Dive Brief:

  • A federal appeals court has struck down the methodology used to determine provider reimbursement in disputes over out-of-network bills under the No Surprises Act (NSA). The ruling is a setback for insurers, as it is expected to further increase payouts to providers.
  • On Tuesday, the 5th Circuit ruled that the government's methodology for calculating the qualifying payment amount (QPA) — a metric representing average in-network rates for a service in a specific geographic area — is partly unlawful. The majority of judges agreed with the Texas Medical Association and other plaintiffs on two of their three challenges, stating that the government violated the law by allowing insurers to include "ghost rates" in QPA calculations and by excluding bonus and incentive payments.
  • However, the court upheld the agencies' exclusion of one-off agreements, such as those common in air ambulance billing. Although the QPA methodology was vacated, the court said agencies may permit insurers to use existing QPAs until new ones are calculated, ensuring the NSA's dispute resolution process continues without interruption.

Dive Insight:

The ruling marks another setback for insurers as they compete with providers to shape the arbitration process established by the NSA, a landmark consumer protection law passed in 2020 to shield patients from surprise medical bills.

The NSA has largely achieved its primary goal, preventing millions of Americans from facing unexpected out-of-network charges. However, it has also created an unintended consequence: a multibillion-dollar cottage industry around dispute resolution that has enabled doctors to receive significantly higher payments than they typically would for providing care.

According to insurers, providers win 85% of surprise billing cases, and their awards exceed the QPA about 87% of the time — evidence that the process is skewed in favor of providers.

Physicians counter that their elevated win rate and higher payouts reflect how little they are normally reimbursed. They argue that insurers keep QPAs artificially low. Medical associations have filed a series of lawsuits seeking to reform the metric, often with success.

The 5th Circuit's new decision overturns a rare legal victory for the Department of Health and Human Services (HHS) and the Departments of Labor and Treasury, which issued the rules implementing the NSA in 2021.

At issue is whether insurers can include "ghost rates" — rates for items or services that providers do not actually deliver — in their QPA calculations. Providers have little incentive to negotiate these rates higher, so they can be extremely low, sometimes as low as $0.

The government instructed insurers not to include $0 ghost rates in their QPAs, but allowed any rate above $0, including contracted rates of $1.

Providers objected, and in 2023, a Texas judge ruled that including ghost rates in the QPA was illegal. The following year, the 5th Circuit overturned that decision, permitting ghost rates.

However, the appeals court agreed to a rare rehearing of the case last summer and has now sided with provider plaintiffs.

The QPA should be based on rates for services actually provided by a provider, a majority of the 5th Circuit's 17 active judges wrote in Tuesday's ruling.

The judges agreed that including ghost rates resulted in artificially low QPAs, citing providers' outsized win rates in arbitration as evidence.

The court also ruled that the government's directive to exclude risk-sharing, bonus, penalty, or other incentive-based compensation from the QPA violates the NSA, as the law requires the benchmark to reflect the highest possible amount in a provider-insurer contract for an item or service.

The judges did, however, agree with the government that single-case agreements between providers and insurers should be excluded from the QPA, as they do not constitute actual contracts. Such agreements are common among emergency services providers, particularly in the air ambulance industry.

Dr. Bradford Holland, president of the Texas Medical Association, said in a statement that the ruling is "another step in the right direction for both patients and the physicians who care for them."

While higher payouts tied to higher QPAs will benefit providers, the decision is not favorable for insurers or U.S. health spending overall.

Doctors are already frequently awarded three or four times the comparable in-network rates when they win NSA determinations. In one instance, a plastic surgeon was paid $440,000 for a breast reduction that typically costs between $15,000 and $25,000.

Higher NSA spending is threatening margins on insurers' commercial businesses. Companies are expected to pass these costs to patients and employers through higher premiums.

HHS and the Labor and Treasury Departments could appeal the decision. The Trump administration has signaled it may take a more active role in reforming the NSA, with health regulators telling the New York Times this summer that they are "actively working to clean up" the process.

The Centers for Medicare & Medicaid Services (CMS) finalized a rule this spring addressing some of the arbitration process's shortcomings, including reducing the number of ineligible disputes that enter the system. However, some provisions of that rule could make it easier for providers to file disputes — a key concern for insurers — and insurers have said that regulators could have done more to address alleged gaming of the arbitration process.