The Surprising Economics of Surprise Medical Bills

Surprise medical bills arise when hospital patients discover that certain fees are not covered by their health insurance. The reason for the surprise is that the patient’s insurance company and the hospital itself list the hospital as “in network.” Then, when the bill is presented, the patient discovers that certain doctors or certain services were “out of network.”

As I wrote previously, in a free health insurance market this would rarely happen. Do you know of any other insurance market where this is a problem? I don’t.

Because of unwise regulations, however, health insurers have perverse incentives to attract the healthy and avoid the sick. Absent these regulations, health insurers would either pay the “surprise bills” or they would negotiate a settlement with doctors and hospitals. But in today’s highly regulated market, insurers can lower their costs by letting enrollees who use hospital services get stuck with the extra fees. This allows them to keep premiums lower than otherwise for healthy enrollees who aren’t using hospital services.

The risk is that enrollees who are surprised will become irritated and switch to another insurer. But insurers are more than happy to see that happen. After all, people who use a lot of hospital services are likely to be unprofitable customers anyway.

Both at the state and the federal level there has been pressure to do something about this problem. (See my analysis here.)