How Investor-owned Physician
Practices Are Driving up Healthcare Costs
By Eileen
Appelbaum and Rosemary Batt
SEP 4, 2019
Surprise medical billing has
become a critical issue facing Americans across the country because of purposeful
corporate practices designed to increase profits. As hospitals have outsourced
emergency rooms and other specialty care to reduce costs, private investors
have bought up specialty physician practices, rolled them into powerful
national corporations, and taken over hospital emergency services. The result:
large out-of-network surprise bills. The hidden actors: Leading private equity
firms looking for ‘outsized’ returns.
S urprise medical billing made
headlines in 2019 as patients with health insurance found themselves liable for
hundreds or even thousands of dollars in unforeseen medical bills. When
patients with urgent medical problems go to an emergency room (ER) or are
treated by specialty doctors at a hospital that is in their insurance network,
they expect that the services they receive will be ‘in-network’ and covered by
their insurance. But often a doctor not in their insurance network is
under contract with the hospital and actually provides the care. When this
happens, patients are stuck with unexpected and sometimes unreasonably high
medical bills charged by these ‘out-of-network’ doctors. This typically occurs
when the hospital has outsourced the ER or other specialized services to a
professional staffing firm or a specialty doctors’ practice. This problem has
exploded in recent years because hospitals are increasingly outsourcing these
services to cut costs. And more and more patients are faced with surprise
medical bills — adding substantially to the already impossible medical debt
that working people face.
Hospital outsourcing of
emergency, radiology, anesthesiology, and other departments has provided an
opening for physician practices to operate these services as independent
organizations. Initially, hospitals outsourced these services to small, local
doctors’ groups. But over the past decade, private equity firms have become
major players — buying out doctors’ practices and rolling them up into large
corporate physician staffing firms that provide services to outsourced
emergency rooms, anesthesiology and radiology departments, and other specialty
units. By 2013, physician staffing firms owned by Blackstone Group and
Kohlberg, Kravis Roberts & Co. (KKR) – among the largest PE firms in the
country – cornered 30 percent of this market. Since then, private equity
ownership of these services has continued to grow. Private equity firms also
own two of the three largest emergency ambulance and air transport services –
another major source of surprise medical billing.
Private equity ownership
matters because the business model of private equity firms is to use a lot of
debt in a leveraged buyout of companies they acquire and then extract as much
cash as possible out of them in order to pay down the debt and reward their
investors with ‘outsized returns’ that exceed stock market gains. They can be
thought of as for-profit corporations on steroids. Buying up specialty
practices is financially attractive because there is a large and growing demand
for outsourced doctors, and out-of-network doctors can command a substantial
premium for their services. Emergency rooms and certain medical services
provided in hospitals are not really part of a competitive ‘marketplace’
because patients in emergency medical situations rarely have a choice: they
need immediate medical care and cannot ‘shop around’ for an in-network trauma
doctor or radiologist. Thus, surprise bills are difficult to avoid if patients face
a medical emergency and must go to the ER or if they are hospitalized and
require access to specialty medical services.
How Widespread is Surprise
Billing and Why Has It Grown?
Surprise medical billing is
exacerbating the already serious problem of medical debt in this country, which
is a leading cause of bankruptcy for American families.[i] And surprise billing is growing
rapidly. Forty percent of Americans surveyed by the Kaufman Family Foundation
in April, 2019, reported receiving an unexpected medical bill; and 20 percent
of those surveyed said it was due to out-of-network charges – or surprise
billing.[ii] A study by health researchers at
Stanford University, for example, examined fees charged to patients with
private insurance who were treated by the emergency department of a hospital.
They reviewed 13.6 million trips to the ER that occurred over the period 2010
to 2016. About a third (32.3 percent) of these trips in 2010 resulted in a
surprise medical bill. But by 2016, that figure had increased to 42.8 percent.
That is, more than 4 in 10 trips to the ER ended with patients getting a
surprise medical bill.[iii] For in-patient stays, surprise
billing rose from 26 percent to 42 percent, and the average costs per patient
also jumped from $804 to $2,040. At this rate of increase, the estimated
percent of hospital visits resulting in a surprise bill would be 48 percent in
2019 – or almost one half. The study also found that in 2016, 86% of ER visits
and nearly 82% of hospital admissions incurred surprise ambulance service
bills.
