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Why Do Doctors Bill More Than Insurance Will Pay?

Published in Health Insurance Billing 4 mins read

Doctors often bill more than insurance pays because they have a standard fee for their services, but for patients with health insurance, they agree to accept a pre-negotiated, discounted price known as the "allowed amount."

This practice is a fundamental part of how healthcare billing works, especially within managed care plans like HMOs and PPOs. Here's a deeper look into why this discrepancy exists:

Understanding the "Allowed Amount" and Negotiated Rates

When a healthcare provider joins an insurance company's network (becomes "in-network"), they enter into a contract. This contract specifies the "allowed amount" – the maximum payment the insurance plan will cover for a particular service. This allowed amount is a discounted price that the health plan has negotiated in advance for its members.

  • Contractual Agreement: In-network providers agree to accept this allowed amount as full payment for a service, after your cost-sharing (deductible, copay, coinsurance) has been applied.
  • Not the "List Price": The allowed amount is rarely the same as the doctor's initial "list price" or standard billed charge for the service.

Why the Discrepancy? Billed Charges vs. Paid Amounts

The difference between what a doctor bills and what insurance pays is primarily due to these negotiated contracts:

1. Standard Charges (The "List Price")

Every medical service has a standard charge or "list price" that a provider sets. This is the amount they would typically bill to an uninsured patient or an out-of-network insurance plan before any discounts or negotiations. This initial bill reflects the provider's general cost of providing the service, administrative overhead, and desired profit margin.

2. Contractual Adjustments

For in-network services, once the doctor bills their standard charge, the insurance company processes the claim based on the pre-negotiated allowed amount. The difference between the higher billed amount and the lower allowed amount is written off by the provider as a "contractual adjustment" or "discount." This means the doctor agrees not to collect that difference from the patient.

  • Example: If a doctor bills $200 for an office visit, but the insurance plan's allowed amount for that visit is $120, the doctor writes off the $80 difference. The insurance then pays a portion of the $120, and the patient pays their share of the $120.

3. Negotiation Strategy and Market Dynamics

Billing a higher amount can also be a strategic move. Providers might set higher initial charges to give themselves negotiating room with different insurers, especially for services with varying market values or complexities. It also serves as a benchmark for what they would charge if not bound by a specific contract.

What Happens When a Doctor Bills More?

For in-network providers, even if they bill an amount higher than the allowed amount, they will only be reimbursed up to the allowed amount by the insurance company. The patient's financial responsibility (deductible, copay, coinsurance) is calculated based on this allowed amount, not the higher billed charge.

Here's a simplified illustration:

Item Doctor's Billed Amount Insurance Allowed Amount Insurance Pays (e.g., 80%) Patient Owes (e.g., 20% Coinsurance + Deductible) Doctor's Write-Off (Contractual Adj.)
Office Visit $300 $150 $120 $30 (if deductible met) $150
Lab Test $100 $60 $48 $12 (if deductible met) $40

Note: This table is illustrative. Actual payments depend on your specific health plan's benefits.

Implications for Patients

  • Protection from Balance Billing (In-network): For in-network services, you are generally protected from "balance billing," which is when a provider tries to collect the difference between their billed charge and the allowed amount from you.
  • Understanding Your Explanation of Benefits (EOB): Your EOB statement from your insurance company will clearly show:
    • The provider's billed amount.
    • The allowed amount.
    • The amount the insurance paid.
    • The amount written off by the provider (contractual adjustment).
    • The amount you owe.
  • Importance of Network Status: Always confirm if your provider is in-network with your health plan to benefit from these negotiated rates and avoid potential balance billing issues that can arise with out-of-network care. You can typically find this information on your insurance company's website or by calling their member services.

By understanding the concept of the "allowed amount" and the role of negotiated rates, you can better interpret your medical bills and Explanation of Benefits, ensuring you only pay what you legitimately owe based on your insurance plan's agreements.