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What is the rationale for doctors to intentionally overcharge for services, when the doctor (or his service) already know the allowable charge for each procedure. For example, a pathology exam of tissue (code 88305) is charged at 227.60 but the doctor (and his billing service) know in advance that private insurance and/or Medicare will only allow a total of approximately 73.00 to be paid for that service.

  • I've been assured by physicians that if the patient has no insurance, they will gladly accept 73.00 in cash.

Is there some objective (by a doctor) to charge three times as much as he knows that he will accept?

ETA: To be fair, approximately 80% of todays practicing physicians are simply employees of a corporate entity, so it's not exactly "the doctors" that are charging multiples of allowable reimbursement. It's mainly the corporate owners. This question is simplified if the focus is on physician's charges rather than adding the complexity of hospital charges.

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  • I have heard - but do not know nearly enough to claim this as truth in an answer - that part of it is tax deductions. If a hospital has to treat emergencies for free, they could either write off 73 dollars as loss - or 227 dollars. And insured people pay reduced rates as negotiated with their insurers.
    – Syndic
    Commented Aug 5 at 14:52
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    Because you discount from prices, you can't add to them.
    – DogBoy37
    Commented Aug 6 at 13:14
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    @BobE It's hard to say for sure without talking to the provider but I'll wager a guess. There are different allowed rates for different payers. The office either doesn't have a system capable of managing which patient is associated with which payer and/or which rate is allowed by each payer. OR, they don't know how (or want) to set it up. Submitting an amount just about the max rate they get from any payer guarantees that they will get the max allowed amount from each payer.
    – JimmyJames
    Commented Aug 6 at 15:53
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    There is no "seem to" about it. They absolutely overcharge for services due to a messy web of screwed up incentive structures. Bags of saline at the hospital don't cost $800.
    – Beefster
    Commented Aug 6 at 21:18
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    @DogBoy37, "actual doctors get roughly get the same for each procedure after the discounting", and that's my point, if they receive the same payment (regardless of the source ie insurance + coinsurance) what is the point of presenting an inflated original charge. Is it just to make the public feel like they are getting a discount that no one else gets? Or is there some other reason?
    – BobE
    Commented Aug 7 at 2:27

5 Answers 5

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This is one of the side effects of the utterly broken health insurance system in the US.

It roughly works like this:

  1. Health insurance is determined by your employer (not by you)
  2. Employers and their HR departments are not experts in insurance selection so they hire a "benefits broker" to create a benefit plan for them.
  3. The brokers compete mainly based on "percentage saved", i.e. they offer a plan where the charge is "75% off the nominal price".
  4. In order to deliver on these massive savings, the brokers work with the providers to radically increase the "nominal price". Example: if a doctor wants $100 for an office visits, the brokers ask them to charge $400. This way the doctor gets the $100 they want/need and the broker gets their 75% savings.

So anyone who is required to pay the "nominal price" (for whatever reason) is utterly screwed. That's also why cash payers typically get deep discounts from the providers. The "nominal price" is ridiculously inflated and 50% off for cash payers (like myself) is typically accepted without blinking an eye.

Source: this was described by a former CEO of a health insurance company, but I can't find the source at the moment.

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    Sure, but in order to get the Medicare rate you need to be on Medicare. If you not, you get billed a fantasy rate that than gets discounted to something comparable to Medicare. This is just a smoke and mirrors game so the insurance can advertise "huge discounts" to the employer who select the plan
    – Hilmar
    Commented Aug 4 at 18:49
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    Does anyone pay the nominal price?
    – gerrit
    Commented Aug 5 at 6:41
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    @gerrit: unfortunately yes. It can hit people that are not insured and are not in a position to negotiate. Often that are vulnerable people: freshly unemployed, people that can't fully understand complex insurance rules, people who are in emergency situations. Medical debt is linked to about 2/3 of all personal bankruptcies in the US and a significant factor is being charged highly inflated prices.
    – Hilmar
    Commented Aug 5 at 12:00
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    This answer could address the anti-competition measures to keep providers from having to fight over prices, and the quasi-trust "gentleman's agreement" between the existing ones to keep prices high.
    – Mindwin Remember Monica
    Commented Aug 5 at 12:05
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    This answer has components that are correct in the right contexts, but they are jumbled together in a way that is not correct. It first conflates brokers with benefits administration/management. Benefits administrators typically help companies with self-funded benefits. Brokers typically work with companies to negotiate with insurers for commercial plans. Any explanation of the US health insurance that tries to describe it as a single system is, by definition, wrong. It's far more complicated than that.
    – JimmyJames
    Commented Aug 5 at 17:53
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This is a bit more specific than you would like.

