the provider billed rate and the health plan payment rate. This shortfall is commonly referred to as a balance bill, and it is the major source of surprise bills from out-of-network providers.
Most balance bills occur when patients receive care from facilities-based physicians who are out-of-network, where the patient has little to no choice in verifying network status nor the alternative in choosing an in-network provider. For example, the patient could have done everything possible in selecting an in-network facility and surgeon for surgery, but could still be subject to balance billing if the anesthesiologist and radiologist on staff that day were out-of-network. Balance bills are an artifact of the dysfunctional reimbursement dynamic between insurance companies and facilities-based specialties, but patients end up being the unfortunate casualty by receiving these surprise bills. To make matters worse, health plans have little incentive to assist patients in balance billing matters, since most of the time these are out-of-network providers where no contract exists. As a result, patients are often left on their own to address these surprise bills.
Health policy fails to address this problem primarily due to statutory authority of state regulators. While state can enact laws that prohibit balance billing, such laws will only apply to insurance plans regulated by the department of insurance in the respective state. Employer sponsored insurance in most cases are regulated by the U.S. Department of Labor under The Employee Retirement Income Security Act (ERISA) of 1974 due to federal preemption. Since there is currently no federal policy on balance billing, people covered by employer sponsored insurance, or 56% of the US population, are subject to balance billing risk. Even for states that have enacted laws against balance billing, the protection usually does not comprehensively cover all potential sources of balance billing.
There are financial and legal options to assist these patients. CALMBA will deploy financial, legal, and medical methods to help patients negotiate balance bills.
Third Intervention Strategy: Identifying errors in medical billing due to the complex nature of the US healthcare reimbursement system.
In order for providers to be reimbursed by the payers, they must first translate the clinical interaction and services rendered into alphanumeric codes. US healthcare reimbursement is based primarily on two coding systems: The 10thVersion of the International Classification of Diseases (ICD-10-CM), which corresponds to the patient’s injury or sickness; and the Current Procedure Terminology (CPT), which corresponds to the procedures that are performed for the patient. These codes are then used by medical billers to create claims that are sent to the insurance company. The system of codes and claims allow providers and payers to communicate with each other in a common language regarding complex clinical procedures and services.
As an example, let’s assume a patient visited the doctor with a sore throat. Upon examination, the doctor suspected a strep infection, and ordered a rapid test. With a positive diagnosis of strep throat, the doctor prescribed amoxicillin, a common antibiotic. The medical coder will review the clinical report and translate the interaction to ICD-10-CM code of J.02.0 for strep throat, CPT code 87880 for the rapid strep test, and CPT code 00781-6401 for prescription of orally administered amoxicillin. The medical biller will take these codes and create a medical claim, which contains an itemized list of procedures, services, and costs that is sent to the payer. Upon recipient of the claim, the payer will perform a process called claims adjudication, where it will review the claim for accuracy and also determine how much of the claim it will pay for based on contracted rates, plan design, and benefit coverage. Once the claim is adjudicated, it is sent back to the medical biller for processing. The medical biller will determine how much the patient is responsible for after insurance payment, send the bill to the patient, and attempt to collect.
Given the complexity in translating healthcare interactions into a system of codes and bills, there are numerous chances for billing errors to occur during the process. This does not necessarily imply ill will by the participants, as it is normal for errors to occur within complex interactions. There is no standard definition of billing error. From a payer’s perspective, the U.S. Office of Inspector General (OIG) defines billing error as “noncompliance with Medicare billing requirements”[xxxvii]. The same concept also applies for commercial and government claims that do not comply with their respective payer billing requirements. From a provider’s perspective, a billing error can mean not correctly coding for the procedure leading to lost revenue for the provider. From a patient’s perspective, it simply means bills and charges that they should not be responsible for, given their particular circumstances.
Due to the varying definition in medical billing error, there is no comprehensive and authoritative statistics on the issue. Providers naturally believe in a lower prevalence of billing error, as the American Medical Association (AMA) estimated that only 7.1% of paid claims in 2013 contain an error[xxxviii]. On the other end of the spectrum, patient advocacy groups and for-profit bill negotiators like Medical Billing Advocates of America and CoPatient, put the error rate at 75 – 80%[xxxix]. The Wall Street Journal, based on a study by University of Minnesota Professor Stephen Parente, estimates that 30 – 40% of bills contain errors[xl]. Finally, a study by NerdWallet found that 49% of Medicare claims contain errors, leading to overpayment of 26.4% to providers[xli].
The major areas where medical billing errors can occur are:
Simple honest mistakes. Medical coding and billing is a very complex and laborious process, and mistakes are unavoidable. For example, examination of a limb can be coded twice, and coding which limb was examined could be mislabeled. Nevertheless, these honest mistakes can still lead to overbilling of patients.
There are many grey areas in interpreting clinical interactions and turning them into procedure codes. A simple procedure like the strep throat example above is relatively straight forward. A trauma in the emergency room is with multiple modalities and physician specialties will be subject to a lot of interpretation during the coding process. These grey areas can lead to upcoding, which is the practice of assigning inaccurate and higher billing code in order to increase reimbursement.
