Surprise Medical Bills: Costs, Consequences, and Solutions

Annual premiums rose 5 percent to an average of $20,576 for an employer-provided family plan in 2019, according to a survey of employers by the nonprofit Kaiser Family Foundation. On average, employers assumed 71 percent of that cost, and employees paid the rest.(2)

There is much confusion regarding balance billing and surprise billing in healthcare. Surprise billing, the receipt of an unexpected invoice for an amount above an expected balance bill, has dramatically increased in recent years.(3) Reports of unexpected charges equal to or exceeding a family’s annual income have become commonplace. State and federal legislatures are exploring solutions that will affect all patients, providers, and payers rather than focusing on the providers contributing to these problems. If the problem providers are not investigated, the proposed solutions will likely result in increased costs for all.

Balance billing is the provider’s charge after the insured patient’s health plan has paid according to the plan benefits. Some plans do not include the deductible and coinsurance within balance billing, but in general, balance billing covers the insured patient’s obligation to pay for any items or services not paid for by the plan. This may be due to the individual (or family) component of the plan’s benefits or the particulars of the plan language, e.g., “items not medically necessary,” as that term is defined in their plan. For example, the plan may have the following benefits: In-network — $1,000 deductible and 80 percent coinsurance with an out-of-pocket maximum of $5,000 for an individual (see Table 1).

Billing Scenario

Bob Smith’s in-network surgeon scheduled a procedure at the surgeon’s out-of-network ambulatory surgery center (ASC). The surgeon or staff assured Bob that the facility “will bill as though it is in-network” or that “the facility will accept whatever your plan pays.” Depending on the surgical procedure, there also may be charges from an anesthesiologist, radiologist, certified registered nurse anesthetist, physician assistant, assistant surgeon, laboratory, intraoperative monitoring company, pharmacy, and others who will participate in some aspect of the insured patient’s surgery at the facility. One or more of these individuals or services may be out-of-network, even if the ASC is in-network.

After Bob’s surgery, the surgeon bills $10,000. Bob’s insurance has contracted an in-network discount of 10 percent, so Bob’s plan’s allowable is $9,000. Based on the benefits outlined in Table 1, the plan applies the $1,000 deductible then pays 80 percent of the remaining $8,000, or $6,400. The surgeon balance bills Bob $2,600 ($1,000 deductible and $1,600 coinsurance), making Bob’s out-of-pocket obligation $3,400.

Bob receives three additional bills: $20,000 from the ASC, $2,000 from the anesthesiologist, and $3,000 from the pathologist. Based on the Explanation of Benefits (EOB) from the surgeon’s bill, Bob knows that he has met his in-network deductible of $1,000 and only has $3,400 more in-network out of pocket, so he is prepared to pay $3,400 and expects his plan to pay the remaining $21,600.

However, because the anesthesiologist and pathologist are out-of-network and sent their invoices before the ASC did, the plan correctly applies the out-of-network $5,000 deductible to their bills. The plan then applies the out-of-network coinsurance to the ASC bill, paying 50 percent of the remaining $20,000, or $10,000. These providers then send Bob bills for the remaining $3,000, $2,000, and $10,000. These balance bills, totaling $15,000, are surprise bills.

The surgeon, perhaps being charitable, does not balance bill the $1,000 deductible or $1,600 coinsurance. The ASC and its providers may also write off their surprise balance bills. However, unless these providers have the permission of the plan sponsor or the third-party administrator (TPA) acting under the discretionary authority of the plan sponsor, the providers who do this are committing insurance fraud. (There are exceptions, such as for proven financial hardship.)

In the insurance contract, the insured agrees to pay a specified portion of his medical bills. The TPA hired by the employer who established the Employee Retirement Income Security Act (ERISA) trust is obligated to apply the plan benefits to the amount the insured is obligated to pay. In the example above, the surgeon, by being charitable, has reduced his actual fee to $7,400. The plan’s allowable is therefore only $6,400. After the $1,000 deductible and $5,120 (80 percent) coinsurance, Bob by contract should get a balance bill of $1,000 + $1,280, or $2,280.

Abusive Versus Fraudulent Billing

The above example illustrates some of the problems with determining healthcare fraud and abuse, as well as addressing complaints about the healthcare system.

