If you have ever had a doctor’s visit or a hospital stay and you have health insurance, you probably received a rather obtuse document called an “Explanation of Benefits.” This document tells you, among other things, how much the doctor or hospital charged for the service they provided, how much the insurance company paid, and how much is your responsibility.
You might think that what you owe is the amount left of the charged amount after the insurance company paid its share. You would be wrong. You would be wrong because what the doctors or hospitals charge is way more than what they will accept as full payment from the insurer…maybe eight to ten times as much. Insurance companies, including Medicare, negotiate the lower rate.
For example, I recently received a summary of year-to-date medical benefits from my insurer. Providers billed $158,502. (It’s been a big year, medically speaking.) Of that amount, the providers accepted only $15,405, or slightly less than 10%. Of this amount, the insurer paid $13,400 and I paid the rest. The insurer had negotiated a “discount” of $143,196!
This is kind of like haggling over the selling price of a car. If you think that a car dealer has priced a car too high, you can negotiate a lower price. One of the firm rules of negotiation is that the dealer will attempt to maximize his profit by making sure that his asking price is considerably higher than his cost. In no case will the dealer negotiate a selling price at which he makes zero profit or takes a loss. So the true cost of the car to the buyer may be considerably less than the original selling price, but you can be sure that it still allows a profit for the dealer.
If cars were priced like health care, you would only have to pay $20,000 for a $200,000 car. What is the true worth of that car: $200K, or $20K?
The true cost of health care is not the cost the provider originally quotes, but the amount that the provider accepts from the insurer. This means that health care services actually cost about an eighth to a tenth of the figures usually quoted…that is, unless you are not insured.
In most cases, a provider can hold an uninsured person liable for the entire billing amount: up to ten times the amount paid by an insurance company. (Some hospitals and doctors claim that they may subsidize uninsured patients, but there seems to be no systematic method in place for that.) It is no wonder that uninsured patients are sometimes forced into bankruptcy by health care costs.
The most significant benefit one can find in the Explanation of Benefits statement is the deep discount that the insurer has negotiated with health care providers.
If everyone knew this, would there be anybody that didn’t see the need for having health insurance?