Why health insurance? Part 2

In my last post, I briefly discussed the “shared responsibility percentage” as one of the reasons people should pay for health insurance. In today’s post, I’m going to talk about the IMPORTANT reason for getting a health insurance policy.

Collective Bargaining Power

The important reason for having an insurance policy is to receive the benefit of the “negotiated rate” between your insurance company and the doctors in the insurance company’s network. The current healthcare payment system is set up to benefit health insurance companies first and the providers and patients last. But the system gives health insurance companies the ability to develop collective knowledge and group bargaining power for our very complicated system of health care services. Medical payments are complicated, and most people don’t have the time or resources to learn how the system works so that they can make educated guesses about cost. This is where the insurance company comes in to make life easier.

Here in the U.S., we have what called a “services for fees” approach to compensating healthcare providers for their work. In short, providers have to perform services to bill for them to get paid. Providers need access to patients upon whom they can perform services, so doctors et al. have to contract with lots of different insurance companies to maximize the number of potential patients they can see so their practices remain full and they can earn a living.

Generally speaking, doctors only get paid for actually providing services to patients. However, due to various regulations and contractual terms, doctors don’t get engage in individual negotiations so that person A gets one price and person B gets a different price for procedure X. Doctors have to set a price for procedure X, and every time the doctor performs procedure X the doctor has to charge the billed rate. But very few people end up paying the billed rate because of negotiated insurance rates and “cash payer discounts.” Insurance companies pay different amounts for procedure X, so doctors will want to set the price of procedure X high enough to receive the entire amount the highest paying insurance company is willing to pay for procedure X.

To make this a little less abstract, let’s say procedure X is a sleep apnea relief surgical procedure called an uvulopalatopharyngoplasty (UPPP). Here is a brief illustration:

UPPP billed charge (what the doctor charges):  $3500.00
Medicaid allowed amount for UPPP: $850.00
Medicare allowed amount for UPPP: $894.74
National insurance company allowed amount for UPPP: $1118.42
Regional insurance company allowed amount for UPPP: $1207.90
Bizarro outlier insurance company allowed amount for UPPP: $2684.22
Price with cash-payer discount of 25%: $2625

Doctors have an opportunity to provide a cash-payer discount, but due to other regulations doctors have to be careful that the cash payer discount doesn’t take the actual payment for procedure X below the amount that Medicaid/Medicare would pay. And frequently, doctors’ contracts with other insurance companies can be terminated if they’re caught giving too many uninsured patients discounts larger than the ones negotiated by the insurance company, which in turn means the doctor has access to fewer patients, so unless the doctor wants to say adios to the patients of that insurance company a doctor isn’t going to give too many people the medicare/medicaid rate for services.

So the important benefit(s) of paying that $1000 per month to your national insurance company is that in the event you or a loved one has to have surgery, the insurance company has the expertise to know what “should” be paid for the procedures, and the contracts in place so the consumer doesn’t have to pay the full billed charge.

In my next post, I’ll discuss how the prices for different procedures and contracts are determined and negotiated. While the illustrated price points above are fictional, there is a system to how they work.


November 8, 2016

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