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Good Luck Shopping for Healthcare Insurance
December 15, 2015

Medical SymbolIt’s that time of year where those of us with private health insurance review our policies. In my family’s case, our health insurance provider, Regence, has discontinued our current policy and is suggesting a new one—more expensive of course. The problem is that we private insurance consumers have no way to evaluate which policy will be best (unless you spring for a “gold” plan). The information we need is simply hidden from us.

Back in the day when I worked for a company, our health insurance premiums were paid by the company and our deductible was relatively small, like $500 a year.  Consequently, we paid little for our healthcare (at least not directly) and really didn’t care about the details of the plan. Now that I work for myself, my family purchases its own private insurance. Obviously, we care about the premiums that we pay. We also care about such numbers as the “deductible,” the “out of pocket maximum,” and the “coinsurance rate.” These values are relatively ascertainable while we shop for insurance. But there is one, very important set of data—the insurance companies’ contract rates for services—that we cannot get. I will explain why this set of data is important.

Our deductible is no longer $500. In fact, it’s more like $10,000 for my family. We will pay the first $10,000 in healthcare costs with the insurance company paying almost nothing. We have a high deductible because my family is generally healthy. Typically, our total healthcare bill, excluding insurance premiums, will be much smaller than these deductibles. We could purchase a low-deductible plan. However, in a typical year, we will pay more in higher premiums for such a plan than we will save by having a lower deductible—much more. So we try to keep our premiums low (“low” being a relative term) by having a higher deductible. I suspect most healthy families make the same calculation.

But this means that the prices that we pay to healthcare providers are very important to us. The “standard” rates that providers maintain—what one might call the “list prices” for these services—are incredibly high. If you are insured, you can see these standard rates on your bills. These rates are the big numbers that the healthcare providers charge for their services. These high rates are then reduced by the “contract discount.” Some folks think that this contract discount is money paid by the insurance company. It is not. These are discounts that insurance companies negotiate with the healthcare providers. These providers are contractually bound to charge the contract rates for services provided to an insurance company’s customer even if the insurance company applies the customer’s deductible and pays nothing toward the bill.

These contract discounts are very significant, often more than 50% of the standard rates. So what I am purchasing when I purchase high deductible healthcare insurance are two things: (1) a safety net in case a member of my family experiences a healthcare crisis, and (2) a negotiated contract discount with the healthcare providers. In most years, we never need the safety net. The only benefit we get is the negotiated contract discount. The money we save each year due to that negotiated discount can exceed the insurance premiums we pay for that year.

However, we have no way of knowing what rates each healthcare insurance company has negotiated with the healthcare providers we use. These negotiations are all about leverage. An insurance company that has a large number of customers that use a particular provider has a lot of leverage in negotiations with that provider since that provider does not want to lose that insurance company’s customers. Conversely, a large provider can have a lot of leverage with insurance companies who need a contract with that provider to remain attractive to the insurance company’s customers. As healthcare providers merge and get bigger—such as when our San Juan Island medical center became a PeaceHealth facility—they gain leverage against the insurance companies. As insurance companies merge, they gain leverage against the healthcare providers.

So should I stay with Regence or perhaps move to Premera Blue Cross, which are large insurance companies presumably with a lot of leverage? Or should I try LifeWise, which is a Premera company but not a Blue Cross licensee? LifeWise has lower premiums and more favorable terms but might not have the leverage that the bigger companies have. Which of these companies did a better job of negotiating with PeaceHealth, or with the large healthcare provider to which my primary care physician recently moved? I have no idea and have no way of finding out. As I understand it, negotiations between healthcare insurance companies and providers are conducted in secret with non-disclosure terms preventing us from getting this information.

In his book, Dr. John Geyman advocates for a “single payer” healthcare system where the government pays all of the healthcare providers. (See my book review.) This is leverage at its greatest. I, however, tend to believe that a market economy will work so long as the rules regulating that market are properly designed to allow that market to act appropriately. Very important to a well-functioning market is product-transparency. We consumers simply cannot make the right choices in that market if we do not know what we are purchasing.

Apparently some states have passed regulations that require disclosure of these negotiated contract discounts. Washington has no such laws as far as I know. As I have said before, our failing healthcare system is the most pressing problem our country faces. The lack of transparency in negotiated contract discounts is part of the problem and should be fixed.

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