The Value of Health Insurance

Stethescope

Open enrollment in the new health insurance exchanges mandated by the Affordable Care Act (“ACA”) begins on October 1st.  Since there are roughly 48 million people currently without health insurance in the US, this means that a lot of people will be using the new exchanges.  When buying health insurance, some people wonder what exactly is the benefit of having coverage.  There are the advertised benefits that seem pretty straightforward.  For example, that the plan covers 80% of your health care expenses, or that you have a $500 deductible, or that you have a $5,000 cap on annual out-of-pocket expenses.  But one of the biggest benefits of health insurance is one that is rarely ever discussed: the negotiated price for doctor’s and hospital’s services.

To demonstrate the benefit of the negotiated price, I’ll give an example.  Let’s say that we have two friends, Alice and Beth.  Alice has health insurance, Beth does not.  Alice and Beth happen to make appointments for a yearly checkup with the same doctor, Dr. Smith.  Dr. Smith charges $150 for a routine appointment.  So after Beth visits Dr. Smith, Beth receives a bill for $150.  Since Alice has health insurance, Dr. Smith sends Alice’s bill directly to her health insurer.  The health insurer does not pay any old price Dr. Smith asks.  Instead, the health insurer has negotiated a price for every service Dr. Smith provides (I’m using “negotiated” loosely here, health insurers actually tell the doctor to take it or risk getting nothing).  Let’s say the health insurer’s negotiated price for a routine appointment is $100.  So Dr. Smith sends Alice’s health insurer a bill for $150 for Alice’s appointment.  The health insurer turns around and says, “For that service, the negotiated price is $100, not $150.”  So Alice has already gotten a 33% discount, even before the health insurer paid anything at all.

Although the exact discount provided by the negotiated price may be different for each service the doctor or hospital performs, the overall benefit to you is significant.  For example, based on the local hospital data from my post earlier this year, Medicare (which is basically a government-run health insurer) has a negotiated price of about 38% of what local Virginia hospitals charge and about 34% of what DC hospitals charge.  In terms of discount, that is a 62-66% discount from the hospital sticker price.  While a private insurer’s negotiated price might not be quite as low as Medicare’s, it is not uncommon for the negotiated price to be only 50% of what a doctor charges.  That’s automatic savings to a person with health insurance.

So the starting point of your health insurance benefits is the negotiated price.  From there, your health insurance provides payment in the advertised percentage.  For example, the new ACA Bronze level plans provide payment for 60% of your health care costs, and you pay the other 40%.  But that’s 60% and 40% of the negotiated price, not of the price that the doctor actually charges.  Assuming Alice, in the example above, has a Bronze level health plan, she would owe 40% of the negotiated price of $100.  So she would pay $40 to Dr. Smith for her routine appointment (and the health insurer would pay $60 to Dr. Smith).  Without the negotiated price, she would pay 40% of Dr. Smith’s billed price of $150, which is $60.

Why would Dr. Smith agree to a negotiated price that is less than what he charges?  Why doesn’t Dr. Smith just refuse to accept Alice’s health insurance?  The reason is that the health insurer will make payment, and usually will make payment promptly.  Beth, who didn’t have health insurance and got stuck with the $150 bill, may or may not pay Dr. Smith promptly.  She may only be able to pay in small increments over time, or she may not be able to pay at all.  So Dr. Smith is willing to let the health insurer pay him less in exchange for a sure promise that he will be paid something promptly.

Negotiated prices sometimes go by different names such as contractual price or “allowed amount.”  But it’s all the same thing; it’s an automatic price discount.  It’s a sale price for those with health insurance.  Negotiated prices are not unique to the health plans offered under the ACA.  This is just how health insurance works.  It’s not a government mandate or a legal requirement.  But the bottom line is that it’s a huge advantage to having health insurance, because it means that you’ll get an automatic discount every time you need to visit a doctor or hospital, in addition to the obvious benefits like not being bankrupted by one illness.