10 November 2020

A Short Introduction To Medical Billing In America

Can a medical practitioner legally charge health insurances a different amount from what it would charge a non-insured patient?
Short Answer

In the vast majority of cases, yes, although a handful of states have laws imposing some limitations on this practice. I haven't reviewed the state laws of the states mentioned in the question.

Long Answer

There is some pattern to the madness that is American medical provider building, but overall it is arbitrary, idiosyncratic and disconnected from any independent reality.

Most cases of weird pricing structures in the U.S. economy are basically variations on ways to engage in "price discrimination" so that people who are willing and able to pay more for something pay more for something, while people who can't can still obtain something while paying less for it in exchange for some sort of compromise or inconvenience. In the case of U.S. medical billing, however, the causes are more complex and involved than that.

Instead, this is largely because the person making the decision on whether or not to purchase the service and the person paying for most of the expense of the service is usually not the same. These prices aren't set in anything closely resembling the models of economic price markets one learns about in introductory college economics classes.

It is easiest to illustrate the health care billing situation in the U.S. by example.

Imagine that Dr. Fred is a medical doctor specializing in internal medicine who performs an exam of a patient who presents as not feeling well and having a fever. Dr. Fred practice in a medium sized U.S. city where he has privileges at a satellite free standing combined emergency room and urgent care center, at an office affiliated with a local hospital, and at his own separate office. Dr. Fred is, as most physicians are, self-employed with a contractual rather than employee-employer relationship with the places where he provides health care other than his own private office.

Dr. Fred would typically have 29 different rates for performing these services, seven at each of the four settings depending upon who is paying and where the services are performed, and a twenty-ninth rate of zero or of only out of pocket costs at cost without markup for extreme charity cases.

In terms of location the price would be highest at the emergency room, next highest at the urgent care wing of the combined emergency room and urgent care center, next highest at the hospital affiliated doctor's office, and lowest at his own private doctor's office. An actual hospital, a special medical clinic with limited hours for a particular subset of patients, and ambulatory surgery center, if Dr. Fred provided the service there, might also have different rates.

The ER rate is often five to twenty times the private doctor's office rate. The urgent care rate is often two to five times the private doctor's office rate. The hospital affiliated doctor's office is often one and a half to five times the private doctor's office rate. An ambulatory surgery center rate is often 33% to 80% of the rate for performing the same services in a hospital. A specialized medical clinic is typically significantly less, typically 20% to 90% of the private doctor's office rate. An ER or hospital will also usually have more independent service providers who charge separately for ancillary or related services than a private doctor's office would.

In terms of who is paying the prices would be, the main categories, from highest to lowest, would typically be:

* Uninsured patient, not paying in cash (this typically includes a large collectability risk premium and is only rarely collected in full unless the uninsured patient receives a personal injury settlement or judgment in a lawsuit). This rate is often disclosed to a regulatory agency and caps the maximum amount that the provider can charge anyone for the services described.

* Insured patient, with an insurance company for which Dr. Fred is an out of network provider (this typically includes a significantly higher than average profit margin but not the collection risk premium paid by insured patients not paying in cash). The reasons that out of network providers are used varies. Sometimes providers with premium services don't join the larger networks because they want to charge a premium price for their services. Sometimes the patient has an insurance company that is geographically limited and has no local network providers where the patient needs to obtain care. Sometimes the patient accidentally chooses a non-network provider without realizing it. Sometimes a patient has bare bones catastrophic health care coverage, or is designed for maximum flexibility at the cost of the insurance company paying a smaller share of total billings, and does not have its own provider's network.

* Insured patient, for an insurance company for which Dr. Fred is a network provider (this typically is the most common rate includes a little more than the profit margin needed to meet the provider's expenses and subsidizes the lower rates). This rate is negotiated and typically is subject to a "most favored nation" clause that prevents one insurance company from being charged more than another for in network services provided to each other's insureds.

