Why Does the Insurance Company Pay Less Than What My Physician Charges?

Why does your doctor bill one amount, but your insurance pays something completely different? In this episode of the Take Care podcast, Melody Mulaik breaks down one of the most confusing parts of healthcare billing and explains why the number on your bill is rarely the number your physician receives.

Using a real listener question, this episode walks through how insurance contracts work, how in-network and out-of-network status is decided, and why Medicare rates play such a big role in what doctors are paid. Melody also explains the real costs physicians carry behind the scenes and why the gap between charges and payments exists in the U.S. healthcare system.

If you’ve ever looked at an Explanation of Benefits and thought, “This makes no sense,” this episode is for you.

In this episode, Melody discusses:

• 00:00 – Why insurance doesn’t pay what your doctor charges
• 00:27 – How doctors negotiate with insurance companies
• 00:56 – In-network vs. out-of-network explained
• 01:21 – How insurance companies decide what they pay
• 01:55 – What Medicare rates really mean
• 02:40 – Medicare allowed amounts and patient responsibility
• 02:55 – Why insurance might pay more or less than Medicare
• 03:17 – Percentage-of-charge contracts (and why they’re rare now)
• 03:43 – Why charges still look so high
• 04:09 – The real costs of running a medical practice
• 04:29 – Why billing and reimbursement are separated in U.S. healthcare
• 04:51 – How this affects what patients ultimately owe

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Transcript

Melody 0:13

Hello everybody and welcome to this episode of Take Care. Got a great question from Linda. She asked, why do insurance companies not pay what my physician charged them for the services that they provided for me? That's a really great question, and it's a very complicated question. So I'm going to boil it down to the primary key issue as to why, what our physicians charge is very different than what actually they get paid for from the insurance company. So really the short answer to that is our physicians and physician practices negotiate with insurance companies, right? And so the insurance company will come to them and they say, I'd like for you to see my patients. And to do so, this is the rate that I'm going to pay you. And so, they come up with a negotiated rate. And if they can come to terms, then the physician office can see patients for that particular insurance company. So that is considered to be an in-network physician for you. But there are times where your physician or physician's office will have a discussion with an insurance payer and they will say, no, I do not agree to that rate. And then, that is when somebody is designated as an out of network physician. So that happens from time to time. So, looking though at, okay, the physician has agreed to accept your insurance. You are now in network. They are going to accept that physician's rate. Well, how do they determine the rate? Well, there's a couple of different ways, but the most popular way they do it is they base it on Medicare reimbursement. Now, Medicare also called CMS Centers for Medicare and Medicaid Services. So, CMS is sets rates at a national level every year. And that's an extremely convoluted process, and I will just leave it at that for the purposes of what we're talking about today. But they publish this Medicare physician fee schedule, and it tells us for every single procedure or every visit level that's out there. What they're going to pay? Now, they do some little adjustments here and there for geographical location For example, if you go to a doctor's office in downtown New York City, that physician will get more than if you're going to a doctor's office in a rural area of South Dakota. Okay, just using that as an example. Now, it's not tremendously different, but there's some adjustments for it. But Medicare puts this information out. So everybody knows this is what Medicare is going to pay for this particular service. So commercial payers, and actually let me be clear, it's not necessarily what Medicare is going to pay. It's what they're going to allow. And typically, Medicare will pay 80% and then the patient has the 20% that comes into play. And again, it may be the same thing with your plan, but that's what they allow based on their contract. So your commercial insurance, your insurance has the same situation. But what they will typically do and again, most commonly they will base their rates on Medicare rates. So, they may say, we will pay two times Medicare. So if Medicare is going to reimburse a hundred dollars for something, your insurance plan may pay$200 for that service, that would be great. Sometimes it's less, sometimes it's one and a half times Medicare. After you get below that, that starts to get really low. And again, there's a lot we could say around what that rate should be. That is not the purpose of my answer here, but just to let you know, that's how those rates get determined. Secondly, and less popular, used to be more common in the past, but less popular is they might pay a percentage of charges. So, for example, if a physician charged a hundred dollars, you might have a plan that says, I will pay 60% of what you charge. But most insurance companies don't do that anymore because you could quickly see, well, what if the physician charged 200 or 300 and the insurance company's obligated to pay that? We don't see that as much as we used to. The vast majority of those contracts are based on those Medicare rates. So you'd say, well, why is there still such a difference? Well, keep in mind, your physician has a lot of different contracts out there. They're seeing Medicare patients. They might be seeing Medicaid patients. They might be giving away some uncompensated care, which most physicians do in some form or fashion, either they're doing a certain amount of charity care within the organization. It may be they don't ultimately get paid for everything that's done. They've gotta cover their staff that's supporting them. They've got a whole bunch of administrative costs. They've got malpractice insurance, they've got rent, they've got equipment. There's a whole long list of things that physicians have to pay for before they even have their own salary to come into account. So the reason that the cost or the charge is a little bit higher is they're trying to show the true cost to provide the medical services for the patient. The way the health American healthcare system is set up, we as a country, separate billing from reimbursement, and there's always going to be that gap between what actually is billed versus actually what's going to get paid by the insurance company. So again, it goes back to that individual contract. How they determine what they're actually going to allow. And then that determines ultimately what your piece of the pie that you have to pay in as well. Again, little bit of a simplified answer to the question, but that gives you an overall piece of it. But if you have other questions for me, everybody, please go to the website, put that information in. I'm happy to answer any questions. And until next time, take care.