Similarly, another 2019 study
found that patients who are admitted to a hospital from the ER are much more
likely to receive an out-of-network charge — as many as 26% of admissions from
the emergency room were found to include a surprise bill. The study also found
that 38 percent of Americans are ‘very worried’ and another 29 percent are
‘somewhat worried’ about being able to afford surprise medical bills. People
particularly vulnerable to these charges are those with coverage from large
employers that are self-insured. And vulnerability also varied by region, with
Texas, New York, Florida, New Jersey, and Kansas having higher rates of
surprise billing; and Minnesota, South Dakota, Nebraska, Maine, and Mississippi
having lower rates.[iv]
While large surprise medical
bills are typically associated with doctors in the ER or in specialties such as
radiology, anesthesiology, or critical care units such as neo-natal, burn, or
trauma centers, other out-of-network physicians may also issue surprise bills.
For example, those who assist a patient’s doctor in a procedure or hospitalists
who check on patients during hospital stays can also charge separately for
their services. The Stanford study found that the likelihood that a patient
admitted to an in-network hospital would face a surprise medical bill because
at least one out-of-network doctor cared for them increased from 26.3 percent
2010 to 42.0 percent in 2016. A particularly egregious instance occurred when
an assistant surgeon sent a bill for $117,000 to a patient who had surgery for
herniated discs in his neck. The patient’s own in-network surgeon sent a bill
for $133,000, but accepted a fee of $6,200 negotiated with the insurance
company. The out-of-network assistant surgeon is seeking full payment of his
charges. This is a particularly egregious example, but surprise bills for a few
thousand dollars are not uncommon.[v]
The problem of surprise
billing has grown substantially in recent years because hospitals have been
under financial pressure to reduce overall costs and have turned to outsourcing
expensive and critical services to third-party providers as a cost-reduction
strategy. Outsourcing is not new, as hospitals began outsourcing non-medical
ancillary services such as facilities management and food services in the
1980s, in response to a round of structural changes in government financing. By
the 1990s, hospitals were experimenting with the use of independent
‘hospitalists’ to care for patients between rounds by the local admitting
doctors who had a hospital affiliation. Hospitalists’ numbers increased over
the next two decades as hospital staffing firms grew and provided a range of
temporary or short-term professionals to fill shortages in nursing, technical,
or clinical positions.[vi]
Recent outsourcing, however,
has expanded to critical care areas – emergency rooms, radiology,
anesthesiology, surgical care, and specialized units for burn, trauma, or
neo-natal care. Now hospitals contract with specialty physician practices or
professional physician staffing firms to provide these services – even if the
patient receives treatment at a hospital or at an outpatient center that is in
the patients’ insurance network. According to one study, surprise billing is
concentrated in those hospitals that have outsourced their emergency rooms.[vii] A recent report found that almost 65
percent of U.S. hospitals now have emergency rooms that are staffed by outside
companies.[viii]
Hospitals and healthcare
systems have accelerated their outsourcing of critical care areas since 2010 in
part due to declines in Medicaid and Medicare reimbursements and to incentives
under the Affordable Care Act to reduce costs and improve care quality.[ix] At the same time, on the supply
side, hospitalist companies were merging and buying up practices of specialists
employed mainly in hospitals. Hospitalist companies evolved into physician
staffing firms and expanded to include staffing for emergency rooms (ERs),
anesthesiology and radiology departments, and burn and neonatal intensive care
units in hospitals across the country.
The business case for
hospitals to outsource was straightforward. Emergency rooms are a major point
of entry for patients who are admitted to hospitals, and thus, a major conduit
for the in-patient hospital stays that are critical for hospital revenue
generation. But they are costly and difficult to manage as they must be
adequately staffed on a 24/7 basis regardless of patient flow, which is
unpredictable. Outsourcing the management, staffing, and billing of ER services
shifts these management problems and the risk of underpayment for these
services to the staffing firm or a specialty doctors’ practice. Hospital
emergency rooms cannot turn patients away if they lack adequate insurance
coverage or any insurance at all; they must treat all patients. Emergency
departments make money on ER visits of patients with commercial insurance, but
lose money on those with Medicare or Medicaid, and see very high losses when
patients have no insurance.[x]
Private Equity’s Business
Model: Its Role in Outsourcing and Consolidating Specialty Services
Private equity firms have
played a critical role in consolidating physicians’ practices into large
national staffing firms with substantial bargaining power vis-à-vis hospitals
and insurance companies. They have also bought up other emergency providers,
such as ambulance and medical transport services. They grow by buying up many
small specialty practices and ‘rolling them up’ into umbrella organizations
that serve healthcare systems across the United States. Mergers of large
physician staffing firms to create national powerhouses have also occurred. As
these companies grow in scale and scope and become the major providers of
outsourced services, they have gained greater market power in their
negotiations with both hospitals and insurance companies: hospitals with whom
they contract to provide services and insurance companies who are responsible
for paying the doctors’ bills.
