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As Congress returns from its summer break, the effort to rein in surprise medical bills hangs in the balance. Physician and hospital groups are engaged in aggressive lobbying to derail the emergence of compromise legislation, or at least to water it down before it gets approved. Congress should ignore the industry and do what is necessary to protect patients who have no ability to avoid these bills on their own.

Important as it is for Congress to act, policymakers also should consider why the insurance industry seems incapable of fixing this problem on its own, because the answer has implications for broader reform.

Some of the most egregious examples of surprise bills are those that arise in conjunction with elective, hospital-based procedures. The patient goes through the trouble of selecting an in-network facility and primary physician (often a surgeon) only to get a bill later from one or several out-of-network ancillary providers, such as the anesthesiologist, radiologist, or pathologist associated with their care.

An obvious question is why insurers don’t take steps to prevent such abusive practices from occurring in the first place. After all, their customers — the patients — are enraged when they get these bills, and insurers have the theoretical power to head off the problem. They already sign contracts with hospitals and surgeons to establish networks of preferred providers. Those same contracts could stipulate that in-network hospitals and surgeons are only allowed to work with in-network ancillary providers when caring for the insurers’ patients. That would eliminate surprise billing in many cases.

Insurers say they don’t do this because it would hand market power to the ancillary providers. If the anesthesiologists in a community know that hospitals and surgeons need them to secure in-network status, they will demand inflated prices for their services. To avoid these costs, insurers choose instead to leave them out of their networks, which has the effect of exposing patients directly to the inflated prices in the form of surprise bills. 

The legislation approved by the Senate Health, Education, Labor, and Pensions Committee includes provisions which would effectively deem ancillary providers as in-network for insurance purposes, with a backstop limiting what insurers must pay for these services to the median amount paid when the care is provided in-network. The Senate bill would provide a federal solution to a problem that could be solved by the industry itself if it were inclined to do so.

For years — really decades — the private health insurance industry told the policy community that their ability to bring discipline and order to the provision of medical care through the use of managed care practices was just around the corner. With large amounts of clinical and payment data, as well as access to investment capital, insurers were seen as uniquely positioned to check the power of hospitals and doctors. The expectation had been that, at some point, insurers would acquire sufficient leverage to force the provider community to cooperate in building more efficient and patient-friendly care systems.

The phenomenon of surprise bills is one of several indicators pointing to the failure of the insurance industry to corral the nation’s vast and complex system of care delivery. While today there are pockets of high-performing managed care plans around the country, for the most part traditional insurers have only limited ability to shift business practices at the major health systems where most patient care occurs. As was the case decades ago, insurers today aren’t really calling the shots.

There are two possible explanations for the relative weakness of the insurance industry, which are not mutually exclusive.

Insurers may be choosing not to confront the medical system superstructure because controlling costs is not essential to their business model. They are able to pass rising costs to their customers in the form of higher premiums without jeopardizing their bottom lines. Higher premiums generate larger governmental subsidization of insurance through tax breaks and premium assistance. Moreover, their customers prefer looser networks, with greater choice of physicians, to tight networks, and that preference is reflected in the direction insurers get from the employers who hire them to provide coverage to workers and their families.

The other explanation is that insurers simply do not have the standing to take greater control over the provision of care to patients. Stopping surprise bills is within the theoretical power of many insurers, but it would require disrupting the business models of many hospitals and physician groups, and in a confrontation between insurers and local providers, the public is more likely to side with the providers than with the insurance companies that process claims and pay bills.

Insurers also are hampered by the weak consumers incentives that undermine cost control. In job-based insurance, the tax break for coverage increases when premiums rise, which makes both the employers and employees less sensitive to rising costs. In Medicare, the beneficiaries in traditional fee-for-service coverage pay a guaranteed national premium for coverage even if there is a local option which is much less expensive. If Congress reformed these provisions of current law, it is possible that insurers would be in a better position to take more direct control over the provision of care, and also be more willing to do so because of the payoff with consumers.

Still, it is hard to have much confidence that insurers will ever take on that role, given how hard and controversial it would be.

It is more likely that the dominant players in the cost of care will always be the major medical systems found in most communities, not the more distant insurance plans that pay the bills. Consequently, policymakers should build reforms that require the providers of care to compete more vigorously with each other based on the prices they charge. It is also important to allow consumers to reduce what they pay for care by selecting providers who deliver high-value care at low costs.

Insurers haven’t been able to prevent surprise bills from exploding into a problem that Congress must now resolve. There is even less reason to think they could take on the larger cost problem on their own.  Insurers have an important role to play in systemwide reform, but they shouldn’t be counted on to bring discipline to a medical industrial complex that is more powerful than they are.

James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.

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