You might be wondering: how can a doctor charge several hundred dollars for a ten-minute office visit? Why can the hospital bill $100k for a three-day stay? Who makes up these numbers besides me? Today’s episode is going to answer those questions so patients can get closer to what price transparency in healthcare should become.
One hilarious irony of medicine is that you won’t always know how much you need to pay for a visit and providers themselves don’t know how much they’ll get paid for the same visit until long after the fact. The dollars on your medical bill are going to be all over the place because of what your insurance covers, doesn’t cover, and writes off. However, let’s focus on the largest and usually shocking number on the EOB or invoice—the actual dollar amount billed to you or your insurance before any discounts. To be consistent, that top-line figure is called the charge or chargemaster price. The charge is nearly 100% at the discretion of the provider or whoever owns the facility. A general primary care doctor running their clinic might wake up one day and decide that a new patient office visit is $500. Or maybe $50. In either case, that charge is going straight to the insurance company. Charges vary a lot based on arbitrary choices about what providers believe their expertise is worth. However, there are some other factors based on a little common sense that influence healthcare prices.
The first major drivers for charges are staff and equipment. Healthcare facilities are more than just doctors and front desk people. Nurses, administrators, and other professionals are necessary inputs for making sure the medical system breathes. Shortages of any given personnel will make the entire system more expensive. The extreme demand for nursing during these last couple years is one such clear example. Equipment quality and depreciation affects charges as well, especially for hospitals and larger medical groups. Getting an X-ray is going to cost you more than guessing if you have a compound fracture or not with a naked-eye glance. Two patients arrive with the same broken left forearm but patient A might have a blood clot or pressure problem that complicates treatment. If patient B has an otherwise unremarkable history, then charges for patient A would likely be higher due to the degree of care needed to deal with the same broken forearm.
Let’s return to our earlier example of a general doctor charging $500 or $50 for a standard new patient appointment (such a visit might be coded as 99203 for reference). Regardless of the charge, no two insurance companies will reimburse the same amount for the same visit code. Even if you control for the insurance company, the payout still changes based on the individual plan due to how deductibles and coinsurance are spread. Health insurers don’t automatically pay the doctor a negotiated fee if the asking charge is less. For example, if the doctor bills $500 for the appointment, the health plan may reimburse $200 and write off $300 (assuming the patient doesn’t have a copay or coinsurance). However, if the doctor chooses to bill $50, the insurance will pay $50 even if the negotiated compensation should be higher. Doctors have to overbill as part of this dance with the insurance companies. This incentive, more than any other factor, is why patients see astronomical medical charges. Dr. David Belk, who runs the True Cost of Healthcare website, shows this reality among other medical charge trends directly affecting patients. Dr. Belk’s site and the other sources in this post will be on my page at rushinagalla.substack.com. There should be little surprise that providers are charging amounts several times more than what the final payment is. The requirements to get paid vary between health plans. Some insurers pay by the service, by the time, or by the diagnosis. Since these policies vary, providers have to submit all information possible on their claims as well as overbill to claim the max possible reimbursement. And if the insurance company chooses not to pay the doctor, the pumped-up tab is 100% on you.
To follow up on this phenomenon, researchers at the Health Affairs policy journal reviewed costs for two portable and common procedures done at most facilities: colonoscopies and MRIs for lower limbs (which are coded 45380 and 73721, respectively). The study’s data taken from Mass General Hospital, the University of Michigan Health System, and Vidant Medical Center (Greenville, NC), track the variation in cash fees, private insurance payments, and public insurance payments. The chargemaster prices for each of the procedures were 27% to 24x greater than the lowest respective final reimbursements. These health systems, all of which have a similar bed count, have such gaps between charges due to both patient demographics and overbilling incentives.
These eye-popping numbers affect patients’ wallets. Even though you may not be on the hook for a full chargemaster price, any increase of that charge will make either your cash payment higher or your long-term health insurance premiums higher. Per conventional wisdom, hospital and office payments across types of plans suggest that privately-insured patients with higher charges are subsidizing the low-margin public and self-pay patients such that everyone is getting the same level of care. The Journal of the American Medical Association debunked this “cost-shifting” with their own review of evidence from the Medicare Payment Advisory Commission. The newest evidence implies that cost shifting does not 100% apply to making up reduced earnings from publicly-insured patients; rather, a rise in private health plan payments go toward dealing with the rising costs of production to take care of that corresponding population. One economic fact about healthcare applying to this situation is that medical offices have mostly fixed expenses. That is, staffing, equipment, and real estate costs have to be paid no matter how strong the business is. Hospitals and large groups notice they get paid more from private health plans and in turn direct that extra money to raise profits while adding higher costs linked to attracting more of those patients. Medicine is an otherwise low-growth business so major providers have to exploit these gaps when possible. Equalizing medical quality for patients isn’t part of the equation here. Reality shows that private vs public patients get different levels of care regardless of how payment trends change. Hence, cost shifting doesn’t happen unless a multi-millionaire is consistently getting the same quality of care as someone on a low-income plan like Medicaid.
Given all this commentary on how medical charges affect you, the last takeaway is that critical events are unfolding right now for helping you deal with the mysteries of billing. The Transparency in Coverage and No Surprises Act are recent laws among many requiring hospitals and insurance companies to disclose certain prices. Changes to come in 2023 make it so various health plans must offer price comparison platforms for 500+ common services and then for all major services in 2024. Although only 6% of US hospitals have been complying with publishing their cash prices as of July 2021, you can still be cognizant of the difference for what providers bill for service XYZ vs what insurance covers for service XYZ, and also be persistent in asking what the charges are.
More patients inquiring about pricing are better for our system’s accountability. By now it should be no surprise that Americans get sensitive to healthcare prices whether it be for drugs, services, or procedures. There is another certainty. No charges occur if there are no providers. Unfortunately, US doctors can’t keep up with the American people’s medical needs as things stand now. For the next pod, I’m going to break down the physician supply and demand time bomb that has a countdown much closer than we’d like it to be. Subscribe and stay tuned to Friendly Neighborhood Patient for modern healthcare consumer tips and tricks. I’ll catch you at the next episode.