Hospitals have consolidated in
order to gain market share and negotiate higher insurance payments for
procedures. Healthcare costs have been driven up further by the dynamics
associated with payments for out-of-network services. As physicians’ practices
merge or are bought out and rolled up by private equity firms, their ability to
raise prices that patients or their insurance companies pay for these doctors’
services increases. The larger the share of the market these physician staffing
firms control, the greater their ability to charge high out-of-network fees.
The likelihood of surprise medical bills goes up, and this is especially true
when Insurance companies find few doctors with these specialties in a given
region with whom they can negotiate reasonable charges for their services.
The design of the private
equity business model is geared to driving up the costs of patient care.
Private equity funds rely on the classic leveraged buyout model (LBO) in which
they use substantial debt to buyout companies (in this case specialty physician
practices as well as ambulance services) because debt multiplies returns if the
investment is successful. They target companies that have a steady and high
cash flow so they can manage the cash in order to service the debt and make
high enough returns to pay their investors ‘outsized returns’ that exceed the
stock market.[xi] Emergency medical practices are a
perfect buyout target because demand is inelastic, that is, it does not decline
when prices go up. Moreover, demand for these services is large – almost 50
percent of medical care comes from emergency room visits, according to a 2017
national study by the University of Maryland School of Medicine, and demand has
steadily increased.[xii] PE firms believe they face little
or no downside market risk in these buyouts.
Private-equity owned companies
differ from publicly traded for-profit chains not only in their greater use of
debt, but also because the private equity firm, via the general partner of the
investment fund it sponsors, makes all investment decisions on behalf of the
investor shareholders. Investors commit capital to a PE-sponsored fund,
typically for 10 years, and have no say in investment decisions. Thus, the PE
general partner’s power is concentrated and largely unaccountable, as investors
cannot ‘exit’ or sell their shares if they are dissatisfied – unlike
shareholders in publicly traded corporations.[xiii] In addition, PE firms charge their
portfolio companies additional ‘advisory fees’ and ‘transactions fees’ that can
amount to millions of dollars over time. And because PE owned companies are not
publicly traded on the stock exchange, they are not required to file a detailed
report to the Securities and Exchange Commission (SEC) the way that publicly
traded companies must do. Their activities and their financial transactions are
largely hidden from the public eye, despite the fact that they receive
substantial taxpayer funding from Medicare and Medicaid for their services,
though not for surprise charges.
Two private-equity owned
physician-staffing firms dominate the market for outsourced doctors’ practices
— Envision Healthcare, owned by KKR with 69,300 employees, and TeamHealth owned
by Blackstone Group with 20,000 employees. KKR also is a major owner (along
with other private equity firms) of AirMedicalGroup Holdings — one of the
nation’s three largest ambulance and air transport companies. We also showcase
private equity owned Air Methods medical transport company. These examples help
illuminate how and why private equity firms have become national powerhouses in
the provision of professional healthcare services and why their activities and
those of other private equity firms in this sector are leading to higher
healthcare costs for patients and the industry as a whole.
