What You Should Know About Your Health Insurance Provider Part I: Is your doctor “in network”?

As we discussed in a previous post, your health insurance company is a for-profit company. It makes money by acting as the middleman between you and your doctor. It negotiates special pricing with a network of doctors and hospitals on behalf of its subscribers (or members). As a member, you can take advantage of that special pricing. All bills for medical services that are covered by your insurance policy go through the insurance company.

But what exactly does your health insurance company do, and what does it matter to you? In this multi-part series, we will discuss in detail the 8 primary functions of your health plan:

1. Negotiate prices with a network of doctors and hospitals.
2. Design insurance plans.
3. Set premium rates for the insurance plans it offers.
4. Collect premiums.
5. Monitor the use of medical services by members to make sure expenses are appropriate and allowable.
6. Pay claims submitted by its network of doctors and hospitals on behalf of its members.
7. Deny claims, in some cases.
8. Return money to shareholders and pay executive salaries.

Let’s take a closer look at each of these starting with the function that consumers encounter when they seek out healthcare services and facilities: the all-important health insurance provider network.

MAKING A PURCHASE IN AN INEFFICIENT MARKET

I have a recurring nightmare where I’m rushed to the hospital for a medical emergency, and my top priority isn’t, “Tell my family I love them!” It’s not even, “I’m allergic to penicillin.” No, it’s, “Make sure everyone who touches me is in network!”

This reaction may seem irrational, but everyone who has had to interpret – and pay – a healthcare bill will understand. You see, healthcare is not an efficient market. In an efficient market, buyers and sellers negotiate prices based on the same access to information. An efficient market depends on this transparency. The healthcare market in the United States is not transparent.

Our healthcare market is designed so that important players (like consumers and physicians and hospitals) each only have access to a small piece of information. This lack of information means that people make healthcare decisions in a manner very unlike other purchase decisions. Here’s an example of a typical transaction in an efficient market: Your local convenience store charges $5 for a half-gallon of Tropicana orange juice. You know that you can get this same product at your supermarket for $4.50, but you choose to pay the additional 50 cents because it takes 10 minutes to drive to the supermarket and you only need one item.

You could purchase another brand of orange juice at the convenient mart for $4, but you choose the Tropicana and you agree to pay more because you prefer the taste and quality. You have made a rational decision based on access to all available information. Another consumer has access to the same information and could make a different purchase decision based on their unique priorities.

NO TRANSPARENCY, NO CONTROL

Here’s an example of a typical transaction in our healthcare system: You go to the doctor because you have a sore throat and a cough. The doctor examines you, takes a throat culture and takes a chest x-ray. You ask to see the bill on the way out. The receptionist tells you she has to send it through your insurance company. She can’t tell you what it will cost.

Three weeks later you get an explanation of benefits (EOB) from your insurance company. It contains charges for a doctor visit, a rapid strep test, a lab fee for the strep test that was sent out, a fee for the x-ray and a fee for a radiologist. There are two prices for each item:

1. Amount charged
2. The “adjustment,” which is the amount your insurance company has negotiated for the service. If you haven’t met your deductible, you are responsible for this portion of the total.

Before you received this EOB, you did not know which specific services you had purchased, what they would cost, or what other doctors would charge for these same services. The reason you don’t know any of this is because if you are insured, the “buyer” of the services is your insurance company.

IN-NETWORK. OR ELSE.

Your insurance company negotiates prices for its subscribers (the people who are insured) by entering into deals with doctors, hospitals and healthcare providers to pay a certain amount of money for different kinds of medical procedures.

For example, your insurance company agrees to pay your pediatrician $87 for every check-up she performs for patients who are covered by your insurance plan. Your doctor charges someone without insurance, or someone who is covered by an insurance plan that does not have a contract with your pediatrician, $150.

In this scenario, your insurance company has negotiated a $63 “discount” for its members. The doctors, hospitals and medical providers that your insurance company has signed contracts with is its “network.”

Some insurance policies require subscribers to use ONLY those doctors and hospitals that are in its network. Even where subscribers are permitted to see doctors and go to facilities outside of the network, it is generally very costly for the subscriber.

AN UNEASY ALLIANCE

Because your insurance company buys lots and lots of services, it can negotiate better prices with doctors and hospitals. The doctors and hospitals that your insurance company has negotiated lower prices with is the insurance company’s network.

Why would your doctor agree to this “discount”? Because insurance companies act as the middleman between people who need health care and the doctors and hospitals that need patients. Approximately 200 million Americans get health insurance through a private insurance carrier. Of the 100 million Americans remaining, the vast majority are eligible for Medicare, Medicaid, Veteran’s Administration benefits, or some other government-sponsored health insurance.

In a system where almost all available customers are represented by a middleman, doctors and hospitals have to deal with the middleman. Think of your insurance company as the only supplier of a necessary part of the healthcare supply chain: the patients for doctors and hospitals.

THE HEALTHCARE MONOPOLY

Another reason health insurance companies have a lot of power to negotiate prices is because a handful of huge health insurance companies dominate the market. When a few big firms dominate a market, their power increases.

Think of your cable company. If you are like most people, you only have one cable provider that services the area where you live – and they charge a lot of money simply because they can. Until recently, cable customers had no alternative, and healthcare consumers are no different.

For large health insurers this monopoly means they can:

1. Negotiate cheaper prices with doctors and hospitals
2. Charge you higher premiums

Doctors, hospitals and patients have no alternative – unless they want to get rid of the middleman.

KNOW BEFORE YOU GO (OUT OF NETWORK)

If access to your current healthcare providers is important to you – like it is for many people – you can make sure your preferred doctors and hospitals participate with your health insurance provider network. Simply ask Daizy.

Read Part 2 ‘You Get What You Pay For’.