Since insurance rates are different than pay out-of-pocket rates who is setting the price for medical procedures?
In: Economics
Hospitals, doctors offices, and other providers set their rates. What those rates are is totally up to them. They are sometimes, but not always, based on their costs. E.g. the electric bills, materials costs, administrative overhead, etc, divided by all the procedures/services they provide. This list of prices can be found on a document called a Charge Master.
Then, they negotiate with different groups that actually pay them for those services, since most of the time or isn’t the consumer. For example, if a hospital is engaged in negotiations with a national health insurer like CIGNA, the insurer may say “Procedure X on your charge master is listed at $1000. But the average hospital in this county charges only $500. Since we represent so many potential patients for you, how about we settle on $600 each?”.
If the hospital agrees, then for any CIGNA patients they will give a -$400 discount vs the $1000 price on the Charge Master. That $600 will either come directly from the insurer, or some of it will come from the patient, depending on their plan. For example, someone on a high deductible plan at the start of the year may have to pay the whole $600, whereas someone else may be on a plan that says they split it 80/20 with CIGNA.
That’s generally how it goes. Though in the real world there’s thousands of procedures to negotiate over, thousands of different providers, hundreds of insurance companies, so as a result those negotiations can take up a lot of time and have very different results hospital-to-hospital, insurer-to-insurer, and so on. It’s hard, mathy guess work figuring out how much is the right amount for each procedure so that insurers or hospitals don’t go bankrupt. A brain surgeon probably could keep a practice going if every 8-hour procedure only got $100 in payment.
As a result, many provider as insurer negotiations often take a shortcut, and piggy back off of the price setting someone else has already done. Medicare, the US health insurer for the elderly, is the elephant in the room, who have vast bureaucracy and legal resources to set target prices for all the procedures they pay for. And all of their work is public. So CIGNA may go to a hospital and say “We know Medicare pays you $1000 for procedure Y, and you basically break even on it. How about for our patients, we’ll pay you the Medicare rate + 30%?” And they’ll negotiate from there.
Latest Answers