Envision Healthcare
Envision Healthcare today is
the result of fifteen years of private equity transactions in buying up and
consolidating emergency ambulance and specialty physicians’ practices. It was
formed in 2005 when private equity firm Onex took over two companies — American
Medical Response (AMR) and EmCare — and merged them. In and out of private
equity ownership since 2005, Envision most recently was acquired by KKR in
October, 2018 in a public to private leveraged buyout worth $9.9 billion. Its
sprawling organization employs tens of thousands of healthcare professionals;
and it supplies doctors in 774 physician practices to hospitals and ambulatory
surgical centers throughout the United States. It provides ER doctors,
anesthesiologists, radiologists, hospitalists, and other specialists covering
intensive care, medical, neo-natal, pediatrics, psychiatric, skilled nursing,
rehabilitation, and other inpatient units. Its outpatient ambulatory surgical
arm (AMSURG) provides trauma and acute care general surgery in 260 facilities
in 35 states.[xiv]
Between 2005 and 2018,
Envision provided two types of emergency medical services: an ambulance and
medical transport business through American Medical Response (AMR) and
emergency physician staffing through EmCare Holdings. Today, Envision focuses
on physician staffing services as it sold the ambulance and transport business
in a $2.4 billion leveraged buyout in 2018 to another private equity consortium
that still includes KKR (as we detail below).
The prior ownership patterns
of AMR and EmCare were similar. American Medical Response was listed as a
publicly traded company as of August 1992; and in February, 1997, it was
acquired by ambulance company MedTrans, a subsidiary of Laidlaw International.
At an undisclosed date between 1997 and 2005, PE firm Peak Capital invested an
undisclosed amount in the company. Like AMR, EmCare Holdings was acquired by
Laidlaw International in the summer of 1997 and subsequently received an
undisclosed amount of investment from PE firm Peak Capital. Emergency physician
practices figured prominently among EmCare’s 10 acquisitions and 17 sister
physician staffing and management firms.[xv]
In December 2005, just months
after acquiring and merging AMR and EmCare, Onex brought Envision Healthcare to
the public market via an IPO in which it retained a majority of the shares.
Subsequent sales of shares left Onex with 31 percent of the company’s equity at
the time it was again taken private, this time by Clayton Dubilier & Rice
with participation of PE firm Ardian through a $3.2 billion LBO in May 2011. An
IPO in 2013 returned Envision Healthcare to the public market. The PE owners
retained about two-thirds of the shares of the now-publicly traded company. The
PE companies subsequently sold some of the stock. And in September 2017, two
hedge funds – Starboard Value and Comex Management – took minority stakes in
Envision Healthcare. Between July 2006 and October 2018, Envision Healthcare
acquired 39 companies. [xvi]
Envision Healthcare bought out
AMSURG in December 2016 after AMSURG failed in an attempt to acquire TeamHealth
(described below). The deal brought together two seemingly complementary
healthcare companies to form a single organization with pro forma market
capitalization of $10 billion and an enterprise value including debt of
approximately $15 billion. A little over $8 billion of this was new debt.
However, KKR contributed $5.57 billion to the deal, using $4.43 billion to
retire Envision’s prior liabilities and the remainder mainly as equity in the
LBO. Adding AMSURG’s large chain of ambulatory surgical centers was supposed to
make Envision Healthcare a dominant player across the outsourced medical
services landscape – emergency room doctors, hospitalists, outpatient surgery,
and ground and air ambulance. But integrating the two health care companies –
with a combined 69,300 employees as of December 2017 – proved difficult for
publicly traded Envision Healthcare.[xvii]
Envision Healthcare appears to
be extremely profitable, but its financials are murky, with no publicly
available accounting of its transactions with each round of private equity
buyouts. And under private equity ownership, when companies are taken private
or pass from one private equity fund to another, there is no transparency. Each
private equity buyout, however, is typically accompanied by levering
substantial debt on the target company, which must be serviced by managing for
cash. Emergency medical services are attractive to private equity firms and are
very lucrative because they throw off a lot of cash, and as noted earlier,
demand is inelastic and the fees are not subject to competitive market pricing.
The contracts negotiated
between these physician staffing companies and hospitals also are not publicly
available. Depending on how they are crafted, they may provide incentives to
outsource even more ER departments, and in turn increase out-of-network billing.
One Wall Street investor analysis, for example, highlights Envision’s ‘joint
venture’ model that raises serious questions. A 2013 analysis by Deutsche Bank
Securities described a 2012 joint venture between EmCare and the HCA Healthcare
chain – with a history of private equity ownership between 2006 and 2011 and
substantial PE ownership of shares following its 2011 IPO. HCA apparently
agreed to give up directly charging for physicians’ services and outsourced
these services to EmCare in exchange for a 50-50 profit split once EmCare
achieved a 13% margin threshold, according to the Deutsche Bank calculation.
