out of network insuranceYou work for a top-tier consulting firm, bank, or hedge fund, and your health insurance benefits through your employer are comprehensive and flexible. You have excellent out-of-network benefits that allow you to see any physician you choose—increasingly rare in an economic environment in which everyone is trying desperately to rein in healthcare spending, which reached 17.2% of U.S. GDP in 2012.

Let’s say you have a mole you want looked at. You decide to see a highly esteemed physician in the field who does not take your insurance. After all, your health insurance company pays 70% of your costs after you have met your deductible for the year, which you have. You pay upfront and submit the $350 medical visit bill to your insurance company, expecting to receive a check for $245. Not bad for one of the top-rated specialists in the field.

After a few weeks, you receive a reimbursement check from your insurance company for $125, half of what you expected. What happened?

Reality Bites

I have news for you: Most health insurance plans do not, in fact, pay 70% of your out-of-network costs. In reality, it pays 70% of your covered costs up to an allowable amount.

In our example, the insurance company has calculated an allowable amount (sometimes called “eligible charge,”) of $178.57 for your doctor’s visit. It then is liable for 70% of the allowable amount, not the full $350 billed by the physician.

You are responsible for “co-insurance” of 30% of the allowable amount ($53.57 in this case), plus all charges above and beyond the allowable amount, for a grand total of $225.

Location, Location, Location

Now let’s say you want a second opinion on the mole. Instead of trekking into the city for an appointment, you see a dermatologist closer to home in the suburbs. She also charges $350 for the initial visit and does not take your insurance. This time, you are prepared for a $125 reimbursement check. Instead, the check that arrives is for $115. Now you throw up your hands. How can you receive less money for the same service, billed at the same amount?

The allowable amount is determined by each insurance company according to a complex algorithm, whose inputs include such data as type of service, type of provider, and location of service. For example, if you read the fine print for out-of-network benefits with United Healthcare, you will find language like this: “The resource used for payment of professional services is based on what other healthcare professionals in the relevant geographic areas or regions charge for their services.”

For you as a consumer, that translates into a cost that changes based on the difference between the geographic location of the two physicians. Essentially, your insurance company has determined that the rate for a dermatologist’s services should be lower in the suburbs than in the city. Accordingly, it pays less for the same service rendered in that location.

Sample comparison of out-of-network insurance costs
Source Bill breakdown Your expectation Actual amount, location A Actual amount, location B
Doctor Total bill $350.00 $350.00 $350.00
Insurance company responsibility Allowable amount $245.00 $178.57 $164.29
70% of allowable amount $125.00 $115.00
Your responsibility 30% of allowable amount (“co-insurance”) $105.00 $53.57 $49.29
Anything over allowable amount $171.43 $185.71
Your total cash outlay $105.00 $225.00 $235.00

Transparency is Elusive

Perhaps a few $350 bills do not faze you, but what if you had a chronic condition that was going to cost you thousands of dollars a year? You might want to know upfront the actual amount of money your insurance is willing to reimburse you before you decide on a physician.

The reality is that it is extremely difficult to determine in advance how much you will pay to see an out-of-network physician. I called my own insurance company, whose representative told me I would need to provide the following information upfront: procedure and diagnosis codes, how much the provider plans to bill, proposed date of service, place of treatment, provider name, type of provider, provider tax identification number and a complete physical address with the nine-digit zip code. She emphasized that the five-digit zip code was not enough. After providing this information I would receive a response in the mail in “several weeks.”

Besides the highly inconvenient wait—perhaps you need to address your medical problem sooner than “several weeks” from now—there is the obvious issue that your physician has no way of determining your diagnosis (necessary for the required diagnosis code) before he sees you. Nor can he or she predict exactly what services and procedures you might need to address the yet-to-be-determined issue.

As a consumer, it’s important to be pro-active. Call your insurance company and call your doctors so that you’re somewhat prepared for the bill after a visit. Unfortunately, there could still be surprises. Transparency, the healthcare buzz-word of our times, is simply more elusive than it seems.

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