Abuse occurs when a provider bills an exorbitant fee for an aspirin and codes it as aspirin. Fraud occurs when a provider bills for an aspirin but intentionally codes it as ampicillin. Fraud also occurs when a provider sends an invoice to an insurance plan for $10,000 but tells the patient that he does not have to pay his deductible or coinsurance. Many legal experts believe that under ERISA, the provider, by rendering services to an ERISA plan participant, becomes a party-in-interest and can be deemed a fiduciary to the employer’s ERISA trust. As such, the provider then has legal obligations to act solely in the interests of the plan, its participants, and beneficiaries.

Fraud and abuse in the Medicare population accounts for $48.5 billion to $83.9 billion, with an estimated savings from intervention of the fraud estimated to range from $22.8 billion to $30.8 billion annually.(4)

Third-Party Administrators

Rather than buying health insurance, some employers establish a health plan trust under ERISA, to which the employer and employee contribute. The trust is not insurance; however, the trust may purchase specific or aggregate reinsurance. The employer may hire an independent entity, a TPA, and give that entity discretionary authority to interpret the plan language and to adjudicate claims.

The employer has broad latitude regarding plan benefits and language. For example, some ERISA plans may cover a certain procedure while others may not. Definitions for medical necessity or experimental treatment may differ among plans. This is confusing to providers who think that because they see the same TPA name on two insurance cards that the benefits and language are the same; in fact, the insured patients may be covered by two different ERISA trusts with different benefits and language, administered by the same TPA. In other words, the TPA covered this treatment for Bob but denied it for Sally.

This scenario is not an outlier; to the contrary, it is the norm. According to an article published in JAMA, in a “retrospective analysis of commercially insured patients who had undergone elective surgery at in-network facilities with in-network primary surgeons, a substantial proportion of operations were associated with out-of-network bills,” roughly 1 in 5.(5)

As the multiyear path to legislative prohibition of surprise billing and the elimination of unintended consequences wends its way through the minefield of lobbyists and stakeholders, we addressed the question of what can be done currently. The study published recently in JAMA looked at the network status of the commercially insured; our study focused on lowering cost and mitigating surprise bills for actual patients who were beneficiaries of self-funded ERISA plans.

Methods

Two TPAs with a long history of successfully administering ERISA health plans asked us to review all out-of-network claims in excess of $10,000. These claims were submitted over a two-year period after adjudication but before payment, along with proposed EOB information.

There were three process components: administrative, clinical, and financial. Our administrative review encompassed federal mandates, state mandates, and plan parameters as defined in group-specific plan language. Our clinical review included review of the billing code(s) in the context of the operative report, medical record, and associated invoices by other providers on the same date of service. Our financial analysis included review of the billing codes, modifiers, and itemized charges in the context of the plan’s allowable rate versus our personally negotiated rate or recommended rate that was accepted by the provider.

Allowable is defined as “what the TPA was preparing to pay.” This included the TPA claim processor’s application of plan benefits and parameters; preferred provider organization (PPO) network discounts when in-network; usual, customary, and reasonable (UCR) when out of network; and code modifier(s) and any other plan reductions.

Cost reduction is defined as the TPA’s allowable minus the amount the TPA actually did allow after our review and after provider appeals, if any, were settled. All cost reductions reported are real, not theoretical.

We reviewed all submitted claims, their related EOBs and benefits, and, when necessary, the plan language, operative note, medical records, itemized invoice, associated invoices, and PPO repricing. After review, we took one or more of the following actions:

1. Corrected coding and billing errors.

2. Called the provider and spoke with the billing staff, supervisor, manager, or physician.

3. Negotiated payment with the provider or provided a recommendation for payment.

4. Called the provider to address the issue, if appealed.

Results

We reviewed 656 claims — 12 (2 percent) were returned to pay according to the plan and 644 (98 percent) were reviewed and further actions taken. Of those, 535 (83 percent) were out-of-network and 109 (17 percent) were in-network (see Table 2). All 644 claims had issues, notably, improper code(s), lack of modifier(s), unbundling, mismatched codes among providers, and double billing. Some examples of unbundling include billing for two codes when one code would cover the services, such as billing for 20 blood tests instead of a multi-chemistry panel, and a facility billing for a surgical CPT code but also billing for the trays, gauze, and sutures.