The translation of procedure codes into claims can introduce errors into the process. The medical biller often only has the medical coding report but not the actual chart, as their responsibility is to translate the coding report into a bill. Therefore, the itemized bill itself may not be an accurate reflection of actual services and supplies rendered.
The claims adjudication process at the payer can also introduce errors. The payer may incorrectly reduce or deny valid claims based on their interpretation of benefits and coverage, especially for complex cases.
Health policy is not the ideal solution to solving medical billing errors, as it is a multidimensional systemic process problem. CALMBA will try to identify and eliminate billing errors on the patient’s behalf, by hiring medical coders / billers to review medical bills and outsource complex cases as needed to experts.
[i]Himmelstein, D. U., Thorne, D., Warren, E., & Woolhandler, S. (2009). Medical Bankruptcy in the United States, 2007: Results of a National Study. The American Journal of Medicine, 122(8), 741-746.
[ii]Remarks of President Barack Obama -- Address to Joint Session of Congress (2009).
[iii]Kaiser Family Foundation. Key Facts about the Uninsured Population (2018).
[iv]Gunja, Munira Z., Collinsm, Sara R., Doty, Michelle M., & Beutel, Sophie. Insurance Coverage, Access to Care, and Medical Debt Since the ACA: A Look at California, Florida, New York, and Texas.
[v]Himmelstein, D. U., Lawless, R. M., Thorne, D., Foohey, P., & Woolhandler, S. (2019). Medical Bankruptcy: Still Common Despite the Affordable Care Act. American Journal of Public Health, 109(3), 431–433.
[vi]Kaiser Family Foundation. Average General Annual Health Plan Deductibles for Single Coverage, 2006-2017 (2017).
[vii]Kaiser Family Foundation. Average Annual Premiums for Single and Family Coverage, 1999-2017 (2017).
[viii]Guzman, Gloria G. Household Income: 2017. American Community Survey Briefs., U.S. Census Bureau (2017).
[xi]Kaiser Family Foundation. Among Covered Workers With an Out-Of-Pocket Maximum for Single Coverage, Average Out-Of-Pocket Maximums, by Firm Size, 2017 (2017). Retrieved April 24, 2019.
[xii]See Note viii.
[xiii]The Commonwealth Fund. Underinsured Rate Increased Sharply In 2016; More Than Two Of Five Marketplace Enrollees And A Quarter Of People With Employer Health Insurance Plans Are Now Underinsured (2017).
[xiv]The Commonwealth Fund. Underinsured Rate Rose From 2014-2018, With Greatest Growth Among People in Employer Health Plans (2019).
[xv]The Federal Reserve. Report on the Economic Well-Being of U.S. Households in 2017 (2018).
[xvii]Bay Area Census.
[xviii]Detweller, Gerri. How Medical Debt Can Impact Your Credit Score (2018).
[xix]Smith, Stacey. Can Medical Bills Affect Your Credit Report (2019)?
[xx]Alder, Loren., Fiedler, Matthew., Ginsburg, Paul B., Hall, Mark., Trish, Eric., Young, Christian Linke., & Duffy, Erin. State approaches to mitigating surprise out-of-network billing (2019).
[xxi]Richman, B. D., Kitzman, N., Milstein, A., & Schulman, K. A. (2017). Battling the chargemaster: A simple remedy to balance billing for unavoidable out-of-network care. The American Journal of Managed Care, 23(4), e100.
[xxii]Assem. Bill 774, 2005-2006 Reg. Sess. (Cal. 2006).
[xxv]Internal Revenue Service. Financial Assistance Policy and Emergency Medical Care Policy – Section 501(r)(4).
[xxvi]Internal Revenue Service. Limitation on Charges – Section 501(r)(5).
[xxvii]Internal Revenue Service. Billing and Collections – Section 501(r)(6).
[xxviii]Cooper, Zack, Fiona Scott Morton. 2016. “Out-of-network emergency-physician bills—an unwelcome surprise.” N Engl J Med 2016; 375:1915-1918.
[xxix]Garmon, Christopher, Benjamin Chartock. 2017. “One in Five Inpatient Emergency Department Cases May Lead to Surprise Bills.” Health Affairs. Vol 36. No. 1
[xxxii]See Note xix.
[xxxiii]Fair Health Consumer. Types of out-of-network reimbursement (2019).
[xxxv]C.C.R. § 1300.71.39
[xxxvi]Assem. Bill 72, 2015-2016 Reg. Sess. (Cal. 2016).
[xxxvii]Centers for Medicare and Medicaid Services. Medicare Claims Processing Manual (2018).
[xxxviii]Grant, Kelli B. It’s Time to Get a Second Opinion Before Paying That Medical Bill (2016).
[xl]Silver-Greenberg, Jessica. How to Fight a Bogus Bill (2011).
[xli]Lamontagne, Christina. NerdWallet Health Study: Medical Debt Crisis Worsening Despite Policy Advances (2014).