Medicare pays very little and demands a tremendous amount of documentation. I had to do an audit a few years ago to measure the documentation to try to determine if there were bogus bills, and found the manditory minimum documentation per visit for medicare treatment outweighed the average documentation for non-Medicare treatment by more than twice the amount.

So yes, the doctor is much more likely to be happy with $73 cash than $73 medicare because it's so much less work.

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  • Documentation, less documentation for a cash patient then a Medicare patient --- is that what you are saying. Speaking personally, I'd prefer complete documentation for a surgery than something that is an abbreviated report. BUT, does Medicare really have significantly lower allowable charges compared to other major health care insurers?
    – BobE
    Commented Aug 5 at 21:30
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    @BobE: I don't know how much lower but Medicare is lower than almost all commerical payers. It's not so much as less documentation for cash patients; it's Medicare's documentation requirement is actually excessive and the commercial payers aren't requiring it.
    – Joshua
    Commented Aug 5 at 21:43
  • see the example I provided to JimmyJames (in answer #1) who asked for specifics. - Compares actual procedure allowables between Anthem and Medicare, for the same physician, in the same geographic region.
    – BobE
    Commented Aug 6 at 3:19
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    Re "Medicare pays very little" -- is it true that, as I have heard, Medicare does not pay the providers enough to cover the cost of doing business, and that's why doctors are reluctant to take it? From that link: "Thanks to the federal program's low reimbursement rates, stringent rules, and grueling paperwork process, many doctors are refusing to accept Medicare's payment for services."
    – shoover
    Commented Aug 6 at 21:42
  • @shoover, from your cited article, MOST physicians accept Medicare allowable as payment in full, According to the Kaiser Family Foundation approximately 95% of physicians accept Medicare and Medicare's allowable reimbursements. kff.org/medicare/issue-brief/…
    – BobE
    Commented Aug 7 at 2:54
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The system encourages high charge rates:

  • The 7-8% of people in the US that are uninsured sometimes pay full price, but they are also more likely to not pay than insured patients. Higher charge rates can help make up for the times providers don't get paid.
  • There are also are many situations where provider reimbursement from insurers is based on a percentage of charges, which encourages higher rates.
  • Different reimbursement methodologies across insurers/plans result in adjusting charges up to maximize revenue.

Each practice/hospital will have contracts not just for each insurer, but each plan. The contracts are complex, some procedures might get reimbursed based on a fairly simple fee schedule, but there are many different reimbursement methods and the same procedure typically gets reimbursed several different ways even within one insurance plan depending on the context (in-patient, out-patient, other procedures performed, who performed the procedure, etc.).

In addition to contract complexity, there are also many laws about healthcare billing/pricing. Setting charge rates properly can require:

  • Evaluating all the reimbursement terms in all the contracts with insurers
  • Understanding various laws
  • Assessing non-payment risk
  • Analyzing out of network revenue/reimbursement
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    @ Hart CO, please see my comment above (to prior answer). In general Medicare ALLOWABLE reimbursement (of the procedure) is the guide. The complexity arises with private insurers co-insurance rates (which may vary between policies) and coverage exclusions. Except for excluded procedures, the allowables seem to be consistant with Medicare.
    – BobE
    Commented Aug 4 at 14:22
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    Nevertheless, the allowable charge (with the exception of excluded procedures) is fairly consistant within a geographic area, that being the case the question remains: what is the objective for a physician to charge multiples of the allowable? Is there some tax advantage accrued to the doctor by "forgiving" a substantial fraction of his charge?
    – BobE
    Commented Aug 4 at 17:15
  • @BobE Medicare pricing is not simple either, providers can base pricing on Medicare (many private plan terms are reimbursed as % of Medicare allowable), but based on doesn't mean equal to, and they rarely are equivalent. Charity care is based on expense not on charges, but that process is also messy and there are certainly some situations where games get played to try to help those figures.
    – Hart CO
    Commented Aug 4 at 19:27
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    IIRC actually Medicare allowable IS rather simple. Medicare pays a committee of the AMA to examine the expertise, time, costs (including overhead) and assigns a point value to each procedure code; there are adjustments made to that point value to accommodate geographical variations (costs more to run an office in NYC than Charlotte). Once that point system is set, Congress makes a determination of how many dollars will be paid per point. This system is sufficiently credible that the major privates insurers follow this point system (but may allow greater latitude for geographic)
    – BobE
    Commented Aug 5 at 14:51
  • @BobE That's an oversimplified explanation. Outpatient medicare pricing isn't too bad, inpatient is significantly more complex. I wouldn't call either "rather simple." To build an accurate Medicare pricing model requires dozens of Addendums/reference tables from CMS website and quite a bit of logic.
    – Hart CO
    Commented Aug 6 at 15:06
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There are some unscrupulous doctors out there, but most are honest and are just wanting their patients to get better.

