June 23, 2024

Serene Nest

taking care of your health, Our Mission

Why Are Cash Prices Lower Than Health Insurance Negotiated Prices?

3 min read

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

My colleagues and I found that among common shoppable services—such as lab tests, imaging, and joint replacements—half of U.S. hospitals set cash prices lower than their median insurance negotiated prices. About 20% of hospitals even set cash prices equal to or lower than their minimum insurance prices. System-affiliated hospitals and those located in low-income communities are more likely to set relatively cheaper cash prices.

How about non-shoppable services, for which patients cannot compare prices or plan ahead? A typical example is trauma activation. Hospitals designated as trauma centers bill trauma activation fees to patients coming to emergency rooms. Our study published in JAMA Surgery found that nationwide, cash prices are lower than insurance prices on average, as well as at the median and various percentiles, for almost all levels of trauma activation fees.

In Arkansas, median cash prices and insurance prices are $2,030 vs. $2,477 for level I trauma activation (18% cheaper paying cash), $1,152 vs. $2,011 for level II (43% cheaper), $1,149 vs $1,900 for Level III (40% cheaper) and $764 vs. $1,420 for level IV (46% cheaper).

Cash price being cheaper than insurance prices has also been documented for prescription drugs. While counterintuitive, these findings reflect the inherent and inevitable trade-offs between using cash and using insurance to purchase healthcare.

Insurance shields us from financial risk exposure but adds administrative complexities. When financial risk exposure is low, it makes little sense to use insurance. That’s why car insurance does not cover oil changes, and home insurance does not cover faucet replacements; otherwise, premiums would skyrocket and such plans would be driven out of business.

Additionally, financial interests are not well aligned between insurance companies and plan sponsors. Lower healthcare spending typically means less revenue for insurance companies. It’s no surprise that they often negotiate uncompetitive prices, leaving plan sponsors’ money on the table.

From providers’ perspective, serving cash-pay patients costs less than dealing with insurance. Administrative burdens and the time and energy spent on insurance compliance disappears. As Dr. Mario Molina recently said: “When I see a patient complaining about a sore throat, I want to focus on the sore throat, not all the screening questions insurance wants me to go over.”

Importantly, patients who spend their own money are sensitive to prices and, by having full agency, actively shape the provider’s reputation, just like consumers typically do in cash-pay markets. Providers understand this and set cash prices accordingly: they are more likely to be cheaper than insurance prices in low-income communities. Even powerful system-affiliated hospitals and non-shoppable services, like trauma activation, offer cheaper cash prices than insurance prices.

Insurance companies should focus on what they do best—covering services that impose meaningful financial risks that can justify administrative complexities. Patients should gain control of their own healthcare dollars (either earned or subsidized) to purchase other services, thus allowing providers to focus on care delivery and innovation.

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

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