A glitch in state insurance law is allowing doctors to collect Medicaid fees that are sometimes hundreds of times higher than the program normally pays, costing taxpayers millions of dollars a year.

Governor Hochul wants to close this loophole as part of the overdue state budget, but both houses of the Legislature have so far resisted her proposed fix.

It’s a small but telling example of Medicaid spending that could be cut without diminishing anyone’s coverage or benefits.

At issue is a decade-old state law meant to shield consumers from “surprise billing” when they receive emergency treatment by doctors and hospitals outside their insurance plan’s coverage network.

Under the law, which took effect in 2015, out-of-network emergency providers can no longer bill the patient for amounts left unpaid by insurance. Instead, providers can seek higher reimbursement from the health plan through “independent dispute resolution,” or IDR. The law says arbitrators involved in this process should base their decisions on the 80th percentile of relevant fees paid by commercial insurers in each region of the state, as determined by a claims tracking organization known as Fair Health.

This policy was not expected to have much effect on Medicaid, because the program’s recipients are generally exempt from cost-sharing and therefore not vulnerable to surprise billing.

However, some providers have used IDR to challenge their reimbursement from Medicaid plans and won dramatically higher payments as a result. This is because Medicaid – as a taxpayer-funded safety net health plan for the low-income and disabled – has traditionally paid lower fees than private insurance, whereas the IDR system uses commercial fees as its benchmark.

In a recent op-ed, the president of the New York Health Plan Association, Eric Linzer, gave striking real-world examples of this loophole in action:

An individual needed emergency back surgery at a downstate hospital, which was performed by an out-of-network surgeon. While the Medicaid fee schedule reimbursed for the surgery at nearly $3,000, the provider disputed the amount, submitting a bill in excess of $566,000 – almost 200 times the Medicaid rate. The independent reviewer determined the surgeon should have been reimbursed over $514,000, which became the ultimate cost to the taxpayers.

A patient was admitted to a downstate hospital and required spinal surgery due to nerve compression that was causing muscle weakness. An out-of-network orthopedic surgeon performed the procedure, charging over $563,000, well above the Medicaid fee schedule of roughly $1,300.  The independent reviewer rendered a decision that the provider was owed over $507,000.

A downstate neurosurgery group that was out-of-network performed spinal fusion surgery on an individual at an in-network hospital. The Medicaid fee schedule set a rate of $1,757, while the group charged nearly $81,000, with the independent reviewer determining that the neurosurgery group’s requested amount to be more reasonable.

The use of IDR to challenge Medicaid payments seems to be on the rise, especially since the surprise billing law was expanded in 2020 to cover “inpatient services which follow an emergency room visit” – i.e., emergency surgery to repair a leg broken in a skiing accident.

As currently operating, this system creates a powerful incentive for certain types of specialists, such as emergency room doctors and orthopedic surgeons, to refuse to join Medicaid managed care provider networks – because that allows them, through IDR, to demand far higher fees than Medicaid would normally pay.

Hochul’s budget proposal included a provision that would exempt Medicaid health plans from the independent dispute resolution – likely saving the state millions of dollars right away, and heading off the even higher costs that would result if current trends continued. It was one few attempts the governor made to contain Medicaid costs, which she has said are rising at an unsustainable rate.

The initial savings are modest, estimated by the Hochul administration at $7.5 million a year out of total state-share Medicaid spending of $44 billion. However, if the policy is left unchanged taxpayers can expect the cost of emergency-related care for Medicaid recipients to escalate indefinitely.

The Assembly and Senate omitted this proposal from their respective one-house spending plans, leaving the measure’s fate to be decided in negotiations between Hochul and legislative leaders.

As congressional Republicans contemplate reductions in future Medicaid funding, Albany lawmakers have raised an alarm about the effects on New York. If they truly want to shield the program’s recipients from possible federal cuts, closing the needlessly expensive IDR loophole is a small but relatively painless step to take.