Of the 644 claims, 324 (50 percent) were successfully negotiated; 274 (43 percent) were paid with a recommended allowable that was accepted by the provider. Many of these 615 claims also had coding problems; 46 claims (7 percent) were recoded for accuracy (see Table 3).

The total charge on 644 claims was $25,172,425. The total allowable, i.e., what the plan was about to pay, was $20,797,697. After our intervention, the total allowable was reduced by 70 percent to $6,200,668. The total cost reduction from allowable was $14,597,028. Of this, $12,433,724 was on out-of-network claims and $2,163,304 was on in-network claims, a 71 percent and 69 percent reduction from allowable, respectfully, as shown in Table 4. All 10 provider appeals were directed to us and were resolved by us with no additional payments and no surprise bills to the insured patients. Balance billing was rare.

There was a wide variation in cost reduction by provider type, ranging from a low of 36 percent for durable medical equipment to a high of 95 percent for hemodialysis. The cost-reduction percentage correlated with the type of provider likely to generate higher invoices (see Table 5).

There was a similar distribution of claims above $50,000, which was about half that between the amounts of $10,000 and $50,000 (see Table 6). Even though we were initially asked to review only out-of-network claims above $10,000, successful out-of-network cost reductions led to additional in-network and lower dollar claims being sent for review and being included in this study. In total, 235 (36 percent) of the claims reviewed were below $10,000.

Case Examples

The following are examples of cases that we reviewed using the process described in the Methods section. Examples were chosen to illustrate that the coding and billing errors and extremes of pricing occur across all specialties, entities, and provider types.

Heart Rhythm Monitor – A 50-year-old mechanic with a history of a single transient ischemic attack (TIA) was referred to a cardiologist for cardiac rhythm monitoring. The cardiologist referred him to an ASC where the cardiologist inserted a subdermal Biomonitor 2. The procedure took 4 minutes 49 seconds.

Cardiologist billed: $2,025. ASC billed: $91,798. Allowable: $93,823. Paid: $7,971. Cost reduction: $85,852.

Cardiac Catherization – A 65-year-old retiree with new onset chest pain was referred for a cardiac catheterization. A single stent was placed.

ASC billed: $41,090. Allowable: $41,090. Paid: $5,664. Cost reduction: $36,245.

Pacemaker Insertion – A 58-year-old engineer with an irregular heartbeat was referred to an ASC for a pacemaker insertion.

ASC billed: $387,800 ($239,897 pacemaker, $130,272 catheterization, other facility fees). Allowable: $387,800. Paid: $99,380. Cost reduction: $288,420.

Oral Medication for Hepatitis – A 31-year-old nurse with hepatitis C was prescribed Epclusa. The pharmacy benefit manager’s in-network pharmacy in its pre-authorization request stated that it did not have a generic formulation and quoted the brand price for the 3-month course. We found a neighborhood pharmacy willing to dispense the generic.

Quoted: $72,670. Allowable: $72,670. New price: $25,943. Cost reduction: $46,727.

Laboratory – A 24-year-old graduate student was admitted to an outpatient drug rehabilitation facility where he was required to have daily urinary drug screens that were sent to multiple laboratories.

Laboratory billed: $38,716. Allowable: $38,716. Paid $0. Cost reduction $38,716.

Dialysis – A 44-year-old parking attendant with end stage renal disease began receiving in-center hemodialysis. First month billed: $135,323. Allowable: $135,323. Paid: $4,500. Cost reduction: $130,823. Note, this would be a cost reduction of $1,568,876 per year.

Free-Standing Emergency Room – A 33-year-old homemaker visited the ER because of a draining boil on her lower abdomen. The area was cleaned and bandaged. She was given an injection for mild pain, IV vancomycin, and observed for 12 hours “so another IV dose could be given.”

ER Billed: $33,268, of which $24,000 was the 12-hour “observation” fee.

Total invoice: $38,716. Allowable: $38,716. Paid $2,000. Cost reduction: $31,268.

Two Physicians, Two ASC Invoices – A 48-year-old salesman with chest pain was referred for a cardiac catheterization. ASC billed: $44,040 for the cardiac catherization. A second cardiologist then placed a single stent. The ASC sent a separate bill for $95,685. Total ASC billed: $139,725. Allowable: $139,725. Paid: $19,523. Cost reduction: $120,202.

