Where Healthcare Prices Come From: Why Does In-Network Price Vary? (Part 2)
One of the fundamental reasons for the need for healthcare price-transparency is that usually In-Network prices vary widely in the same city or town. Let me state that again, because it is very important:
The price of healthcare services is very different depending on where you receive care locally, even WITHIN NETWORK.
Let’s go through some examples:
- In-Network Facility A $1,240
- In-Network Facility B $527
Upper GI Endoscopy:
- In-Network Facility C $2,580
- In-Network Facility D $544
Total Knee Replacement:
- In-Network Facility E $57,504
- In-Network Facility F $29,377
One of the reasons these variations exist is because of the negotiation process the insurance network and the provider go through. That negotiation process is much like a process of horse-trading or ‘give-and-take’ where the prices of some services are boosted very high, while others are kept very low to achieve an ‘aggregate’ discount of around 50%.
Facility A says to the Insurance Network…
“I want high reimbursement for imaging”
–Contracted Rate of $1,240
Insurance Network then says to Facility A, “Ok, but you need to give me a lower rate on another service.” Facility A responds…
“I am willing to take lower reimbursement for total knee replacements”
–Contracted Rate of $29,377
The Insurance Network then goes across town to Facility B and has the exact OPPOSITE conversation:
Facility B says to the Insurance Network…
“I am willing to take lower reimbursement for imaging”
–Contracted Rate of $544
Insurance Network says, “Oh, that’s great.” Facility B then responds…
“I want high reimbursement for total knee replacements”
–Contracted Rate of $57,504
The Insurance Network and the Provider then go back-and-forth for all the other types of healthcare services:
–Labor & Delivery
–Implantables like pacemakers and orthopedic rods and screws
In the end the aggregate discount at Facility A is 50% and the aggregate discount at Facility B is also 50%.
So if someone were to ask me which provider is more cost-effective, the answer would be, “Well, it depends.” It depends on what service you are having.
I will add that quality is largely not a part of this negotiation process. The issue of quality is very complex in and of itself, as there are limited objective measures and all sorts of challenges surrounding risk adjustment. However, I will discuss quality more in a subsequent post.
To make matters more confusing, sometimes the sign on the front of the building at two different provider locations can say the same thing—ABC Medical Center—but, they will actually have 2 separate contracted rates, so the price will be very different, even though it appears to be all within the same umbrella organization. The converse is also true. Some physician offices, urgent care centers, and outpatient locations will say Dr. XYZ, but will actually bill through ABC Medical Center’s contracts and use their rates (which are often higher).
All of this did not matter to a healthcare consumer when all that was necessary was to pay a $25 copay. However, now that deductibles and out-of-pocket maxes are higher and more people are on consumer-directed health plans eliminating copays—consumers are caught in the middle of this pricing complexity. So now it does matter—a lot.
In the next blog post, I will discuss several specific contract methodologies used to ‘calculate’ the discount.
Have you experienced a large price difference in healthcare services? Have you had a hard time trying to find out pricing information?
To view the other posts in this series on Where Healthcare Prices Come From follow the links below: