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SURVIVING OBAMACARE SIMPLY (SOS): MEDICAL PRICES?

Jul, 18 2013

Did you know that prices can vary 300%-500% between healthcare providers for the same procedure, in the same network, and within the same zip code?  

I recently read a story about a reporter who needed an MRI due to some migraine issues, so he decided he would take this  opportunity to become “an engaged, savvy patient.” He called around to get pricing (which was difficult, to say the least) and found prices ranging from $600 to $7468.

How is this possible?

I had NO idea healthcare pricing was this wacky until I read Jim Skinner's book Smart Money:  The Simple Guide to Becoming an Educated, Empowered, Money-Saving Champion of the Healthcare You Deserve. We’ve recently introduced a multi-post series called SOS - Surviving Obamacare Simply, where we explore advice on becoming an ace healthcare consumer. We started with the basics with 15 Terms Explained.  

Yesterday, I went shopping at my local grocery store. I realize grocery stores run sales and have specials to bring in customers, but overall, commodities like milk, eggs, and butter sell at similar prices locally from store to store. Now, let’s switch the example to my favorite product: shoes! When I shopped for a new pair of designer shoes at my local department store, I was paying a premium for the in-store experience and customer service. In contrast, I often shop at DSW where I can get great name brands, style and quality at 40-60% off the department store prices. In other words, commodities don’t see huge fluctuations in price locally from store to store and non-commodity products will see fluctuation based on quality, experience, service, brand, etc.   

So, this pricing theory should follow with healthcare pricing, right? NOT SO MUCH! Unfortunately, the conclusion we draw with most all other products in the USA, is not true for the healthcare industry – services of similar quality are found at drastically different prices. To an outsider (like, uh, 95% of Americans), there’s really no rhyme or reason.

What most of us don't understand is how this happens and where healthcare prices originate. Why? Because the healthcare “system” was set up in such a way that kept us ambivalent to it. Here’s a story that might sound familiar to you: when Joe had a $200 deductible, full dental and vision insurance, was he worried about the cost of an MRI? No, because he wasn’t paying much, so who cares how the price is determined and how much the bill comes to, right? When we’re not footing the bill, do we control our spending? No! In fact, we want the most expensive because we think it’s “the best.”

NOW, however, Joe has a high deductible insurance plan and he’s paying $2500 - $7500 out of pocket before his insurance kicks in. Most of us won’t ever use our insurance and we’ll pay out of pocket for most, if not all, of our healthcare expenses in a year. These days, we need to know just as much about our healthcare costs and quality as we do about buying butter or a pair of quality shoes. In order to be a good healthcare consumer, it pays to defend ourselves with some knowledge about healthcare pricing. 

The Overview

With a little help (OK, a lot!) from Reid Rasmussen, our resident health insurance expert, let’s explore how it works!

Unlike most industries, Government spending has a HUGE affect on where healthcare pricing starts. In the US, EVERY medical procedure or service available (and there are thousands of them) starts with the Medicare price as a baseline. In other words, if someone on Medicare had the procedure, the baseline price is what Medicare would pay the provider.

Jim has this to say, “Does this mean a Medicare patient is charged less than a non-Medicare patient? Yes, definitely! The rest of us pay much more to make up for the money lost in Medicare, Medicaid and from uninsured people who don’t pay for their services.” More on this in a minute!  

All medical procedures for the rest of us in this country are then priced relative to Medicare pricing. Insurance companies take the Medicare baseline price and work with every local provider (docs, hospitals, imaging centers, etc.) to negotiate what they will pay for each of these procedures or services. Each procedure is given a code (like a SKU) and today there are 13,000 different medical procedure codes. Can you imagine the tracking spreadsheet for prices of thousands of procedures across thousands of providers? YIKES! There are entire careers built on dealing with medical pricing and billing. 

Side note:  If your insurance company has negotiated a price with a provider, that provider is considered “in the network” for your insurance company. This is why you sometimes get a better price when you go to a doctor who is “in your network.”  

Now, a note on how a procedure’s price is calculated: the Medicare baseline price for each procedure or service is defined as a ‘1.0’ rate. Insurance companies always pay above that rate and it’s stated as a percentage above that. On average, procedures are priced at 1.4 or 1.5 compared to the Medicare rate at 1.0.  In other words, we typically pay 40-50% higher prices than Medicare patients.    

Image removed.

So, let’s use the picture below and a fake procedure to help explain: the Browoscopy (just go with it!). Keep in mind, I’m WAY oversimplifying the process – imagine this process X 13,000 procedure codes.  Now you can stop wondering why it’s hard to find the “real price” you’ll pay.  

1) If you’re on Medicare, the Browoscopy costs $1,000 (and Medicare will reimburse the provider $1,000 for your Browoscopy).  

2) Now, each insurance company looks at the Medicare price and then determines what they’ll pay for this procedure. Remember, there are thousands of procedures and codes – to save time, an insurance company might say they’re going to apply a 1.6 rate to all procedures in a certain category of treatment. For example, Insurance Company A will pay 60% higher than Medicare pricing on all Eye procedures - and there could be thousands of procedures/codes just in that one category.

3) Providers determine what they’ll charge for the Browoscopy procedure (and all the other procedures they perform). Every provider has a “Retail” price and “Wholesale” prices they negotiate with each individual insurance company. The Retail price is what they would charge you if you didn’t have insurance. The Wholesale price is what they charge based on your insurance company’s negotiated amount. 

4) Your price is determined! After all this work is done, you pay the lower price between: 

a.  your insurance company’s negotiated price (wholesale price)

                    OR 

b. the provider’s retail price

Image removed.

The Problem

The problem (well, one of them!) is this: If I were a savvy Browoscopy provider, I would charge a really high retail rate. This way, I would ALWAYS get paid the highest negotiated rate by all the insurance companies. This is why there is such a wide range of pricing. Like many industries in the US, it’s a fake retail amount because almost no one actually pays that price.   

The Moral

Now you can see why some people ask for the "cash price" and save a bunch of money while others get a better price with their insurer’s discount. Using the Browoscopy example above: if I had a $5,000 deductible plan with Insurance Company B and I needed a Browoscopy, I would be very smart to shop around and go to Provider A. I would save $700!  If I hadn’t shopped around, I would’ve been fine spending $2,000 and think I got a deal through my insurance company’s negotiated rate!

This brings me to a very wise statement from our friend, Dr. Eric Bricker: “Everybody’s talking about going to another country to get better healthcare prices….sometimes, it’s just a matter of going across the street!”  

Stay tuned for our future articles where we’ll give tips on how to navigate through this mess and help you “shop” for a procedure!

Now, it’s your turn! Did you know this is how it worked? Do you have any questions?

Tonia Degner

Tonia Degner is a retail expert with over twenty years in the industry. When not out traveling and exploring, she enjoys helping others by taking the complex and making it simple and understandable. She loves saving busy families time, money and frustration.

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