During my recent podcast interview with Jeff Deist, president of the Ludwig von Mises Institute, I remarked that third-party payers are not, in fact, intermediaries between doctors and patients. In reality, it is the physician who has become a “middleman” in the healthcare transaction or, as I argued, a subcontractor to the insurer.
Important as it is, this reality is not well recognized—not even by physicians—because when doctors took on this “role” in the late 1980s, the process by which healthcare business was conducted did not seem to change in any visible way.
When health insurance was first introduced on a large scale in the 1940s and 1950s, a patient would see a doctor and pay the bill directly. The doctor would issue a receipt and the patient would submit the receipt to the insurance company for reimbursement. The insurance company was, in that sense, a financial intermediary since it would enable the patient to afford the care and see the doctor.
Overtime, as the cost of medical care began to rise rapidly, a practice evolved whereby physicians would take it upon themselves to submit the claim to the insurance company and would not require patients to pay upfront.
In that sense, doctors were making an advance to patients, and the money they received from insurers could still be considered a “reimbursement.” If the insurer did not pay, or only paid a portion of the bill, the physician could submit the remaining balance on the bill to the patient. The insurer was still a financial intermediary.
The situation changed fundamentally in the late 1980s when contractual arrangements began to take effect between doctors and insurers.
Medicare abandoned the practice of paying doctors the “usual, customary, and reasonable fee,” but instead imposed a fee schedule and business rules that physicians were obligated to accept in toto.
Private insurance companies followed suit and began to formalize contractual agreements with physicians. These agreements would similarly tie payments for services according to a predetermined schedule of fees.
But these new contractual agreements—which are standard arrangements today—did not visibly alter the practice by which physicians would submit a claim to an insurer after a patient encounter. It continued to be the case that, for the most part, patients would not pay the total bill upfront¹ and that, subsequent to the visit or procedure, a physicians would submit a claim to the insurer.
Since that time, though, the money physicians receive after services are rendered can no longer be considered a “reimbursement.” In fact, that money is truly and simply a payment for a service the physician has provided according to the terms of his or her contract with the insurer.
And to see more clearly how that payment sanctions a sub-contractual relationship between doctors and insurers, consider the overall scheme of healthcare financing as it has been set up since the 1980’s:
In the case of private insurance, employers pay premiums to insurers in exchange for a promise to provide “healthcare benefits” to certain employees. In turn, private insurers hire doctors to enable them to fulfill that promise. The doctors are essentially subcontractors in the healthcare benefit enterprise and the subcontract is typically called a “provider agreement.”
In the case of government insurance, “society” funds the government in exchange for a promise to provide healthcare benefits to certain classes of citizens. In turn, the government hires doctors as subcontractors to enable them to fulfill that promise. The subcontract is called the Medicare (or Medicaid) provider agreement.
The foregoing should make it clear that the persistence of the term “reimbursement” conceals the nature of the relationship between insurer and doctor. The evolved relationship between insurer and doctors also explains why the term “healthcare benefits” and “health care” are frequently conflated:
A “healthcare benefit” is a vague promise to pay for actual healthcare services. But having healthcare benefits in no way guarantees that one will receive anything resembling true care, since the provider agreements do not specify, except in very rudimentary ways, what exactly can be considered “health care,” let alone “quality” health care.
It should be readily apparent that an arrangement where physicians operate as healthcare benefits subcontractors to insurers, and not as primary agents to the patient, is not healthy for anyone.²
1. We ignore here the effect of high-deductibles and high co-pays which do not alter the nature of the relationship between doctor and insurer.
2. It should also be clear that an arrangement where physicians are employed by an entity which enters into similar contracts does not fundamentally alter this unhealthy relationship. Lastly, it should be clear that hospitals and any other entity that similarly enters into contractual agreements with insurers also act as healthcare benefit subcontractors, and not as primary agents to the patient.