This topic is contentious, to say the least. Typically, defense experts and plaintiff experts have very conflicting ways of determining the actual cost of medical care. To appreciate why determining the cost of healthcare can be so difficult, one must understand the difference between health care costs and healthcare expenditure, the factors that go into determining each and why they are usually so far apart.
Health care costs
The cost of health care is defined as the cost of providing health care services, including the cost of procedures, therapies, medications, evaluations, etc. How the cost of healthcare is determined is similar to determining the cost of any other good or service; overhead, materials and profit margin must all be considered. The cost for healthcare includes overhead costs (including salaries), materials cost (incremental costs per case or patient) and a profit margin. Overhead costs are fixed, whereas incremental costs are based on the number of patients treated. Profit margin may have variability from one medical provider to another. While determining a reasonable profit margin may seem arbitrary, there are market forces at work that can determine what is usual and customary.
Since overhead is fixed and incremental costs are fixed per unit, the variability in healthcare costs across providers is usually due to profit margin. Here, like elsewhere in a free market economy, the market will determine a reasonable range for a profit margin. It is important to note that there may be multiple markets at play. These markets include the contracted insurance market and the non-contracted market. In the contracted market, providers accept a smaller profit margin in return for a greater volume of patients. In the non-contracted market, a provider provides services to a smaller group of patients and takes on greater reimbursement risk. As a result, the provider requires a higher profit margin. In each case the sum overall provider profit may be similar, yet the profit margin per case and number of cases can be substantially different. In other words, the contracted provider spreads his profit across more cases while the non-contracted provider arrives at the same overall profit through less patients.
There are many reasons why a physician may be contracted or non-contracted. These include tolerance for administrative burdens and preferences on volume of practice. A physician may also have a hybrid practice. These factors are outside of the scope of this discussion.
How does one determine what the reasonable profit margin is? In the contracted market it is simply the overall reimbursement that the physician agrees to minus overhead and incremental costs. In the non-contracted market, it is not as simple. It is largely driven by specialty and geographic factors. Fortunately, there are third party services that analyze and collect data on what non-contracted providers in each area are charging for services. This data is collected from claims sent to private insurers by non-contracted medical providers. In that way, a range of usual and customary medical costs can be determined for a particular service, in a particular area by a non-contracted provider.
One respected third party service used for determining non-contracted usual and customary charges is Fair Health. Fair Health is a repository for 2 billion claims a year and 30 billion claims since 2002. These consist of raw claims submitted by physicians to payers. Fair Health is widely respected and utilized. In Texas and New York Fair Health 80th percentile is used to determine workman’s compensation rates.
In contrast to Fair Health, other methods for determining usual and customary costs are lacking. Physician’s Fee Reference (PFR), Practice Management Information Corporation (PMIC) and the Medical Fee Book (MFB) are based on solicited survey data, incorporate Medicare fees and utilize other outlier methodologies. As a result, they are considered biased.
Health care reimbursement
Health care reimbursement, often referred to as healthcare expenditure, has a very different meaning than health care cost. In the contracted insurance market reimbursement usually equates with health care costs. In the non-contracted market there is a huge difference between the two; They are apples and oranges. In the contracted market, reimbursement is generally considered to be what an insurance company determines is reasonable to pay for a claim. In common practice, this is essentially identical to a contracted rate. This does not apply in the case of a non-contracted provider. Since the non-contracted provider does not receive the volume of referrals that the contracted provider does, the overall profit to the contracted provider would be far, far less than the profit to the contracted provider under this arrangement. As a result, the non-contracted provider cannot lower the cost of healthcare to the insurance reimbursement rate. The non-contracted provider will maintain a higher profit margin to offset a lower volume of cases. The difference between contracted insurance reimbursement and healthcare costs will be offset by additional reimbursement sources. Usually, this will include a higher non-contracted reimbursement rate as well as a patient’s cash contribution.
In a personal injury case where the patient is insured and the provider is contracted with the patient’s insurance, the provider is contractually obligated to accept a contracted rate. In cases where the provider is not contracted, sources of reimbursement are at the discretion of the provider. If the patient is insured, the provider may choose to bill insurance as a non-contracted provider, recoup from the patient or a combination of the two. Like any other non-contracted provider, the provider will seek enough reimbursement to cover as much of his/her healthcare cost as possible.
The reimbursement-cost gap
In dealing with a non-contracted provider there is a large gap between insurance reimbursement and the cost of healthcare. Non-contracted providers have similar overhead and incremental costs but smaller volumes of cases by which to derive a reasonable profit. Attempts to equate insurance reimbursement with a fair and reasonable cost of healthcare in these cases ignores basic facts of economies of scale. It also ignores that there is no contractual relationship between the payer and the provider. Scenarios of mixed practices do exist. In these cases, there may be a blend of contracted and non-contracted cases or non-insurance cases. Here the reasonable costs of services probably lie on a spectrum between the two extremes, depending on the proportionate share of a provider’s business volume.
Conclusion
It is advantageous for defense experts and attorneys to equate healthcare costs with reimbursement, no matter the contracted or non-contracted scenario. In doing so the defense will attempt to devalue the cost of medical services and, as a result, the value of a potential settlement or judgement. A clear understanding of the principles that determine healthcare costs, the differences between reimbursement and cost, and how reasonable costs are determined will allow the plaintiff expert and attorney to accurately demonstrate the true costs of services.
An Daoquan, MD
The views expressed are the personal views of the author and do not represent the views of The Brain, Spine and Joint Group, its managers, affiliates, partners, employees or its clients. Furthermore, the information provided by the author is not intended to be expert or legal advice.
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