One thing they cannot do is offer their patients a bigger discount then any insurance company they are contracted with. Obviously a cash pay should be cheaper than having to file claims with the insurance company. The money is received today, rather than 3 months from now, and there is less labor involved. If a cash payer in paying $75, the the insurance company is probably paying around $30.

The other evil man in this mix is the practice management company. Many times these practices are not doctor own, but run by business types. They will bill you for everything possible to improve their bottom line.

An example of this is one OB office would require a second follow up appointment if a patient wanted an IUD after giving birth. So the patient would have to come in for a 4 week post partum, then pay for a second visit after that to get the IUD. Its totally unnecessary other than billing and time. I happen to know a certain provider who would just do it all in one visit but would have gotten in trouble if she was found out.

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    "One thing they cannot do is offer their patients a bigger discount then any insurance company they are contracted with." Do you have a source for this claim, I'm not sure it's true, at least not in general.
    – JimmyJames
    Commented Aug 5 at 18:08
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    @JimmyJames only my wife who is a provider and keeps a very informed for this sort of thing. No formal source.
    – Pete B.
    Commented Aug 6 at 12:13
  • I've worked in the industry for decades and I am aware of no such rule, in general. I have seen posts on this site where insurers do not allow a provider to give an insured customer the cash rate, which makes sense because it's someone who has a relationship with the insurer. I don't think most providers really understand the system that well, other than the parts that directly involve them (and why should they? they should be busy providing care.) There's a doctor on my street that didn't even know that BCBS is not a payer.
    – JimmyJames
    Commented Aug 6 at 15:40
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    My dentist stated that they would charge me more paying cash than using my out-of-network insurance. i.e. Dentist knowledge that I am insured, but not in- network, resulted in a discount. And he could not give this rate if I did not have dental insurance.
    – paulj
    Commented Aug 6 at 18:48
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Different payers (insurance companies) demand different deals from providers. So insurer A states they will reimburse at a rate 50% below the chargemaster price. Insurer B states they will reimburse at a rate 80% below the chargemaster price. So for a procedure (cpt billable code) that a provider wants $100 dollars, the minimum "rack-rate" will need to be roughly $500 dollars. Note, this means insurer A will be paying more for the same procedure. They will not have a good fiscal year, unless they can negotiate a better rate, or charge their clients (employers) quite a bit more.

And this is for in network. Out-of-network, insurers may state they will reimburse at rate 200%, 250% of medicare rate.

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  • @ paulj, please expand on what you mean "chargemaster price" . Who sets the Chargemaster price?
    – BobE
    Commented Aug 6 at 3:12
  • @BobE chargemaster is the list of rates set by providers
    – Hart CO
    Commented Aug 6 at 16:42
  • @Hart CO, via Copilot " A chargemaster is a comprehensive list of prices for every service and item a hospital provides to patients. This includes everything from room charges to lab tests and surgical procedures. Each hospital maintains its own chargemaster, which is used primarily for billing purposes. " I fear that as soon as we try to incorporate inpatient (or hospital outpatient) care we quickly run into a bigger set of problems. Let's confine the discussion to physician's charges - at least that was my intent of the question.
    – BobE
    Commented Aug 7 at 3:06

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