By Jane Anderson

An arbitration system that New Jersey uses to resolve payment disputes between insurers and out-of-network providers over surprise medical bills has resulted in payments that are much higher than prevailing in-network rates for the same services, according to a new study.

The study, published in the January issue of Health Affairs, found that New Jersey’s final-offer arbitration system “appears likely to increase health care costs relative to other surprise billing solutions and perversely incentivizes providers to inflate their charges over time,” the authors wrote.

The study has significant implications now that Congress has approved legislation mandating a similar nationwide system of binding arbitration, says Dan Mendelson, founder of consulting firm Avalere Health. “The central finding — that the median arbitrator decision awarded an out-of-network payment of 5.7 times the prevailing median in-network rates — shows that the process favors providers and pushes costs to payers, and thus to consumers,” he says.

The study compared provider bids, plan bids and arbitration decisions with Medicare payment rates, median in-network prices, and the 80th percentile of charges for the same service or services. The mean arbitration award was $7,222 and the median award was $4,354. Providers won 59% of decisions, and health plans prevailed in the remaining 41%.

In addition, nearly one-third of cases decided for amounts that were more than 10 times the median in-network price, the study found. Both health plans and providers tended to bid above in-network rates, but providers bid far higher than plans: the median health plan bid was 1.6 times the median in-network price for the same set of services, whereas the median provider bid was 10.1 times the median in-network price.

In the new federal legislation, Congress stipulated that arbitrators may consider the median in-network rate paid by the insurer, says lead author Benjamin Chartock, a Ph.D. student in the Health Care Management Department at the University of Pennsylvania. “It will be interesting to see the results of the federal rule-making process,” he tells AIS Health. “It’s become clear, given our research on New Jersey, that the intricacies of the arbitration system have a meaningful impact on the outcome of disputes.”

Mendelson says the clout of providers in New Jersey makes it unsurprising that the state adopted a provider-friendly process. “I expect the same with the federal regulations,” he says.