Breast Reconstruction Surgery – A 58-year-old executive was referred for bilateral breast reconstruction following double mastectomy for breast cancer. The surgical team included two physicians and a PA. The reconstruction was performed in two stages.

The hospital, surgeons, and PA billed: $613,202. Allowable: $613,202. Plan paid: $215,061. Cost reduction: $398,141.

Implant Surgery – A 56-year-old high school soccer coach was referred for knee replacement surgery.

ASC billed: $137,535. Allowable: $137,535. Paid: $17,657. Cost reduction: $119,878.

Implant Sizing – A 62-year-old golf pro was referred for knee replacement surgery. We requested ASC itemization and the operative note and learned that the surgeon tried one implant, found it was too small, and tried a second implant, which fit. ASC billed for both implants. After our call to the ASC, the invoice for the unused implant was removed from the bill, giving a cost reduction of $5,955.

Spine Surgery – A 61-year-old cotton mill loom manager had laminectomy surgery.

Surgeon billed: $247,033. Allowable: $159,197. Paid: $8,216. Cost reduction $150,980.

Surgical Coding – A 29-year-old computer programmer was referred for hand surgery. The surgeon billed $16,798 for five CPT codes. An assistant surgeon billed $14,524 for four CPT codes. The ASC billed $41,900 for four CPT codes, $15,760 for one implant, and $3,513 for 10 additional line items on the bill. We requested the itemized invoice and operative note. All surgical and facility services except the implant should have been billed under a single code.

Total billed: $92,495. Allowable: $32,422. Paid: $5,125. Cost reduction: $27,297.

Neurostimulator – A 46-year-old truck driver had a neurostimulator implanted for chronic back pain.

ASC billed: $201,949. Allowable: $121,169. Paid: $47,971. Cost reduction: $73,197.

Pain Management – A 55-year-old carpenter was advised to have epidural corticosteroid injections for his neck pain. The procedure done under monitored anesthesia care took eight minutes. The individual underwent five sessions over eight months. ASC billed: $396,220. Allowable: $309,767. Paid: $14,328. Cost reduction: $295,439.

Neuromonitoring – A surgeon recommended intraoperative neuromonitoring during a spinal procedure. The physician who interpreted the neuromonitoring submitted a bill for $46,976. The surgeon-owned partnership submitted an invoice for $15,146 for the technical component.

Total IOM billed: $62,122. Allowable: $22,125. Paid: $3,079. Cost reduction: $19,045.

Hospital Infusion Suite – A 22-year-old college student with a rare genetic disorder was a patient of an endocrinologist whose practice was owned by the hospital. The patient was prescribed twice-a-month medication given at the hospital infusion suite. Our solution was to call both the insured and physician for permission to move the infusion from the hospital to the patient’s home.

Hospital billed: $197,039. Allowable: $197,039. Home infusion: $50,000. Cost reduction: $147,039.

Discussion

Healthcare planning, policy, and economics are complex. Treating physicians and other clinicians make buying decisions, such as which tests to order or drugs to prescribe. Providers of healthcare services (e.g., hospitals, ASCs, physicians, and pharmacies) are the implementers and patients are the recipients. People, companies, and governments are the payers. Insurance companies, TPAs, and governmental entities are the administrators. Self-funding companies, reinsurance providers, and taxpayers are the risktakers.

Because of the increasing number of individuals and entities involved in the care of patients, all aspects of health costs are fraught with confusion and abuse. Further complicating matters, information is exchanged among these healthcare participants via codes (e.g., CPT, HCPCS, DRG, EOB), administered according to variable contracts (benefits and plan language) and procedures (TPA policies and software algorithms) by humans of variable education and training, with variable degrees of risk or authority. Physicians and medical students are inadequately trained in medical economics, and dishonest providers corrupt the system. Traditional healthcare services have turned into businesses with the primary goal of maximizing profits.

We found disturbing patterns of practice errors, overcharges, and deflections. Most of these could only have been detected by specialty physician reviewers who also had experience managing practices, ASCs, and hospitals. Most of the claims reviewed led to a telephone conversation between us and the provider’s physician, practice manager, or billing personnel.