* Medicare patient (this is typically a few percent less than the insured patient network provider rate and includes a somewhat smaller profit margin). This is benchmarked to the insurance company price which must often be disclosed to Medicare administrators. Medicare is the program providing the primary health insurance coverage for most retired senior citizens in the U.S.

* Uninsured patient paying in cash (this is typically slightly more than the break even price for the provider providing the services given the provider's cost structure).

* Sliding scale rate paid by low income uninsured patient not paying in cash (this is typically slightly less than the break even price). Reproductive health care providers (e.g. abortion providers), and mental health care providers, often provide the largest share of their services on a sliding scale to uninsured patients. Sometimes this rate is also used for friends and family of the provider.

* Medicaid patient (this is typically much less than the break even price). Medicaid primarily provides care to low income patients on a means tested basis with minimal or not patient co-pays or deductibles.

* Uninsured, totally indigent patient provided with charity care (typically for someone who doesn't qualify for Medicaid for some reason like lack of U.S. citizenship, but urgently needs care) for a nominal cost or for free (the same at all four locations) (obviously this doesn't pay any bills and is an act of pure charity reserved for exceptional heart strings tugging cases).

Sometimes there would be other special rates for worker's compensation insurance patients, patients who are part of a provider based or third-party price discount plan that doesn't provide the third-party payment that an insurance company does, or flat rates for providing medical services in bulk to an institution such as a university or school medical clinic, a jail or prison, a factory, or a professional sports team. Rates almost as high as emergency room rates are often charged for patients paying in cash for illicit, "off the books" care like drug cartel members injured in gang warfare, or people seeking prescription drugs that they are not medically permitted to receive lawfully for their particular ailment, or for priority treatment contrary to the policies of the institution where the physician would usually provide these services.

The hierarchy of cost by location, however, is not always exactly the same for each kind of payment arrangement.

For example, a hospital based HMO may negotiate lower prices for services provided as a hospital or a hospital affiliated doctor's office, than at a private physician's office, even if the physician is in the HMOs network, because the HMO makes some of the money it pays back in its role as a hospital provider.

Some physicians with predominantly office based practices refuse to treat patients who are insured and not paying cash in advance, and also refuse to treat patients who are on Medicaid.

Some boutique high end practitioners will no join any network of health care providers and will only treat patients with out of network coverage or patients who pay a premium cash only price rather than a usual discounted cash only price. Often these practitioners make house calls or provide specialty elective services like cosmetic plastic surgery.

The ER price for an uninsured patient exam might be $6,000. The urgent care price for an insured patient from a network provider might be $500. The cash price for an uninsured patient at a hospital affiliated office might be $250. The Medicaid price for a visit at Dr. Fred's private office might be $75.

Also, in a hospital or ER setting and sometimes also in a hospital affiliated doctor's office or urgent care clinic, each of the providers who interacts with the patient bills separately, so there is often more than one charge for what would be a single physician visit charge in a private doctor's office.

For example, a hospital might charge, in addition to the physician exam fee, an admission nurse triage fee, a facilities fee, a hospital gown charge, and a disposable thermometer charge, all from different vendors on separate invoices. In the case of insured patients, some, but not all of these charges would be disallowed.

The price charged at First Hospital for different services might be completely different from the price charged at Second Hospital across the street. Rates for the same service in the same city by comparable providers typically vary by a factor of ten within the same city, and it is virtually impossible to get an accurate price quote in advance from all relevant providers, except in the case of elective surgeries scheduled weeks in advance, or for very simple basic routine services (e.g. a pediatric well child visit, or a sport's physical).

Typically, the price charged has little or nothing to do with the cost of providing the service, or with the rates charge for similar services in the same geographic area. Billing rates and practices are quite arbitrary and nearly random, although they have some vague internal logic at times and are usually tied to one of several standard billing code systems.

Typically, neither Dr. Fred nor the patient would know what the price of the service rendered was in advance, and there would often be discretion on the part of the billing office to bill for the same service in different ways.

