Why do doctors seem to overcharge for services?

Question

What is the rationale for doctors to intentionally overcharge for services, when the doctor (or his service) already know the allowable charge for each procedure. For example, a pathology exam of tissue (code 88305) is charged at 227.60 but the doctor (and his billing service) know in advance that private insurance and/or Medicare will only allow a total of approximately 73.00 to be paid for that service.

• I've been assured by physicians that if the patient has no insurance, they will gladly accept 73.00 in cash.

Is there some objective (by a doctor) to charge three times as much as he knows that he will accept?

ETA: To be fair, approximately 80% of todays practicing physicians are simply employees of a corporate entity, so it's not exactly "the doctors" that are charging multiples of allowable reimbursement. It's mainly the corporate owners. This question is simplified if the focus is on physician's charges rather than adding the complexity of hospital charges.

Answer 1

This is one of the side effects of the utterly broken health insurance system in the US.

It roughly works like this:

1. Health insurance is determined by your employer (not by you)
2. Employers and their HR departments are not experts in insurance selection so they hire a "benefits broker" to create a benefit plan for them.
3. The brokers compete mainly based on "percentage saved", i.e. they offer a plan where the charge is "75% off the nominal price".
4. In order to deliver on these massive savings, the brokers work with the providers to radically increase the "nominal price". Example: if a doctor wants $100 for an office visits, the brokers ask them to charge $400. This way the doctor gets the $100 they want/need and the broker gets their 75% savings.

So anyone who is required to pay the "nominal price" (for whatever reason) is utterly screwed. That's also why cash payers typically get deep discounts from the providers. The "nominal price" is ridiculously inflated and 50% off for cash payers (like myself) is typically accepted without blinking an eye.

Source: this was described by a former CEO of a health insurance company, but I can't find the source at the moment.

Answer 2

This is a bit more specific than you would like.

Medicare pays very little and demands a tremendous amount of documentation. I had to do an audit a few years ago to measure the documentation to try to determine if there were bogus bills, and found the manditory minimum documentation per visit for medicare treatment outweighed the average documentation for non-Medicare treatment by more than twice the amount.

So yes, the doctor is much more likely to be happy with $73 cash than $73 medicare because it's so much less work.

Answer 3

The system encourages high charge rates:

• The 7-8% of people in the US that are uninsured sometimes pay full price, but they are also more likely to not pay than insured patients. Higher charge rates can help make up for the times providers don't get paid.
• There are also are many situations where provider reimbursement from insurers is based on a percentage of charges, which encourages higher rates.
• Different reimbursement methodologies across insurers/plans result in adjusting charges up to maximize revenue.

Each practice/hospital will have contracts not just for each insurer, but each plan. The contracts are complex, some procedures might get reimbursed based on a fairly simple fee schedule, but there are many different reimbursement methods and the same procedure typically gets reimbursed several different ways even within one insurance plan depending on the context (in-patient, out-patient, other procedures performed, who performed the procedure, etc.).

In addition to contract complexity, there are also many laws about healthcare billing/pricing. Setting charge rates properly can require:

• Evaluating all the reimbursement terms in all the contracts with insurers
• Understanding various laws
• Assessing non-payment risk
• Analyzing out of network revenue/reimbursement

Answer 4

There are some unscrupulous doctors out there, but most are honest and are just wanting their patients to get better.

One thing they cannot do is offer their patients a bigger discount then any insurance company they are contracted with. Obviously a cash pay should be cheaper than having to file claims with the insurance company. The money is received today, rather than 3 months from now, and there is less labor involved. If a cash payer in paying $75, the the insurance company is probably paying around $30.

The other evil man in this mix is the practice management company. Many times these practices are not doctor own, but run by business types. They will bill you for everything possible to improve their bottom line.

An example of this is one OB office would require a second follow up appointment if a patient wanted an IUD after giving birth. So the patient would have to come in for a 4 week post partum, then pay for a second visit after that to get the IUD. Its totally unnecessary other than billing and time. I happen to know a certain provider who would just do it all in one visit but would have gotten in trouble if she was found out.

Answer 5

Different payers (insurance companies) demand different deals from providers. So insurer A states they will reimburse at a rate 50% below the chargemaster price. Insurer B states they will reimburse at a rate 80% below the chargemaster price. So for a procedure (cpt billable code) that a provider wants $100 dollars, the minimum "rack-rate" will need to be roughly $500 dollars. Note, this means insurer A will be paying more for the same procedure. They will not have a good fiscal year, unless they can negotiate a better rate, or charge their clients (employers) quite a bit more.

And this is for in network. Out-of-network, insurers may state they will reimburse at rate 200%, 250% of medicare rate.