Where Healthcare Prices Come from: (Part 3)
Now that we have discussed (1) that healthcare prices can be estimated in advance and (2) that in-network prices can vary by over 300%, let’s now turn to the specific healthcare provider/insurance network contract terms that create such pricing discrepancies.
First, we need to cover some terminology and basic definitions.
Billed Charges: what a provider submits on a bill to the insurance carrier/TPA for adjudication and payment.
- The bill is called a UB04 for facilities and a HCFA1500 for professional fees (e.g. the doctor). Billed charges are also referred to as the submitted amount. Billed charges are based on a facility’s ‘chargemaster’, a list of the charges for every individual item/service at the facility (e.g. Aspirin $1, 30 min of operating room time $3,000, bag of IV fluid $115, etc.). However, billed charges are not really the price as we will discuss shortly.
Contract Terms: the reimbursement methodology to which the billed charges are applied.
- The above billed charges are re-priced according to the contract that exists between the provider and the network. This re-pricing is also referred to as the discount—it is the reduced fee that the provider and the network have agreed upon.
Allowed Amount: the dollar amount that will actually need to be paid by the patient and/or the health plan.
- The allowed amount is the true price. The allowed amount is also referred to as thecontract rate. How much of the allowed amount is paid by the patient and how much is paid by the health plan depends upon an employer’s specific plan design—i.e. deductible, coinsurance and out-of-pocket max.
Given this background in terminology, let’s now turn to specific types of contract terms. These contract terms are important to employers and employees, as they are a major reason why healthcare prices vary by over 300% among healthcare providers in the same town within the same insurance network.
Two examples of contract terms are as follows:
1. Case Rate: the allowed amount is negotiated for a specific test or procedure independent of billed charges. This contract term is most frequently applied to outpatient imaging (MRIs, CT scans, etc) and some outpatient surgery. In this situation, the allowed amount is equal to the case rate. For example, two hospitals may have very different billed charges for an MRI. Hospital A may charge $3,000 and Hospital B may charge $1,500. However, each hospital has also negotiated a different case rate with the insurance network. Hospital A may have negotiated a $2,000 case rate and Hospital B may have negotiated a $1,000 case rate. Notice that at Hospital A you have a discount of $1,000 ($3,000 minus $2,000), but at Hospital B you have a discount of only $500 ($1,500 minus $1,000). So in absolute terms your discount at Hospital A is actually greater than at Hospital B—even though you will be paying more at Hospital A for your MRI. In this scenario, it is not the discount that is relevant, but rather the allowed amount.
Historically, patients have been shielded from this contracting complexity when they had low deductibles (say $250), no coinsurance, a low out-of-pocket max and just $25 copays for many services. However, now that more and more people have CDHPs or HDHPs with $2,000 deductibles, coinsurance to an out-of-pocket max of $5,000 or even $10,000, and the copays are gone—these contract terms are very important in determining what a patient ultimately must pay.
With the expansion of consumerism in healthcare, patients want to know what they owe—in advance.
In the next post we will continue the discussion and cover carve out and stop-loss contract terms.