For example, one billing office might bill the exam as a "sick patient office visit" and another might bill the same exam as a "COVID-19 risk prescreening visit" at different rates with different billing codes. Some might bill the use of a thermometer by a nurse as a separate laboratory test with a different billing code, and another might roll it into the same service.

There are a handful of systems in the U.S. in which the insurer and the provider are vertically integrated, most notably a health maintenance organization known as Kaiser Permanente, the U.S. Veteran's Administration, some medical services for active duty military personnel, and a few smaller health maintenance organizations (HMOs) that usually operate only in one city with one provider network. In these systems, pricing is somewhat more predictable and services are usually provided only to HMO enrollees.

Of course, within the category of insured persons there are myriad variations on what a patient's responsibility is under the insurance policy.

Generally speaking, providers take the position that the patient is responsible for all charges billed, and then adjust their rates to reflect negotiated prices reached between an insurance company and the provider. The onus is on the patient to resolve billing disputes between the insurance company or companies involved and the often many providers involved in providing a single medical service. But, once that negotiated price is determined, the division of the negotiated price between the patient and the insurance company varies a great deal.

Billing disputes are common. It is unusual for any medical service more complicated than a single physicians office visit, vaccination or isolated laboratory test to not result in some sort of billing dispute or mistake outside of a vertically integrated health care provider.

In practice, courts typically end up siding with health care providers in medical billing disputes, even under circumstances when other vendors would be denied all recovery or full recovery of the amount sought, even though the legal doctrines upon which this is done are often flimsy or not formally articulated.

A small minority of states (Colorado is one of the few in this category) impose some statutory limitations on price discrimination between insured and uninsured patients, but this is the rare exception rather than the norm, and not infrequently isn't enforced even when these laws are on the books.


Guy said...

Hi Andrew,

I asked an friend who works in the insurance field to comment on your post and here is the anatomized response:

I did not work in the billing area, but worked closely enough in the insurance field to have a decent appreciation of the issues. While I may take issues with some comments or question some cost ratios quoted, I think the general thrust of the blog article is legitimate.
Providers are supposed to have a ‘standard’ charge for each procedure, which, as far as I know, is supposed to be the same for uninsured and out-of-network insured persons. This will be the highest cost.
Even IF providers ultimately waive most/all of the cost for some uninsured persons who can’t pay, many will want to take that waiver (of over-stated price) as a basis for charity deduction.
For persons who went out of network, many insurers will often intervene to negotiate an ad hoc, retroactive discount with the provider, or at least ferret out many charges that should have been already included in other procedure charges as a matter of course.
Providers belonging to one or more networks of insurance companies have contractually-set fee charge schedules that are substantially discounted. The discount levels will vary by provider and insurance company.
Charges are indeed often hard to compare between providers, in part due to how they interpret the ‘complexity’ of a situation. But some insurance company tools do allow insureds to compare costs to some degree between providers in the same network, for better price shopping. Some tools also give a sense of costs for non-network providers (esp hospitals).
Some provider fields (e.g., anesthesiologists) have a higher portion of providers who don’t want to participate with any networks, and think they have enough supply and demand leverage to charge at a high level. So even if an insured person follows the rules of going in-network, they may ‘by necessity’ have used the service of non-network providers who charge out of proportion with everyone else involved.
The lowest provider charges are available for persons covered by Medicare or MedicAid. That’s basically because the Fed Government dictates the prices for each area (subject to Lobbying input to Congress). But, providers who don’t want to ‘waste their time’ at such ‘low rates’ can refuse to see Medicare or (more frequently) MedicAid patients.
So, the biggest message/caveat is: if you are uninsured, you are highly likely to ‘get screwed’ if you end up with anything other than a mild medical issue.

andrew said...

Thanks for the thoughtful second opinion. BTW, the means tested federal-state joint health insurance program is capitalized as "Medicaid" and not "MedicAid".