Kevin Drum Is Right About Problem, Wrong About Reasons

Kevin Drum, quoting Karen Tumalty, is correct in his assessment that the uninsured are being screwed but is incorrect in his assessment of motivations. His post would also be more accurate if written about the uninsured as opposed to placing “the poor” in the title as the poor are more likely to have Medicaid coverage and therefore not be affected by this. Drum writes (quoting Tumalty in the first paragraph, and having his assessment in the second also picked up by Andrew Sullivan):

“A paradox of medical costs is that people who can least afford them — the uninsured — end up being charged the most. Insurance companies, with large numbers of customers, have the financial muscle to negotiate low rates from health-care providers; individuals do not. Whereas insured patients would have been charged about $900 by the hospital that performed Pat’s biopsy (and pay only a small fraction of that out of their own pocket), Pat’s bill was $7,756. For lab work — and there was a lot of it — he was being charged as much as six times the price an insurance company would pay.”

There are lots of things to hate about our current medical system, and all of us have our own favorite things to hate.  This is mine: the fact that the system massively overcharges you if you’re uninsured, and they do it just because they can.  If you’re uninsured, you’ve got no leverage, no alternatives, no nothing.  So you get screwed.  It’s like the shopkeepers who charge twenty bucks for a pair of flashlight batteries after hurricanes.  Maybe it’s the free market at work, but if so, that’s all the worse for the free market.  In the healthcare biz, it just doesn’t work.

He misses the real reason for the screwed up system where the uninsured get charged the most. It is not at all like the shopkeepers who charge twenty bucks for flashlight batteries.  It is not because doctors want to charge the uninsured more, or because they can, but because of how insurance reimbursement works.

Different plans reimburse differently. Some pay more for some types of services and less for others. There is often no logic to how each company sets their fee schedule. Doctors  survive poor payment for some services by the money made on others, but this differs with the insurance company.

Since doctors are going to be underpaid on some items, we try to maximize income on the items each insurance company pays well on. This means charges are generally based upon the highest we reasonably expect to get for each service to maximize income from insurance companies who underpay on other services.

Here’s a simple illustration based upon just two charges and two insurance companies.

Let’s say that insurance company A pays $100 for X and $60 for Y. Insurance company B pays the reverse.  To ensure they receive the maximum payment from insurances which discount what they pay, many doctors will charge s $110 for each and they will bring in $160. If the doctor tried to charge $80 each they would only bring in $140 ($80 from the company which approves $100 and $60 from the company which approves $60.) As there are actually many different insurance companies out there and nobody knows all their fee scales, doctors might charge $110 to guarantee maximum payment from the companies which value that service the highest.  As there are still rare payers who pay all or most of a charge, a doctor might even add on more to offset all the other cases where a large percentage of the charge must be written off. The uninsured patient therefore winds up being charged $220 or more when the charge for those with insurance winds up getting written down to $160.

The doctor might be happy to receive $160 total but it is not possible to set charges based upon receiving $160 when insurance companies will pay different amounts. One answer might be to charge uninsured people $80 and only play the above games with the insurance companies. However insurance companies pay a doctor’s customary and reasonable fees up to the insurance company’s maximum. If the insurance company found that a particular doctor was charging $80 to the uninsured, they would reduce their payments to $80, considering this to be their customary fee, while still only paying $60 for the other service.

The result is that the uninsured do wind up getting charged more, but this is based upon responses to how insurance companies pay, not a conscious decision to obtain more from the uninsured.This is one reason that even a high deductible plan which winds up paying little might still be of some value. Even if your insurance doesn’t pay, you might be able to pay a lower amount than the full charges based upon your insurance company’s payment scale.

There are also variations from different sources. In the simplified example above, most doctors might charge $110 but reference laboratories and hospitals might charge $200. Note that in Karen Tumalty’s example the problems come primarily from the hospital and labs, not their doctor. Even then, the prices charged are primarily based upon the fact that there are still rare  third party payers who will pay the bill, not any belief that they will really be able to collect these sums from the uninsured.

Actually the uninsured can often receive breaks. Most doctors and hospitals will agree to a payment plan for less than the actual charges for an uninsured patient who runs up a big bill. In contrast, Kevin Drum’s hypothetical shopkeeper tries to gouge everyone for the batteries. There is also a relatively low collection rate for charges to uninsured patients. I suspect that hospitals start from a high number to give themselves plenty of bargaining room.

While I cannot legally use a different pay scale for uninsured versus insured patients, there is another way I at least give my uninsured patients a break. It is of value if I don’t have to submit insurance claims and if I don’t have to wait for payment. Therefore I give a discount for those who pay at time of service. This primarily benefits uninsured patients (along with patients whose office calls are not covered by insurance or have a large deductible). I figure insurance companies cannot complain as I’d give them the exact same discount if they paid me at time of service.

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  1. 1
    Eclectic Radical says:

    This is an excellent analysis of the current situation.

    I would note, however, that the word ‘poor’ in this instance is highly subjective. Whether or not it is correct depends on the definition of ‘poor.’

    If the definition of ‘poor’ is to be taken as ‘people who qualify for Medicaid’, then no, Kevin Drum is incorrect to use the word ‘poor.’ However, Medicaid has very specific requirements and some of those qualifications are not based on income. My father used to work as an eligibility worker for Medical, in California.

    Single parents with an income below a specific level may receive Medicaid, as may families with an income below a specific level. Children are automatically, in most states, eligible for Medicaid even if their parents are not. Yet single adults without children may not meet Medicaid requirements regardless of income, and some working people do not meet Medicaid income requirements as they currently stand but cannot afford private insurance without great hardship.

    If people who work and bring home an income but cannot afford insurance (either without great financial hardship or at all) despite lack of eligibility for Medicaid are to be considered ‘poor’, then Kevin Drum is entirely correct to use the word.

    With the exception of a brief period during the Clinton Administration when a great deal of talking was done about the plight of the ‘working poor’, we have typically used the word ‘poor’ to describe the homeless, unemployed, or underemployed. There are quite a few working Americans who are ‘poor’ in the economic sense. More all the time, as jobs that pay well become more education-intensive and our education system fails to meet those standards.

  2. 2
    Ron Chusid says:

    That’s why I wasn’t overly concerned with the use poor. It should be qualified that this is really not about the poorest people but there certainly are people who could still be classified as poor who are uninsured and don’t qualify for Medicaid.

    My main objection is that this is not a practice which is aimed at all against the poor. The poor are adversely affected (assuming they don’t qualify for Medicaid) but medical fees are not set based upon any expectation of getting this money from the poor.

  3. 3
    Eclectic Radical says:

    I agree entirely with that. It is not a premeditated act targeting the poor, it is rather a misguided belief that health care is a commodity that should be traded at a profit rather than a necessity of life to which all should have equal basic access. Utilities are also necessities, and while the utilities industry IS operated at a profit as well, it is operated under very different rules and much tighter regulations: gas, electricity, and water are seen as basic necessities to which all should have access and some effort is made to prevent feral price gouging. Not that there isn’t room for improvement.

    However, whether or not those unable to pay for health care are deliberately targeted by the system does not change the fact that there is a ‘reverse Robin Hood’ aspect to the system: those least able to pay are those who pay the most, those most able to pay are those who pay the least. (‘Reverse Robin Hood’ is not my creation, it was used by Dr. Peter Hanson in one of the scariest articles about health care I have ever read from someone purporting to want to make the system ‘better’)

    I do, however, have to agree with your basic premise.

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