Why Health Insurers Don't Care About Large Provider Bills
Written by Editor   
Monday, July 09, 2018 08:45 PM

It is widely assumed that insurers are fierce guardians of health care spending.  In many cases, however they aren’t.  In fact, they often agree to pay unreasonably high prices and then pass them along to patients.

The United States spends more per person on health care than any other country. A lot more. By many measures, as a country, we are not getting our money’s worth. Millions are in financial peril. About 1 in 5 is currently being pursued by a collection agency over medical debt. Health care costs repeatedly top the list of consumers' financial concerns.

About half of Americans get their health care benefits through their employers, who rely on insurance companies to manage the plans, restrain costs and get them fair deals.  Frequently, high costs are blamed on doctors and hospitals, but less scrutinized is the role insurance companies — the middlemen between patients and those providers — play in boosting the health care tab.  A secretive system of deals often come into play that have little to do with charging a reasonable fee. 

It has been documented that hospitals and insurance companies have agreed on prices. The patient is then required to help pay that price. It’s a three-party transaction in which only two of the parties know how the totals are tallied.  Coinsurance contract provisions can require the patient to pay the hospital a percent of the total agreed upon by the hospital and the insurance company, even though more reasonable charges may prevail elsewhere.

Patients who want to know what they’ll be paying — let alone shop around for the best deal — usually don’t have a chance.  Once the provider and the insurance company have agreed upon a price, even if it might be outrageous, the patient is obligated to fulfill their part of the insurance contract even if they might have found a better price.  Imagine if other industries treated customers this way. The price of a flight from New York to Los Angeles would be a mystery until after the trip. Or, while digesting a burger, you could learn it cost $50.

Patients fund the entire health care industry through taxes, insurance premiums and cash payments. Even the portion paid by employers comes out of an employee's compensation. Yet when the health care industry refers to “payers,” it means insurance companies or government programs like Medicare.  Patients now pay more for monthly premiums, higher copays, deductibles and coinsurance rates.

Employers are equally captive to the rising prices, and Employers nationwide are passing rising health care costs on to their workers by asking them to absorb a larger share of higher premiums. The Bureau of Labor Statistics data has found that every time health care costs rose by a dollar, an employee’s overall compensation got cut by 52 cents.

It might be assumed that health insurers would make money by reducing how much they spend. But it turns out, insurers don't have to decrease spending to make money. They just have to accurately predict how much the people they insure will cost. That way they can set premiums to cover those costs — adding about 20 percent for their administration and profit. If they're right, they make money. If they're wrong, they lose money. But, they aren't too worried if they guess wrong. They can usually cover losses by raising rates the following year. If the insurance company has accurately built high costs into the premium, it can make more money. For example, say administrative expenses eat up about 17 percent of each premium dollar and around three percent is profit. Making a three percent profit makes money if the company generates more premiums.  It's as if a mom told her son he could have three percent of a bowl of ice cream. A clever child would say, “make mine a bigger bowl.”  Experts call this a “perverse incentive.”  Insurers and providers have a symbiotic relationship. There’s not a great deal of incentive on the part of any players to bring the costs down.

Insurance companies may also accept high prices because often they aren't always the ones footing the bill. Nowadays about 60 percent of the employer benefits are "self-funded." That means the employer pays the bills. The insurers simply manage the benefits, processing claims and giving employers access to their provider networks. These management deals are often a large, and lucrative, part of a company's business. 

To entice the self-funded plans, insurers need a strong network of medical providers. A brand-name system can demand — and get — the highest payments. On the flip side, insurers can dictate the terms to the smaller providers.  The little guys get the short end of the stick.  That’s why they often merge with the bigger hospital chains so they can also increase their rates.

Other types of negotiations can also come into play, experts say. Insurance companies may agree to pay higher prices for some services in exchange for lower rates on others. 

Patients, of course, don't know how the behind-the-scenes haggling affects what they pay. By keeping costs and deals secret, hospitals and insurers dodge questions about their profits.  The system is stacked against the consumer.

In response, a Tennessee company is trying to expose the prices and steer patients to the best deals. Healthcare Bluebook aims to save money for both employers who self-pay, and their workers. Bluebook used payment information from self-funded employers to build a searchable online pricing database that shows the low-, medium- and high-priced facilities for certain common procedures, like MRIs. The company, which launched in 2008, now has more than 4,500 companies paying for its services. Patients can get a $50 bonus for choosing the best deal.