How Doctors Make Prices

I’m venturing out a little bit on this post because I don’t know if the pricing process I’m about to explain is used by all providers or not. That’s my disclaimer.

Now I’m going to pretend I’m a doctor with a brand new self-run clinic. I’ve just hired all my nurses and bought all my computers, etc. My next step is to decide on a fee schedule. How do I do it?

I start by checking prices of other doctors in the area. Or not, because I can’t find any of those. So then I ask some of my physician friends, who say they generally charge 100 to 120 percent of Medicare fees. “That’s quite a range,” I say. But then they say it doesn’t matter too much what I set my fees at because my future patients’ insurance companies will basically choose how much they are going to pay me anyway.

Insurance companies decide the price? I guess that makes sense because they have all the bargaining power over me, a lowly solo doctor running my own clinic. So I somehow find a way to take a look at compensation schedules for different insurance companies, including Medicare and Medicaid. Their prices are all over the board for every procedure! For a single billing code (maybe it’s the one for setting and casting a broken arm), Insurance Company X will pay $1,100, Insurance Company Y will pay $1,000, Medicare will pay $900, and Insurance Company Z will pay $1,200.

Now I start thinking strategically about this. If patients are never going to ask me how much I charge, since their insurance companies will handle all of that, I decide to set my price for setting and casting a broken arm at $1,200. Why? Because if I set it at $1,000, I’m only going to get $1,000 from Company X, who was willing to pay me $1,100, and $1,000 from Company Z, who was willing to pay me $1,200. Why would I set my price low and leave all that money on the table? So as long as I set my price at $1,200 or higher, I’ll get the full $1,200 from Company Z, the full $1,100 from Company X, the full $1,000 from Company Y, etc.

So how do the insurance companies decide on these fees? I hear stuff about this specialist-dominated group of physicians who, working as a committee (known as the RVS Update Committee, or RUC), get to update the Medicare fee schedule every year. And people keep telling me that’s why I, as a primary-care doc, don’t get paid as much as I should because those darn specialists in that committee overvalue work done by specialists and undervalue work done by primary-care physicians.

At this point, I give up worrying about prices and just trust that the money that comes in every month will be more than the money that goes out every month. And, after a few years, that seems to consistently be the case, so I just stop worrying about it.

. . . That is, until patients on high-deductible insurance plans start calling my receptionist and asking what our prices are for various procedures. We’re not sure we want her to admit that our price for setting and casting a broken arm is a whole $1,200, so we prepare a canned response to such inquiries: “We’re not allowed to quote prices over the phone. You’ll just have to come in so the doctor can take a look at you first.”

3 thoughts on “How Doctors Make Prices”

  1. You make an interesting point. From what I’ve learned–(I’m only an undergrad in a Health Management & Policy program with a concentration in Hospital Admin)–charge is largely irrelevant in healthcare. Any astute practice manager should be reviewing existing insurance contracts on a yearly basis. If a company is reimbursing you what you charge then you are not charging enough. From what I’ve been told, you should always be told no from the insurance company (this ensures that you are not leaving any money on the table).

    Where I live, I’m starting to see billboards with price quotes for MRI scans. I have no idea what the FTC/DOJ think about this and how it isn’t a blatant violation of antitrust law but they’re still up.

    Couldn’t the office offer a discount to charge for out-of-pocket or high-deductible patients? Or would it be more advantageous to not discuss price. But then don’t you run the risk for them coming into the office (which should be a billing event) only to say no, you charge too much, and go elsewhere?

    1. Matthew, I hesitated to write anything about price discrimination (in favor of out-of-pocket patients) because, frankly, I don’t know the repercussions of it. Do insurance companies see the lower price a doctor’s charging out-of-pocket patients and demand the same price? If not, what’s stopping doctors from coming up with a discounted fee schedule that lists all the prices out-of-pocket patients would pay? (And of course it would be discounted because I bet it’s worth a lot to a physician to not even have to deal with the hassle of billing an insurance company!)

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