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Are Surprise Billing Payments Likely to Lead to Inflation in Health Spending?

  • Jack Hoadley_headshot
    Jack Hoadley

    Research Professor Emeritus, Health Policy Institute, McCourt School of Public Policy, Georgetown University

  • Kevin Lucia

    Research Professor, Center on Health Insurance Reforms, Health Policy Institute, McCourt School of Public Policy, Georgetown University

  • Jack Hoadley_headshot
    Jack Hoadley

    Research Professor Emeritus, Health Policy Institute, McCourt School of Public Policy, Georgetown University

  • Kevin Lucia

    Research Professor, Center on Health Insurance Reforms, Health Policy Institute, McCourt School of Public Policy, Georgetown University

  • The federal No Surprises Act was designed to protect consumers from “surprise” medical bills. Determining how payments are made to providers is critical to ensuring stakeholders are satisfied and will comply with the law

  • Because state laws vary in how they determine rates for consumers’ out-of-network medical billing, their effects on inflation also will vary

The federal No Surprises Act protects consumers from “surprise” bills from out-of-network providers and also establishes a method to determine how much insurers will pay those providers. Establishing payment is critical to ensuring that stakeholders are satisfied and comply with the law. But an upward trend in payments for out-of-network care could push rates higher in in-network contracts. These costs, in turn, could push premium costs higher for employers and consumers.

No Surprises Act

The No Surprises Act will ensure, starting in 2022, that all Americans are protected from financial liability (beyond normal in-network cost sharing) when they are provided emergency services by an out-of-network facility or provider, including an air ambulance, or when they are treated by out-of-network providers at in-network facilities. Today, where state laws do not apply, patients are responsible for bills over and above what their insurer elects to pay. An important component of the law is establishing the payments made by the patient’s insurer to the out-of-network provider. The law calls first for negotiations between the insurer and the provider. If negotiations fail, the insurer and provider may elect to use the federal independent dispute resolution (i.e., arbitration) process. The arbitrator reviews amounts submitted by the parties and selects one of those amounts. The law specifies a set of factors to be used by the arbitrators in making decisions.

The federal law’s method for determining payments will be the primary mechanism, but the law calls for state mechanisms to be used where they exist. All 18 states that have already enacted comprehensive protections have such mechanisms, as do several states with partial protections. State payment mechanisms will apply for state-regulated insurance, but not to federally regulated self-funded plans, which are typically offered by large employers.

This post examines the potential implications of these various mechanisms on health costs and premium trends.

Impact of Rate Determinations

By eliminating any payment standard and relying solely on private negotiations and independent dispute resolution to determine rates, congressional negotiators tilted toward the preferences of providers. Providers prefer arbitration because it avoids a government-set rate standard and allows them to make their case for higher fees. The law did, however, maintain significant guardrails on arbitrations.

Under the law, parties must first attempt private negotiations. If negotiations fail, either party may request arbitration. Parties then exchange amounts and offer supporting evidence. The arbitrator picks one of the offers but may not choose a different amount. The losing party must pay the cost of the binding arbitration.

The law requires that arbitrators consider the plan’s median in-network rate and allows them to consider factors like the provider’s experience or the complexity of the case. Arbitrators may not consider billed charges, usual and customary rates, or Medicare or Medicaid rates.

Whether arbitration means higher prices depends on arbitrators’ decisions and on what insurers currently pay for out-of-network care. When payment amounts selected by arbitrators are higher than in-network rates, it can raise spending in two ways: it can raise the cost of the out-of-network service if the payer previously limited its payment to the in-network rate, or it can lead to higher in-network rates in future contract negotiations if providers see that they can receive more out of network. Arbitrator decisions that are reasonably close to median in-network rates should avoid these scenarios, making an inflationary impact less likely.

State Alternative Approaches

State laws vary considerably in how they determine rates. Among 18 states with comprehensive protections, four rely solely on payment standards and five use only arbitration. The other nine have hybrid systems combining the two approaches. State laws also vary widely in how they constrain inflationary impacts, based on whether payment standard or arbitration factors avoid referencing billed charges or point to in-network or Medicare rates. Many state laws were enacted recently; our findings are based on the limited evidence available.

States with comprehensive surprise billing laws

What is considered in determining payment?

Is there a likely inflationary impact?

California,* Colorado, Maine, Maryland, Michigan, New Mexico, Oregon

Law specifies use of in-network rate or Medicare rate and does not specify billed charges or usual and customary rates

No, approach is generally cost containing

Georgia, New Hampshire, Virginia, Washington

Law is not specific on what is considered

Varies based on arbitration results

Connecticut, Florida, Illinois, New Jersey, New York, Ohio, Texas

Law specifies a role for billed charges or usual and customary rates

Yes, approach is generally inflationary

* For nonemergency services.

Three arbitration states — New Jersey, New York, and Texas — allow consideration of billed charges, with potentially inflationary results. In each, 80 percent of billed charges — a factor not allowed in the federal system — has become a guideline. According to one study, median awards by New Jersey arbitrators were 5.7 times median in-network prices and often much higher. Similarly, Connecticut and Ohio have payment standards that rely in part on charges, with a potentially inflationary result.

Elsewhere, rate standards or arbitration factors may not be inflationary and may even bring payments down. California sets payment for nonemergency, out-of-network services at the greater of 125 percent of Medicare (which is not allowed in the federal system) or the plan’s average contracted rate. Maryland’s basic rate standard is the greater of the 60th percentile of in-network rates across insurers or 150 percent of Medicare. Maine, with its hybrid system, sets payments using the insurer’s in-network rate and directs arbitrators to use the in-network rate in their decisions — thus limiting the chance of inflationary outcomes.

In other hybrid states, payment levels are less constrained, leaving arbitrators considerable discretion. Virginia and Washington require payments at commercially reasonable rates determined by insurers — likely close to in-network rates. Georgia requires payments at in-network rates. These states do not direct arbitrators toward or away from billed charges. Experience to date in Washington shows few arbitration cases and no indication that decisions are skewing high.

Looking Forward

The agencies designing the federal arbitration system have considerable ability to avoid inflationary impacts. Stakeholders and policymakers will be watching these decisions closely. Regulators should heed the lessons from states such as New Jersey, New York, and Texas by reinforcing the law’s focus on the in-network rate as a key arbitration factor that is consistent with controlling costs. As results are reported and evidence becomes available, we will be able to see whether the federal process will be as effective as rate standards in California, Maine, and Maryland. States will have to decide whether to maintain their approaches or switch to the federal system.

Publication Details



Jack Hoadley, Research Professor Emeritus, Health Policy Institute, McCourt School of Public Policy, Georgetown University


Jack Hoadley and Kevin Lucia, “Are Surprise Billing Payments Likely to Lead to Inflation in Health Spending?,” To the Point (blog), Commonwealth Fund, Apr. 26, 2021.