This allowed EmCare to “… penetrate HCA’s 160+ hospital portfolio more deeply
with its physician offerings.” As of 2014, EmCare valued its HCA joint venture
at a net revenue of $124 million, with assets of $155 million and liabilities
of $31 million, according to the company’s SEC filing. The filing identified
similar joint ventures with hospitals involving Evolution Health (also owned by
Envision).[xviii] Commenting on EmCare’s relations
with hospitals, Benedic Ippolito, a research fellow in public finance and
health economics at the American Enterprise Institute, noted, “Right now,
EmCare surprise bills patients and hospitals effectively turn a blind eye.”[xix]
Envision has come under heavy
scrutiny for the huge out-of-network surprise medical bills it sends to ER
patients. A team of Yale University health economists examined the billing
practices of EmCare, Envision’s physician staffing arm.[xx] They found that when EmCare took
over the management of emergency departments, it nearly doubled its charges for
caring for patients compared to the charges billed by previous physician
groups. These egregious practices have resulted in a Congressional
investigation headed by Missouri Senator Claire McCaskill, lawsuits from
shareholders, and court actions involving Envision and UnitedHealth Group, the
largest U.S. insurer.[xxi]
TeamHealth
TeamHealth has also grown into
a powerful national healthcare professional staffing company with 20,000 employees.
It contracts with hospitals to provide doctors and other healthcare
professionals as ER staff, anesthesiologists, hospitalists, and hospital
specialists (OB/GYN, orthopedics, general surgery, pediatric services); and in
post-acute care, ambulatory care, and behavioral health.[xxii] The company experienced successive
rounds of private equity leveraged buyouts punctuated by IPOs that returned it
to the public markets – only to be taken private again through another LBO. In
1999, private equity firms Cornerstone Equity Investors and Madison Dearborn
Partners, with minority participation of Becken Petry O’Keefe and Company,
acquired TeamHealth as a platform for a physician staffing company. According
to PitchBook (an industry research and data firm), TeamHealth acquired an
anesthesiology practice, a hospitalist company, and a health management
business in its first two years. It made no further acquisitions until after it
was acquired by the Blackstone Group in 2005 in a leveraged secondary buyout
(in which one PE fund sells a company to another PE fund). TeamHealth made two
more acquisitions between 2005 and 2009 – an emergency physician’s group and a
hospitalist company.
In 2009, Blackstone Group
returned TeamHealth to the public market via an IPO, but retained possession of
a majority of shares in the newly public company. Passage of the Affordable
Care Act in 2010, with its promise of cost containment via capitated and
bundled payments, spurred TeamHealth to go on a buying spree. Between 2010 and
2016, TeamHealth acquired 51 companies, mainly practices of emergency doctors
and anesthesiologists and a few hospital management companies. One very large
exception to this pattern was TeamHealth’s 2015 acquisition of IPC Healthcare.[xxiii]
IPC Healthcare was a major
hospitalist company. In its early years, it attracted four rounds of venture
capital investments between 1998, when it was launched as IPC The Health
Company, and 2002. In June 2002, IPC had an IPO and began its life as a
publicly traded company. Between 2002 and 2009, IPC acquired 20 physician
practices. Between 2010 and 2015, following passage of the ACA, it acquired 78
more. The companies acquired by IPC were overwhelmingly hospitalist companies
with a smattering of doctor’s practices in specialties such as geriatrics.[xxiv]
TeamHealth’s acquisition of
IPC in 2015 raised questions. There was no evident fit between TeamHealth’s
specialty physician practices and IPC’s hospitalist companies. IPC was also in
trouble with the Department of Justice, which in June 2014, had filed a civil
lawsuit against the company for “knowingly engaging in systematic overbilling”
for services billed to Medicare and Medicaid and other government health
programs. Ultimately, TeamHealth paid $60 million plus interest to resolve
these allegations.[xxv] This fueled speculation that
TeamHealth, which had rebuffed AMSURG’s attempt to acquire it, wanted this very
large acquisition in order to protect itself from being taken over.
