Why Do Doctors Charge So Much More Than Insurance Will Pay?

A trip to the doctor often comes with sticker shock these days. You may see an initial bill for $500 for an office visit, but your insurance claim shows they only paid $100 of that. This gap between healthcare charges and insurance reimbursements is a complex issue rooted in the economics of modern medicine.

The Chargemaster System

Hospitals and medical practices set their official rates via a “chargemaster” – an exhaustive list of thousands of billing codes and charges for every service, treatment, supply, etc. This chargemaster usually produces initial bills that are 2-10X higher than insurance reimbursements.

Some reasons chargemasters are set so high:

  • Cover costs of treating uninsured patients
  • Offset shortfalls from Medicaid/Medicare
  • Subsidize new facilities, equipment and services
  • Account for inflation and future costs
  • Leave room for negotiating with insurers

The Insurance Reimbursement Game

Insurers never pay the full chargemaster prices. Through contracts and negotiations, insurers pay much lower pre-set rates for services based on:

  • Medicare rates
  • In-network provider agreements
  • Allowable charges for a diagnosis
  • Negotiated discounts off chargemaster prices

This back-and-forth leads to each provider having different reimbursement rates with each insurer. Often the initial bill reflects the inflated chargemaster while the final insurer payment is far lower.

Why Providers Set Such High Charges

Some reasons providers’ chargemaster rates are often double, triple or more the actual reimbursement:

  • Cover shortfalls for Medicaid/Medicare patients
  • Offset losses from treating uninsured patients
  • Subsidize expanding services and technology
  • Account for rising equipment, labor, drug costs
  • Leave room to negotiate with insurers
  • Take advantage of higher out-of-network reimbursements

Examples of the Charges vs. Reimbursements Gap

Here are some real-world examples of chargemaster prices versus average insurance reimbursements:

  • Hip replacement surgery
    • Chargemaster price: $39,000
    • Reimbursement: $12,500
  • C-section delivery
    • Chargemaster price: $42,000
    • Reimbursement: $14,500
  • MRI of the brain
    • Chargemaster price: $2,100
    • Reimbursement: $450

While list prices often seem outrageous compared to what insurance pays, providers argue their reimbursements barely cover their actual costs and overhead these days. This contentious system has fueled intense debates over who is most at fault for rising medical costs.

Efforts to Fix the Dysfunctional System

There are movements towards charging sane, transparent prices patients can actually pay like:

  • All-payer rate setting
  • Government price controls
  • Improved price transparency laws
  • Increased insurer-provider negotiations
  • More upfront patient cost estimates

But until sweeping reforms are enacted, the gap between initial charges and insurance reimbursements will likely persist. Patients are often left confused and frustrated by gigantic bills that their insurance ultimately takes care of for a fraction of the listed prices.

The real reason American health care is so expensive


Why do doctors overcharge insurance?

The way it works is doctors and hospitals will charge for more extensive and costly services than they’ve delivered, entering incorrect billing codes that lead to overcharges. In some cases, this is accidental and caused by confusion over how to pick the right payment codes.

Why are medical bills so expensive even with insurance?

There are many factors that contribute to the high cost of healthcare in the country. These include wasteful systems, rising drug costs, medical professional salaries, profit-driven healthcare centers, the type of medical practices, and health-related pricing.

Why is self pay cheaper than using insurance?

First, insurers have a limited incentive to negotiate down the bills as much as they can, because they eventually pass the costs onto the policyholders. Second, providers spend a lot of money dealing with insurance bureaucracy, and a patient’s direct payments cuts all that, allowing for a significant discount.

Are doctors overpaid in America?

A 2011 study in Health Affairs found American doctors, who make an average salary of almost $300,000, are paid around twice as much as doctors in other rich countries. Baker says ‘doctors are seriously overpaid‘ and a big reason is rules that restrict the number of people who can get residencies.

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