New research suggests health insurers could take some negotiating tips from people who pay for health care out of pocket.
According to an analysis from HealthCareInsider, hospital costs for patients with insurance are higher than for those who self-pay.
That flies in the face of conventional wisdom. Insurers are in the business of managing healthcare costs — especially those associated with serious medical events like heart attacks. With their sizable patient pools, we might expect them to have enough negotiating leverage to bargain for lower prices than a patient fending for himself.
But patients are a lot better at allocating healthcare resources than they’re given credit for. Policies that empower individuals to spend their healthcare dollars as they see fit would go a long way towards reducing unnecessary health costs.
On average, patients with private insurance cost hospitals roughly $1,700 more for inpatient stays than patients who either pay themselves or aren’t charged, according to HealthCareInsider’s research. That difference has climbed steadily from about zero in 2001.
For certain health conditions, the difference is more substantial. Hospitals charge heart attack patients with private insurance $22,599 for inpatient stays. Patients who pay out of pocket, on the other hand, are billed just $6,191.
One reason for these disparities is that hospitals tend to enforce a tiered charge system, wherein self-payers are charged less than those who pay through insurance. In some cases, a person with insurance could actually save money by paying out of pocket.
Healthcare providers also charge higher rates to private insurance to compensate for lower payment rates from government health plans like Medicare and Medicaid — or non-payment by the indigent.
But self-paying patients have a strong incentive to keep costs down. Every dollar they knock off their bill, whether by asking for a discount or turning down care they may not feel they need, ends up in their pockets.
Insurers and providers, by contrast, increasingly have less of an incentive to keep the cost of care down. And that’s because competition is waning in both sectors.
Take the insurance industry. A little over half the country has coverage through an employer. Workers tend to have little say over their health plan — and little freedom to change coverage should they wish to.
On the individual market, Obamacare’s exchanges were supposed to allow Americans to comparison-shop for coverage — and insurers to compete for customers. That vibrant marketplace hasn’t materialized. In 2021, nearly one-quarter of counties had only one or two insurance companies offering exchange coverage.
On the provider side of things, a wave of consolidations has brought independent hospitals and physician practices to the brink of extinction. According to a recent study in Health Affairs, nearly three in four hospitals are now part of a larger hospital system.
Nearly half of physician practices are owned by a hospital system or other corporate entity — and that share is rising quickly. Between January 2019 and January 2021, corporate entities acquired a whopping 20,900 practices across the country.
As competition has diminished, so too has the incentive to keep prices down. Providers have leeway to demand higher prices from insurers, as there aren’t as many competing healthcare facilities to keep them honest.
Insurers, meanwhile, have less reason to negotiate for lower rates. Their customers don’t have many other options. So insurers can just pass their higher costs along to their customers.
Those with private insurance may not even notice that their premiums are heading up. Employers may feel compelled to eat higher premiums to attract and retain workers in today’s tight labor market. In the exchanges, everyone’s contribution toward their premium is capped at 8.5% of income — or less. So federal taxpayers pick up most premium hikes.
Higher claims costs can actually work to insurers’ benefit, thanks to Obamacare’s medical loss ratio rules, which require insurers to spend 80% of premiums in the small-group market and 85% in the large-group market on medical care. Higher premiums can mean higher profits, on an absolute basis.
Years of misguided reforms have made America’s third-party healthcare payment system less competitive, less innovative, and more costly. But the status quo isn’t irreparable. We need policies that promote competition — and give patients the freedom to make their own healthcare choices.
Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is “False Premise, False Promise: The Disastrous Reality of Medicare for All,” (Encounter Books 2020). Follow her on Twitter @sallypipes. Read Sally Pipes’ Reports — More Here.