Tuesday, May 29, 2012

Cash vs. Insurance - Lessons to be Learned

On Sunday the Los Angeles Times ran an article about the huge discounts available to patients who pay cash for medical services.

The discounts documented by the Times were astounding - in one case for a CT scan the cash price was ten times (10 X) less than what the insurance price was, and 20 times (20 X) less than what the "list" price was.

This correlates with my personal experience. In the past, when I was covered by Blue Cross, which required I pay a deductible for annual health checkups, I paid cash to my physician - the cost of paying cash was less than the deductible!

I have to say, however, that while I knew cash based physician services cost less than insurance covered services, the disparity highlighted in the Times article alarmed me. While insurance is about spreading the risk to a larger population set so that those who otherwise could not afford services could, the Times article begs the question: is insurance administration so inefficient that vendors can charge ten times less for a procedure than if paid through insurance?

What goes into the economics of the pricing of medical services when comparing cash versus insurance? How does the fact of insurance derail the pricing model?

The Times article does not go into why this occurs and perhaps the complexity of medical economics will be addressed in future articles.

It's easy to blame insurance for the high cost of medical treatment, and the war between insurance carriers and medical vendors gets played out every time there is an attempt to regulate the cost of services.

That's not the point here though. What intrigues me is that medical service vendors must have plenty of data which allows them to price services based upon different payment methodologies. They obviously have worked out what the costs are given a certain set of payment criteria - these are all smart business people that must have crunched the numbers to justify a discount ten times less than what insurance pays.

In other words, they have studied the inefficiencies attendant with the different reimbursement sets, have quantified the various costs, and can price their services accordingly.

What would fee schedules look like if those in charge of these pricing decisions shared with payers and regulators all of the data that identified each friction point in insurance based reimbursement schedules versus getting paid cash?

It seems to me that this same sort of cash disparity analysis would also be applicable to the cost of workers' compensation medical treatment services.

If medical vendors have the data to figure out their cash discounts, it seems to me that they know best where the friction points are and that would be invaluable data to the regulatory community - perhaps our laws play an oversized role in the cost of medical services.

It is nearly universally accepted that the cost to the medical vendor is much higher going through the workers' compensation system than general health, which per above, is higher than a cash for services system (at least for the more routine, non-iterative procedures) otherwise services could just be paid for at Medicare rates rather than a multiple as in most states.

I can accept that.

When we ask why medical vendors point to the increased regulatory hassle, increased paper work and other elements - but these are all generalities.

What specifically are the steps along the way that create that extra friction cost? What can regulators learn from those who give cash discounts as to system efficiency?

I suspect that there are service points that either can be eliminated entirely, consolidated with other service points or at least modified to be more efficient than they currently are.

It's a complex equation for sure, but it seems to my simplistic way of thinking that studying medical vendor pricing would yield some valuable insight into system efficiency. By understanding how certain legal, regulatory and insurance imposed constrictions or requirements add to the cost of services maybe overall system costs can be addressed in a meaningful fashion rather than the customary top end debate over reimbursement sets.

Perhaps medical and insurance executives could explain these economics to us and give us the insight that allows such deep discounting in the non-insurance payment model.


  1. What is not obvious to someone who is not billing for a medical office, is that the insurance companies can commit fraud and the medical office has little recourse. An individual office is in no position to take on a large insurance company. The systems with is copays, different plans, with multilevel of insurance make it almost impossible to determine who creates the problem. Even entire hospitals have difficulty negotiating with these large corporations. In the past reimbursement was higher so a medical office just wrote these losses off. But as payments have been dramatically reduced the impact is now being felt by the physicians and patients. In my office we only collect about 50% of what we bill, and the these rates are constantly being lowered by the Federal Government via Medicare Guidelines. The only charges we can set are cash prices, we give about a 50% cash discount if paid at the time of the service. Cash patient's seem to be more respectful of the physician than patient's who really don't understand how little physicians are being paid of an office visit.

  2. Thank you for your observations.