TeamHealth’s explanation was that it wanted IPC’s expertise in participating in
Medicare and Medicaid bundled payments programs.[xxvi]
In February 2017, Blackstone
Group once again took TeamHealth private in a $6.1 billion leveraged buyout.
Similar to Envision Healthcare, the financials of TeamHealth are murky. After
many LBOs, its revenues, debt load, and financial stability remain unknown, as
do the contracts it negotiates with the phyisician groups it has acquired and
the hospitals it contracts with for services.
And like Envision, its billing
practices are being scrutinized. The Yale researchers who investigated EmCare
and found excessive use of surprise medical billing also examined TeamHealth’s
billing practices. They found that Blackstone owned TeamHealth has taken a
somewhat different tack. It uses the threat of sending high out-of-network surprise
bills for ER doctors’ services to an insurance company’s covered patients to
gain high fees from the company as in-network doctors. In most cases, the
researchers noted, TeamHealth emergency physicians would go out-of-network for
a few months, then rejoin the network after bargaining for in-network payment
rates that were 68 percent higher than in-network rates received by the
previous ER doctors.[xxvii] While this avoids the situation of
a patient getting a large, surprise medical bill for the services of ER
doctors, it raises healthcare costs and premiums for everyone.
Emergency Ambulance and Air
Transport Services
Emergency ambulance and air
transport is also a lucrative target for private equity investment, which has
fueled consolidation in this industry segment. Demand is inelastic – there is
no competitive market pricing. And demand for air transport has grown
considerably because many rural hospitals have closed or consolidated, leading
to far longer distances for access to emergency care. Two of the three air
transport companies that together control two-thirds of this US market are
private equity owned – AirMedicalGroup Holdings and Air Methods. The third, PHI
Air Medical, is privately owned.[xxviii]
Returning to the Envision
story, recall that American Medical Response (AMR) was the ambulance service
division that Envision spun off in 2018. Before the divestiture, however, AMR
grew to a national powerhouse in the decade from 2007 to2017 through 12
acquisitions of ambulance and medical transport businesses and one air
ambulance company7. In addition to these acquisitions, AMR has seven sister
companies – mainly ambulance companies, including several air ambulance
businesses. It was acquired in 2017 by air ambulance company, AirMedicalGroup
Holdings (AMGH) — owned by PE firms Ardian, Koch Equity Development, and KKR —
in a $2.4 billion leveraged buyout. With this acquisition, AirMedicalGroup now
holds a leading position in emergency and medical transport across a range of
transport modalities.[xxix] The acquisition merged the largest
provider of ground ambulance services in the U.S. with a leading operator of
medical helicopters, with over 320 locations in 38 states.[xxx] The combined entity creates the
opportunity for KKR to substitute its more expensive medical helicopters for short
trips previously done by AMR’s ambulances.[xxxi]
Air Methods became private
equity owned in 2017, when it was acquired by American Securities and Alpinvest
Partners through a $2.5 billion public-to-private LBO. The company’s air
medical transport services operate out of over 300 bases in 48 states.[xxxii] The buyout came in response to
pressure from activist hedge fund investor, J. Daniel Plants, founder of Voce
Capital Management. Concerned about the bad publicity surrounding predatory
charges by air ambulance companies, Plants wanted Air Methods to agree to be
taken private by a PE firm in order to keep information about its billing
practices out of public view. According to the hedge fund, Air Methods big
price hikes created economic and political risks for the company. Going private
would shield its financial documents from patients and insurers. The hedge fund
was right to be concerned about Air Methods predatory billing practices. The
average bill for being transported in one of its medical helicopters was $17,262
in 2009 and had risen to $40,766 in 2014. Air Methods calculates that it
accounts for nearly 30 percent of total air ambulance revenue in the U.S. Its
profit increased sevenfold from 2004 to 2014.[xxxiii]
In general, charges for
out-of-network ambulance services are likely to be high. In the case of air
ambulances, they are exceedingly high – not only due to the high costs of air
travel, but especially because an estimated 69 percent of charges are out-of-network
— according to a 2017 US General Accountability Office (GAO) study of private
insurance records for 2012-2017. That is, insured patients in these cases ended
up being billed for most of the charge. The GAO study also found that the
median price for helicopter service doubled between 2010 and 2014 – from
roughly $15,000 to $30,000 per tri;p it also found that the average cost of an
air ambulance trip is over $36,000. .[xxxiv] Another study by researchers at
Johns Hopkins University found charges were likely to be – as they put it – sky
high. The study found that air ambulance charges had risen substantially from
2012 to 2016, and in 2016 these charges ranged from 4 to 9 times higher than
what Medicare paid for this service. Some of the largest providers had among
the highest charges. Between 2012 and 2016, the median charge ratios (the
charge divided by the Medicare rate) for the services increased by 46-61
percent. [xxxv]
Legislative Solutions
Some hospitals have attempted
to solve the problem of surprise billing on their own by simply requiring all
attending physicians in their hospitals to remain in-network – receiving
payment from the insurance companies with whom the hospital has contracted.
