The No Surprises Act, which took effect in January 2022, was supposed to be a straightforward consumer protection: shield patients from unexpected medical bills when they inadvertently receive care from out-of-network providers. Instead, according to an investigation by the New York Times, the law has created a parallel economy in which physicians leverage mandatory arbitration to extract payments from insurers that dwarf standard reimbursement rates.

The most striking example: a breast reduction procedure that resulted in a $440,000 arbitration award—roughly 50 times what insurers typically pay for the same surgery.

The mechanism is simple, and the incentives are powerful. When an out-of-network doctor treats a patient at an in-network facility—a common scenario in emergency rooms and surgical centers—the law requires insurers to pay the physician directly and prohibits billing the patient beyond standard cost-sharing amounts. If the doctor and insurer cannot agree on payment, either party can trigger binding arbitration through a process called Independent Dispute Resolution.

What lawmakers apparently failed to anticipate was how aggressively some physicians would use this system, and how profitable it would become.

The Arbitration Gold Rush

The Times investigation reveals that specialized firms have emerged to help doctors maximize arbitration awards. These companies handle the paperwork, select favorable arbitrators, and coach physicians on how to justify inflated charges. Some operate on contingency, taking a percentage of whatever they extract beyond the insurer's initial payment offer.

The arbitration process itself was designed to be streamlined and cost-effective—each case costs $350 to file. But the potential returns have transformed it into something resembling a lottery with favorable odds. Physicians routinely submit "billed charges" that bear little relationship to market rates, and arbitrators—who must choose between the insurer's offer and the doctor's demand—often split the difference or side with providers.

The result is a system that consistently produces windfalls. According to federal data cited by the Times, doctors win approximately 60 percent of arbitration cases, and the median award is roughly three times what insurers initially offered.

For context, this mirrors what happened after Congress passed similar surprise billing protections for air ambulances in 2016. That law also included arbitration provisions, and it similarly spawned an industry of consultants and aggressive billing practices that drove up costs—a cautionary tale that apparently went unheeded.

Why Insurers Keep Paying

One might wonder why insurance companies tolerate this arrangement rather than fighting every case. The answer lies in economics and incentive structures.

First, insurers can pass these costs along to employers and policyholders through higher premiums. While any individual insurer has reason to resist inflated payments, the industry as a whole has limited incentive to wage war against providers when the ultimate bill goes to customers.

Second, insurers must weigh the cost of prolonged disputes against the cost of settlement. Even when they believe a doctor's demand is unreasonable, paying an inflated claim may be cheaper than dedicating staff time and legal resources to fighting it—especially when the arbitration process offers no guarantee of a reasonable outcome.

Third, and most importantly, the law prohibits insurers from penalizing patients or steering them away from providers who exploit the system. Patients remain protected regardless of how much their doctor extracts in arbitration, which means insurers cannot use consumer choice as leverage against aggressive billing.

The Broader Pattern

This is not the first time well-intentioned healthcare legislation has produced expensive unintended consequences. The history of American medical regulation is littered with examples of laws that created perverse incentives or opened new avenues for rent-seeking.

The Emergency Medical Treatment and Labor Act of 1986 required hospitals to treat emergency patients regardless of ability to pay—a moral imperative that nonetheless contributed to cost-shifting and the closure of emergency departments in underserved areas. The Medicare Modernization Act of 2003 prohibited the government from negotiating drug prices, a provision that added hundreds of billions to program costs over two decades.

What distinguishes the No Surprises Act debacle is how quickly the exploitation emerged and how transparently it operates. Within months of implementation, physicians and their advisors had mapped the system's vulnerabilities and built an industry around them.

What Happens Next

Congress could amend the law to cap arbitration awards, require arbitrators to consider standard market rates rather than billed charges, or eliminate arbitration altogether in favor of predetermined payment formulas. Each approach has precedent in other contexts and would likely reduce the most egregious windfalls.

But any fix faces the same political dynamics that shaped the original law. Physician groups wield substantial lobbying power and will resist changes that reduce their leverage. Insurance companies will push for reforms but lack public sympathy. And patients—the intended beneficiaries—remain largely unaware that their premiums are funding this system.

The fundamental tension is this: protecting patients from surprise bills requires someone to determine what doctors should be paid when market negotiations fail. Arbitration was supposed to provide a neutral mechanism for making that determination. Instead, it has become a mechanism for wealth transfer from insurance pools to medical practices, with the costs ultimately borne by everyone who pays premiums.

The No Surprises Act succeeded in its primary goal—patients are no longer receiving devastating unexpected bills. But it achieved this by creating a hidden tax on the healthcare system, one that flows through arbitration awards and into premium increases that affect millions of Americans who never set foot in an arbitrator's office.

Whether Congress will address this problem depends on whether the political will exists to confront a well-organized interest group over an issue that remains largely invisible to voters. History suggests that absent a crisis or scandal, such reforms tend to languish. In the meantime, the arbitration industry will continue to thrive, and the gap between healthcare's sticker prices and its actual value will continue to widen.