On February 23, a district court in Texas invalidated key parts of a federal rule to implement the No Surprises Act, a new law with broad bipartisan support that protects patients from many types of surprise medical bills. The lawsuit is led by the Texas Medical Association and is one of several legal challenges brought by health care providers. The court’s ruling does not disturb the No Surprises Act’s core protections for patients but eliminates key guardrails — aimed to help keep down health care costs — on the arbitration process used to negotiate between providers and patients.
The Arbitration Process
Under the No Surprises Act, patients are protected from financial liability beyond normal in-network cost sharing when treated by an out-of-network provider for most types of emergency care and nonemergency care provided in an in-network facility. Providers and facilities are banned from billing patients to collect a higher amount.
The No Surprises Act includes a process to determine how much a patient’s health plan must pay an out-of-network provider. The parties must first negotiate for 30 days. If negotiations fail, either party may initiate “baseball-style” arbitration in which each party offers a payment amount and a neutral arbitrator decides between them.
In choosing between competing offers, arbitrators must consider certain factors: the health plan’s median in-network rate (known as the qualifying payment amount), additional circumstances like the provider’s level of training or experience, and any information the parties provide or the arbitrator requests. Arbitrators cannot consider a provider’s “usual and customary rates” (i.e., billed charges) or reimbursement rates paid by public payers such as Medicare or Medicaid.
In an interim final rule establishing the arbitration process, federal officials directed arbitrators to pick the offer closest to the qualifying payment amount unless the parties submit credible information that shows the payment amount should be different. Federal officials and the plaintiffs refer to this as a “rebuttable presumption.”
Aggressive Litigation by Providers
Arbitration is especially important for the types of specialty providers where surprise billing has been most common — for example, anesthesiologists. Many of these providers, including those in practices backed by private equity firms, have historically had very high charges, which has contributed to higher patient out-of-pocket costs and overall health care costs.
Given the money at stake, physicians, hospitals, and air ambulance companies have filed six lawsuits over the No Surprises Act. Concerned about losing their ability to use the arbitration process to obtain higher out-of-network rates, all lawsuits challenge the arbitration rule’s “rebuttable presumption.” One of the lawsuits is even broader, arguing that the No Surprises Act itself (including the law’s patient protections) is unconstitutional.
Consistent with the other lawsuits, the Texas Medical Association, joined by a Texas-based physician, argued that the “rebuttable presumption” creates a de facto payment standard that it believes will disadvantage its members and is inconsistent with the No Surprises Act. They also argue that federal officials should have provided an opportunity for the public to comment on the arbitration rule before adopting it. The plaintiffs asked that specific provisions of the rule be vacated (i.e., invalidated). The Biden administration explained its approach in the preamble to the rule and in court, pointing out that the goal was to help hold down health care costs.
In the first ruling on this issue, Judge Jeremy D. Kernodle, a federal judge in the eastern district of Texas, agreed fully with the Texas Medical Association. He then invalidated the challenged portions of the rule and remanded the rule back to the Biden administration to make revisions.
Only a handful of the rule’s provisions were invalidated, meaning the overall arbitration process is undisturbed. But arbitrators no longer have explicit guidance on how to choose between competing offers. This could lead to greater variation in arbitration outcomes, thereby reducing the predictability of the process which could incentivize providers to leverage arbitration to obtain higher payments when doing so is not warranted. This, in turn, increases the risk that arbitration could become inflationary and lead to higher health care costs and premiums, which is inconsistent with Congress’ goals in enacting the No Surprises Act.
What Happens Next
The Biden administration is expected to appeal Judge Kernodle’s decision to the Court of Appeals for the Fifth Circuit but has not asked that his decision be stayed while the case is on appeal. This means the court’s decision remains in effect and arbitration will proceed without the rule’s guardrails. Federal officials acknowledged the court’s decision and are considering next steps.
In light of Judge Kernodle’s decision, the government asked that two of the other five pending lawsuits in Georgia and Illinois be put on hold. Both courts agreed, and those lawsuits have been paused for at least 60 days. A hearing will be held on March 21 in two cases — one brought by the Association of Air Medical Services and one led by the American Medical Association — pending before the District of Columbia; a decision could come soon thereafter. Briefing could begin soon in the constitutional challenge filed in New York, with a decision expected later this year.
In the meantime, the Biden administration has indicated it will issue a final arbitration rule by May 2022. This final rule could rescind, replace, or readopt the provisions set aside by Judge Kernodle, which could trigger future lawsuits over the new rule and arbitration process.