This has been the traditional approach used by hospitals in managed care
networks. According to John Cascell, Senior Vice President of Managed Care at
MemorialCare Health System in Fountain Valley, California, “Such stipulations
were commonplace decades ago, but some experts say the practice slipped out of
favor around 2000 as major physician staffing companies—which tend to make more
money when they’re out of network—gained market power.”[xxxvi] MemorialCare, however, has retained
this long-standing policy, which Cascell supports. The downside of this
approach, however, is that it may shift bargaining power to insurance companies
who will seek to set lower in-network payments for specialty services. In these
cases, according to Cascell, MemorialCare takes a strong role in negotiating
with insurance companies to maintain reasonable payments.[xxxvii]
More generally, the public,
healthcare providers, insurers, and state and federal legislators recognize
that individual solutions are only stop-gap measures and that no individual
hospital can solve the pervasive problem of surprise medical billing on its
own. Twenty-five states have passed legislation that aims to protect patients
from surprise billing, but these laws do not fully cover all types of
situations. Over seventy-five percent of Americans believe that the federal
government should step in and protect them from surprise bills, according
to a Kaufman Family Foundation April, 2019 national survey. The same survey
found that 90 percent of Democrats, three-quarters of Independents, and 60
percent of Republicans favored federal legislation to protect patients.[xxxviii] Americans differ, however, in who
they think should bear the costs of care. According to the Kaufman survey,
about half say insurance companies alone should cover the costs of care (43
percent) while about half favor joint responsibility between providers and
insurance companies (47 percent).[xxxix]
Two approaches to ‘fixing’
surprise medical bills have been put forward. One would benchmark the fees paid
to out-of-network doctors to the negotiated fees received by in-network doctors
in that region for the procedure performed or the service provided. This would
have the effect of holding down health care costs by setting limits to what
out-of-network physicians can charge. In the second approach, out-of-network
doctors would immediately be paid a given amount by the patient’s insurance
company – possibly 125 percent of the Medicare payment or, alternatively, the
median payment for that procedure or service in the geographic region – and
could then take the insurance company to arbitration in an effort to collect
the balance of the patient’s bill.
The second approach has the
potential to raise health care costs if arbitration panels award out-of-network
doctors all or a major part of the fees they charge. This approach, which is
favored by investor-owned physician staffing firms and by large physician
practice groups, would further raise health care costs for consumers. Even if
many of these physician practices became in-network doctors, as Envision now
claims to be doing[xl], the threat of going out-of-network
remains. As the TeamHealth example illustrates, this allows physician staffing
firms to negotiate high in-network rates that drive up premium costs for
consumers.
In sum, there is growing
concern over the pricing practices of companies like Envision, TeamHealth,
AirMedicalGroup, and Air Methods — leading emergency healthcare companies owned
and operated by private equity firms. There is little oversight of the prices
they charge, and evidence suggests that these companies are among those
responsible for driving up health costs by taking advantage of the possibilities
for surprise medical billing. But they are not alone, as private equity firms
buy out medical services in specialties other than trauma and radiology and as
large physician practices take a page from the PE playbook when setting fees.
Reining in these charges is critical to efforts to slow the growth or even
reduce health care costs.
[i] Mireya
Villarreal. 2019. “Insurance Gap Leaves Patients on the Hook for Unexpected
Hospital Bills.” CBS News TMarch 18, 6:45 PM https://www.cbsnews.com/news/insurance-gap-leaves-patients-on-the-hook-for-unexpected-hospital-bills/ (last
accessed August 17, 2019)
[ii] Ashley
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