We typically were able to reduce the billed amount by initially asking the provider to explain its charges. This was usually met with a “thank you” and a reduction in charge amount. Common comments included:

“We have never had a physician call us about an invoice.”

“That’s the way we have always billed.”

“You are the first person to ever ask that question.”

“The network told us to up our charges.”

“That’s what workers’ comp pays for that code, so we can’t lower our invoiced charges.”

The reasons for the cost reductions are outlined in Table 7. The most common reason for the reduction was personal negotiations between us and the provider. For example, when the provider responded with “This is a very complex procedure,” we responded with “Yes, I know, I’ve done hundreds myself,” and they followed with “What do you think would be a fair reimbursement?”

Excess billing practices were common. A review of several dozen suspect claims made it apparent that certain corporations and individuals have learned to maximize revenue by setting in-network patient entry points and referring to their out-of-network connections. We used Corporation Wiki (www.corporationwiki.com ) to determine the extent of connectivity among individuals and corporations that own multiple entities (see Figure 1). The individual and corporation entered are in red; their linkages are in blue.

Figure 1. Connectivity among individuals and corporations

Those on all sides of a PPO (the PPO administrator, PPO provider, and providers not in a PPO) have learned to use PPO contracts to their financial advantage at the expense of the ERISA trusts.

During conversations with providers, we often heard a variation of “The reason we charge this amount is that the PPO network told us to increase our charges by X percent so that the PPO could add us to their network and we would still get our regular fee.” For example, an ASC that typically charges $1,000 could raise its charge to $1,500. The PPO contracts at a 33 percent discount. The provider still receives $1,000 but is paid at the better in-network benefits. Plans pay access fees to PPOs so they can pay the inflated PPO discounted rates.

The most egregious example of PPO abuse in this study involved dialysis. After receiving the $4,500 payment for the first month, the dialysis provider signed a contract with the insured patient’s PPO that promised a 15 percent discount. So the employer’s group health plan was obligated to pay $115,024 per month instead of $4,500. By simply joining the plan’s network, this self-funded employer was obligated to pay the dialysis provider $1,380,288 more per year.

One national PPO contract states, “Company may not apply any bundling or clinical editing logic to (PPO name) contracted facility claims from participating providers […] Company acknowledges and agrees that, in some instances, payment to participating providers in accordance with participating provider organization agreements may result in payment of amounts in excess of billed charges.”

In other words, nothing can be done. Neither the administrator nor the employer nor its auditors nor the authors can review this PPO’s provider’s repriced invoices for any reason. Most ERISA plans incorporate Centers for Medicare & Medicaid Services (CMS) payment guidelines, yet some PPO contracts prohibit application of modifier reductions. If challenged, the PPO will threaten to remove the network from the entire plan, even all the TPA’s client’s plans.

These PPO contracts force payment for the $5,955 duplicate knee implant, $850 oxygen sensor, $13,240 physician discharge fee, $462 syringe, $46 alcohol wipes, and $1,380,288 dialysis charge in the examples above. We have encountered PPO discounts as low as 1 percent, i.e., requiring payment at 99 percent of billed charges, with no audit allowed.

This transition of preferred provider organizations to provider protection organizations (or provider preferred organizations) is a primary cause of increased healthcare costs. The PPO claims comprised 17 percent of claims reviewed. By comparison, 93 percent of all claims adjudicated by these TPAs were from providers in PPOs. The potential aggregate cost reduction from having specialty physicians review all PPO claims is many times greater than shown in this study.

Of the 535 out-of-network claims totaling $32,269,633, the plan allowable amount of $17,559,497 reflected a $21,269,633 (17 percent) reduction from the original invoiced amount. This reflected normal adjudication using modifier reductions and UCR repricing based on information available on the claims submitted. Following our intervention, there was an additional 71 percent cost reduction ($12,433,724) over and above the plan allowable.

Even though the focus of this study was out-of-network provider invoices, 109 of the claims referred were in-network. All had been repriced by the PPO when referred to us and reflected a 17 percent reduction based on the PPO’s repricing using contracted discounts and modifier reductions based upon information available on the claims submitted. All 109 PPO claims had problems, notably improper codes, lack of modifiers, unbundling, and improper billing. Calling the provider and discussing the billing errors or omissions, and occasionally negotiating directly, achieved a further cost reduction of $2,163,304 (67 percent) over the PPO discount.

