The price is wrong

Ted Belle, a retired design supervisor in Greer, S.C., recently had cataract surgery. Shortly afterwards he began to receive "Explanation of Benefits" forms-the ones that state "This is not a bill"-from his insurance company. He noted a common pattern: Providers rarely receive full payment. The surgeon, for instance, charged $2,700, but Medicare only paid him $702.25.

Belle saw similar discrepancies between charges and payments when he had treatment for prostate cancer 18 years ago. He took for granted that the insurance companies and doctors knew what they were doing. But with the national healthcare debate raging, Belle decided to seek an explanation. He talked to everyone he knew about it, including the companies that processed his medical bills: "They just say, well, we don't set up the numbers. We just follow the guidelines and that's it."

The system of healthcare pricing and payment is as mysterious to many Americans as it is to Belle. It punishes ignorant customers, who could get identical services for a fraction of the cost if they understood how the pricing scheme works. It works like the used car business. Medical services have a sticker price, labeled on an Explanation of Benefits as the "amount charged." For Belle's cataract surgery, the sticker price was $2,700. But the sticker price is just a starting point for negotiations between the doctor and the insurance company. Each doctor or group of doctors haggles with insurance companies over how much they will get paid for their services. How much doctors receive depends on the outcome of these ongoing negotiations.

The actual customer-the patient-isn't part of the equation.

Jeff Rice is a doctor and CEO of healthcarebluebook.com, a website that gathers and reports data on healthcare pricing. His company researches the costs of medical procedures all over the country and regularly finds variation of 300 percent to 500 percent among prices for the same procedure. That variation depends on one thing: the physician's market clout. "There isn't a price; there's a bunch of different prices depending on where you go," Rice said. "The price does not correlate with charity, it doesn't correlate with quality of care, it doesn't relate to Medicare percentage or Medicaid percentage."

He cites a personal example. When his son needed outpatient surgery on his foot, Rice did some comparison shopping. The local hospital gave him a sticker price of about $37,000. When he told them he had insurance, they gave him a new price range of $15,000 to $25,000. His son eventually had the surgery at an outpatient surgery center for $1,500.

The extreme variation in healthcare pricing is a symptom of the "third-party payer" system in the United States, says Joshua Greenberg, president of HealthCPA, a company that keeps track of patients' medical bills for them. Having a third party pay medical bills allows inefficiency to creep in without the patients noticing or even caring, unless they are uninsured and have to negotiate a discount on their own.

"It's a very convoluted reimbursement system that we have," Greenberg says-and "Obamacare" won't do anything to untangle it.

Rice says consumers could save thousands of dollars on medical care each year by researching and comparing prices in their area. Most don't because they don't understand how the system works. Since insurance foots most of the bill, patients are not motivated to learn more about the way it works.

Belle only recently started to ask questions about his medical bills after a lifetime of apathy. "It doesn't matter because I have no skin in the game," said Belle, who has Medicare and AARP supplemental insurance. "I'm not putting out one dime. I think as a result, people don't even bother looking at those numbers."

Off balance

If hardly anyone pays the sticker price for medical services, then why does it even exist? Patients need to know the sticker price because in some cases their doctor can ask them to pay it, even if they have insurance. Balance billing is when a healthcare provider bills a patient for the difference between what insurance pays and the sticker price. It is different than collecting a co-pay or deductible, which the doctor, insurance company, and patient agree the patient will pay in advance.

Medicare and Medicaid do not allow balance billing; patients who think they have been billed more than the Medicare-allowed amount can file a complaint with the government. Most states have laws that outlaw some but not all balance billing. By 2010, every state but Alaska had forbidden doctors to balance bill HMO patients for in-network services, according to a survey by the Kaiser Family Foundation. Balance billing was usually allowed for out-of-network services. For PPO patients, protection against balance billing existed in only 24 states. A summary of balance billing laws by state is at statehealthfacts.org.

The government does not negotiate with healthcare providers. It uses a formula to calculate payments, which includes variables for geographic location, type of facility, and the quality of patient outcomes.

What about people who don't have insurance? Sometimes they are billed the sticker price for services and left to negotiate a discount on their own, though many medical providers have discounts for patients without insurance. -Lynde Langdon