What is an insurance network discount worth?
Consider the value of insurance discounts
Some self-insured employers are adopting new strategies to pay for their group benefits plan. These plans, including direct contracting with hospitals or reference-based pricing, typically do not use a traditional insurance network.
Many employers are finding they can obtain better value for the services they pay for by either negotiating with the hospital directly, or by paying an excess of Medicare’s reimbursement rate.
Why would employers want to adopt these strategies? Generally, the benefit that insurers provide to employers are their network discounts for services. But with healthcare prices skyrocketing, are employers getting the most value through this set up? Let’s look at how it typically works.
What is the cost of a medical procedure? As most consumers know, this isn’t an easy question to answer. It isn’t like buying a television or even a car.
Hospitals have what are called “chargemaster” prices. This is what the hospital will charge an uninsured or out-of-network patient for their services.
These prices are typically very high, often two, three or four times higher than what these services cost in other countries. Why are these prices so high? It’s because they are actually starting points for a negotiation.
Hospitals negotiate off of the chargemaster price for inclusion in the insurer's network. Hospitals want volume, or people to come to their hospital, so they will accept a discounted chargemaster rate from insurers who include the hospital in their “network.”
Here’s an example. Let’s say Acme Hospital’s chargemaster rate for a total knee replacement is $60,000. Beta Insurance negotiates that down by 50 percent—$30,000.
Beta Insurance goes to Charlie Company and says, “We’re able to provide you and your employees with a 50 percent discount for knee replacements.”
That sounds pretty good, but without mentioning prices, Charlie Company doesn’t really know what that 50 percent discount is worth. And what Beta Insurance doesn’t say is that Medicare reimburses Acme Hospital $10,000 for the same service.
So Charlie Company may have received a 50 percent discount through Beta Insurance, but they are still paying 300 percent of Medicare’s reimbursement rate.
These high prices drive up Charlie Company’s premiums, and make their benefits plan less sustainable.
This dynamic is the reason some employers are eschewing the traditional insurance network, and simply paying an excess of Medicare’s reimbursement rate.
In the example above, Charlie Company would not have a contract with Acme Hospital. Instead, a Charlie Company employee has their surgery at Acme Hospital, and the hospital bills the employee the chargemaster rate—$60,000.
Charlie Company’s representatives would say, “We’ll pay 150 percent of what you receive from Medicare for the same service, which comes to $15,000,” and encourage the hospital to accept the payment in full.
The employer pays significantly less than if they went through Beta Insurance. However, hospitals don’t really like this strategy, because it reduces their reimbursements.
In some cases, the hospital will balance bill the employee for the remainder of what the employer didn’t pay—$45,000, in our example.
Many reference-based pricing plan administrators provide legal advocacy to employees in the case of a balance bill. Often, these cases are resolved quickly, though they can go to court.
But in many cases, employers are finding it more valuable, sustainable and transparent to pay in excess of Medicare, than to receive a discount off an inflated chargemaster price.
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