On negotiated claims, the remaining allowable was so much lower than the initial allowable that the TPAs and employer groups nearly always waived any remaining deductible and coinsurance amounts to ensure there would be no balance billing to the patient. Again, there were no surprise bills on any of the 644 claims.

Impact on One Employer’s ERISA Health Plan

During a one-year period, 22 out-of-network facility claims totaling $1,030,918 were reviewed and are included in this study. A 78 percent cost reduction ($799,570) was achieved with no balance billing or surprise billing. This represented a cost reduction of $496 per employee or $394 per covered life with spouses and dependents (see Table 8).

Extrapolation of Cost Reduction Data to ERISA

According to the U.S. Department of Labor, ERISA encompasses 2.4 million employer health plans and covers about 83,000,000 insured.(6) Application of the methods used by the authors could potentially save self-funded plan sponsors (employers) about $33 billion annually (see Table 9). Since the majority of claims processed are in-network, if the PPO contract audit prohibitions were removed and all PPO claims were eligible for review, the savings would be about $83 billion annually (see Table 10). This is in addition to the savings directly to the patient from balance billing and surprise billing.

Conclusion

Despite an extensive review of the literature on healthcare costs, we were unable to identify any similar studies. The implications of our findings are profound. The $14,597,028 million cost reduction achieved by the process described was accomplished entirely by having specialty physicians correct provider billing and PPO repricing, and negotiate high, abusive, and possibly fraudulent charges to a more reasonable amount.

So-called “soft-dollar” savings, such as one less day in the hospital, better medication compliance, or screening colonoscopy, were not included in our data. Also not included was the amount saved by the patient. There were no surprise bills, and in nearly all cases the patient’s deductible and coinsurance were also negotiated away or waived by the plan.

While most insurance companies employ physicians as medical directors, these physicians are focused primarily on medical necessity, underwriting, and excess loss prevention. TPAs administering ERISA plans are generally too small to have a medical director, and those that are large enough to afford physicians use them much as insurance companies do. The cost for the process we undertook in this analysis was deducted from the cost reductions generated, i.e., this research and its results were accomplished at no cost to the patients, employers, or TPA. After this deduction, the remaining dollars in cost reduction stayed in the patients’ pockets and the employers’ ERISA trust.

The process reported herein identifies problems with billing and providers that if corrected have the potential to significantly lower healthcare costs in the United States, resolve most surprise billing, minimize balance billing, and help the collections and reputations of providers who are billing correctly and responsibly. In addition, these methods would greatly improve patient satisfaction by essentially eliminating surprise billing and significantly reducing balance billing. In turn, these actions would improve insurance underwriting, resulting in lower healthcare premiums in subsequent years. Specialty physician review of claims in real time would lead to dramatic reductions in costs, balance billing, and surprise billing at no additional cost to the plan sponsor or patient.

References

1. Gordon JS. A Short History of American Medical Insurance. Imprimis. 2018; 47:9. https://imprimis.hillsdale.edu/short-history-american-medical-insurance

2. Mathews AW. Cost of Employer-provided Health Coverage Passes $20,000 a Year. The Wall Street Journal. September 20, 2019. https://www.wsj.com/articles/cost-of-employer-provided-health-coverage-passes-20-000-a-year-11569429000 .

3. Pollitz K, Lopes L, Kearney M, et.al. US Statistics on Surprise Medical Billing. JAMA. 2020;323(6):498.

4. Sharank WH, Rogstad TL, Parekh, N. Waste in the US Health Care System: Estimated Costs and Potential for Savings. JAMA. 2019;322(15):1501–9.

5. Chhabra KR, Sheetz KH, Nuliyalu U, et.al. Out-of-Network Bills for Privately Insured Patients Undergoing Elective Surgery with In-Network Primary Surgeons and Facilities. JAMA. 2020;323(6):538–47.

6. U.S. Department of Labor Employee Benefits Security Administration. Fact Sheet: What Is ERISA. Employee Benefits Security Administration website. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/what-is-erisa .