The polarizing debate over health care reform in the United States, amid countless attempts to repeal and replace the Affordable Care Act, has obscured the core purpose of having access to health insurance coverage — especially affordable coverage.
Health insurance is a financial bulwark that serves two main roles. On one hand, it protects insured Americans from financial risks associated with unforeseen medical events, like cancer or a serious injury, the way auto insurance provides protection from the financial impact of a car crash.
At the same time, health insurance offers a means of securing lower prices for almost all health care services — both planned and unplanned. Large insurers routinely negotiate with health care providers for prices that are substantially less than the providers’ billable or “list” prices. This effort to manage overall costs insulates insured consumers from the full cost of health care.
However, uninsured Americans generally do not have access to these price discounts for health care service use. Sometimes their costs are written off by providers or uncompensated care programs. But in many cases, uninsured individuals face a significant financial burden.
An estimated 28.2 million Americans under age 65 lack health insurance. A report by the Henry J. Kaiser Family Foundation illustrates the ripple effect on this population. In 2016, 30% of uninsured nonelderly adults said they were paying off at least one medical bill over time — and three-quarters worried about paying medical bills if they get sick. Medical expenses can threaten people’s financial well-being and lead them to tap savings, borrow, have trouble paying for necessities, and face stressful calls from debt collectors. Lack of insurance can also affect their health: People without insurance coverage have worse access to care than insured individuals; 20% of uninsured adults in 2016 went without needed medical care due to cost, the Kaiser report says.
As context for the ongoing health care reform debate, we analyzed Health Care Cost Institute (HCCI) data. HCCI is a nonpartisan, nonprofit organization aimed at providing complete and accurate information about health care utilization and costs in the United States.
Our goal was to demonstrate the value of insurance through these discounted rates. We did so by calculating median billed charges for inpatient hospital stays and the median percent of billed charges paid with private insurance. (This percentage includes the portion that both the insurer pays and the insured individual pays through cost-sharing arrangements such as coinsurance and deductibles).
We used HCCI’s 2014 employer-sponsored insurance (ESI) administrative claims, which includes data from three large national private insurers that represent about 25% of the ESI membership in the United States.
The sample included 2,162 inpatient hospitals with at least 30 general acute care inpatient admissions. It was limited to individuals under age 65, and claims with unreasonably low or high charges were excluded, consistent with similar studies of claims. We used the resulting data set to calculate median billed charges (charges) and median allowed insurance payments (payment), as shown in the figure. To exemplify the substantial price reduction for insured individuals, the percent of charges insurers pay was calculated as the median payment divided by median charges.
As expected, we found substantial variation in median charges and payments by type of admission. The magnitudes of the discounts from the billed charges across admissions types, however, are significant for most Americans. The median household income, according to the U.S. Census Bureau, was $53,718 in 2014. The median charges for a hospital admission that year were $21,116, and the median insurer payment was $10,776. When we stratified the data by common types of admissions, we also found that:
- Insurers typically paid between 50% and 55% of billed charges.
- There was wide variation in median charges across services. Admissions related to pregnancy and childbirth had the smallest median charges ($13,685) and payments ($7,324). Admissions related to musculoskeletal and connective tissue, such as a major joint replacement, had the largest median charges ($51,677) and payments ($27,625).
- Charges for admissions that begin through the emergency department (ED) were over $4,000 more than non-ED admissions ($23,836 versus $19,401). However, median payments differed by only $1,754 ($11,852 versus $10,098).
As previously noted, in addition to securing lower prices, insurance shields insured individuals from financial risk, no matter what type of insurance — employer-sponsored insurance, individual market, Medicare, Medicaid, etc. Because insured patients pay only a portion of the price that insurers negotiate with providers, the benefit of price discounts is magnified through deductibles (an annual amount one pays even before insurance coverage kicks in) and coinsurance (the portion of medical costs that are not covered by one’s insurance plan) applied to lower prices.
The table above compares the billed charges to the amount an individual with insurance would pay, assuming deductibles of either $2,000 or $4,500 and coinsurance of 20%. The table also shows the cost for specific hospital admissions with the patient’s payment, plus the average family insurance premium. The average annual family premium in 2014 was $16,834, of which the employee was responsible for $4,823 on average.
The total with premium and cost sharing is still substantially less than the cost of a hospital bill without insurance. For example, a patient admitted with the chronic lung disease COPD (respiratory) with an annual premium contribution, coinsurance, and a $2,000 deductible would pay $8,760, on average, while that same patient without insurance might be charged $21,747. Drawing on the auto insurance analogy, this would be like paying $25 for an oil change if you have car insurance, but being charged $125 for the same oil change without insurance.
Much of the national debate about the future of the Affordable Care Act has focused on prevailing premium levels or increases. While premiums are an essential part of the conversation, it is important to recognize the critical role that health care prices play in the overall costs of care, as well as the value of insurance in protecting consumers through insurer-negotiated price cuts. The debate should also recognize the financial and social toll of this charge-based system on the millions of Americans who lack insurance and access to these discounts.
This article originally appeared in NEJM Catalyst on October 11, 2017.