Why are cash prices lower than negotiated health insurance prices?

Growing evidence shows a counterintuitive phenomenon in healthcare: the cash price is often cheaper than insurance prices for the same service or product. Cash prices are determined unilaterally by a provider, while insurance prices are negotiated bilaterally between a provider and an insurance company. Don’t insurance companies probably have more bargaining power than individual patients?

Our study found that among routine services – such as lab tests, imaging and joint replacements – half of US hospitals set cash prices lower than average insurance negotiated prices. In fact, about 20% of hospitals set out-of-pocket prices that are equal to or lower than their minimum insurance prices. System-related hospitals and hospitals in low-income communities are more likely to set relatively cheaper cash prices.

What about non-shoppable services, for which patients can’t compare prices or plan ahead? A typical example is trauma activation. Hospitals designated as trauma centers charge trauma activation fees to patients who come to emergency rooms. Us study published in JAMA Surgery found that out-of-pocket prices are lower than insurance prices nationally on average, as well as at the median and various percentiles, for almost all levels of trauma activation reimbursement.

In ArkansasThe average cash and insurance prices are $2,030 versus $2,477 for Level I trauma activation (18% cheaper out-of-pocket), $1,152 versus $2,011 for Level II (43% cheaper), $1,149 versus $1,900 for Level III (40% cheaper), and $764 versus $1,420 for Level IV (46% cheaper).

The cash price has also been documented to be cheaper than insurance prices for prescription drugs. Although counterintuitive, these findings reflect the inherent and unavoidable trade-off between using cash and using insurance to purchase health care.

Insurance protects us from exposure to financial risk, but adds administrative complexity. When exposure to financial risk is low, there is little point in using insurance. That’s why auto insurance doesn’t cover oil changes, and home insurance doesn’t cover faucet replacements; Otherwise, premiums would skyrocket and such plans would go bankrupt.

In addition, the financial interests between insurance companies and plan sponsors are not well aligned. Lower health care expenditures generally mean less revenue for insurance companies. It’s no surprise that they negotiate often uncompetitive pricesleaving plan sponsors’ money on the table.

From the providers’ perspective, serving cash-paying patients costs less than arranging insurance. Administrative burdens and time and energy spent on complying with insurance policies disappear. If Dr. Mario Molina recently said, “When I see a patient complaining of a sore throat, I want to focus on the sore throat, not all the screening questions the insurance company wants me to go through.”

Importantly, patients who spend their own money are sensitive to prices and, by having complete freedom of choice, actively shape the provider’s reputation, just as consumers typically do in the cash payment market. Providers understand this and set cash prices accordingly: cash prices are more likely cheaper than insurance prices in low-income communities. Even powerful system-related hospitals and non-shoppable services, such as trauma activationoffer cheaper cash prices than insurance prices.

Insurance companies should focus on what they do best: covering services that carry significant financial risks that may justify administrative complexity. Patients should take control of their own healthcare dollars (earned or subsidized) to purchase other services, allowing providers to focus on care delivery and innovation.

As we wrote JAMA Internal Medicine: “Broader health insurance is not the same as better health care or better health. Policy solutions to improve health while containing costs should focus on allowing patients, not insurance, to control health care dollars wherever possible.” Failure to do so results in high prices and deprives patients of a dynamic and innovative healthcare system that puts their interests first.