Physician Finances

Improving Physician Commercial Health Insurance Rates

Physicians rely on high reimbursement rates from commercial health insurance companies in order to balance out for lower rates from government payers such as Medicare and Medicaid. But every physician group negotiates independently with each health insurance company to settle on the amount that the company will pay the physician for every service and procedure. All of this is done in private so one physician group does not know what another physician group gets paid by any given insurance company to provide the same medical services. Conversely, one insurance company does not know how much another insurance company pays any given physician to provide the same medical services. In a previous post, we looked at the variables that go into a physician’s payer mix and found that for most physicians, commercial insurance rates are higher than those of Medicare or Medicaid. But different physicians do not get paid the same rates from any given insurance company.

To illustrate this, let’s look at an example of two physicians. Dr. Smith and Dr. Jones who both have a listed charge (“sticker price”) of $1,800 to perform a laparoscopic appendectomy. If a patient has Medicare, they both get paid the standard Medicare amount of $605 and if a patient has Medicaid, they both get paid the standard Medicaid amount of $435. But for patients with commercial health insurance, Dr. Smith gets paid anywhere from $756 to $1,512 – all rates higher than Medicare. On the other hand, Dr. Jones gets much less by each insurance company, ranging from $580 (less than Medicare) to $650 (slightly greater than Medicare).

So, why does Dr. Jones get paid so much less than Dr. Smith by each insurance company to do the same surgical procedure? The answer is that Dr. Smith negotiated a better deal with each insurance company contract than Dr. Jones did. In this post, we’ll delve into the variables that can affect physician reimbursement by commercial health insurance companies.

Physician group size matters

In the U.S., employers select a health insurance company and then the health insurance company selects the doctors that will be “in-network”. Employees get whatever insurance company their employer has contracted with and consequently, whatever in-network physicians the insurance company has contracted with. If the doctors that the employees want to see are not in the insurance company’s network of physicians, then the employees complain to their employer and the employer looks for a different insurance company to contract with to provide health coverage for its employees. The bottom line is that if the insurance company does not contract with the physicians that the employees want to see, that insurance company is going to eventually lose business.

If there are 100 self-employed cardiologists in a city, then the insurance company can afford to give them a take-it-or-leave-it offer with low reimbursement. If a few of the cardiologists say “no”, then there are still plenty of in-network cardiologists in the city for the people covered by the insurance company to see so few people will complain. On the other hand, if 20 of those cardiologists are member sof a single large physician group and another 40 are employed by a single hospital, then the insurance company can be forced to pay the 40 hospital-employed cardiologists higher rates than the private 20-physician group that in turn will have higher rates than the remaining solo practice cardiologists. The reason is that the largest physician group can demand higher rates because the insurance company cannot afford to lose that many physicians from their in-network physician list.

The greater a physician group’s local market share, the higher the commercial rates they can command. As a result, a multi-physician specialty practice will almost always get paid more by an insurance company than a solo practitioner.

Insurance company marketshare also matters

The size of an insurance company’s marketshare in a community also affects the amount that insurance company will pay physicians to provide medical care for the insurance company’s patients. In this case, the larger the insurance company’s marketshare, the lower the rates it has to pay physicians. This is because a physician group can afford to walk away from negotiations with an insurance company that only brings a small number of patients to the physician group’s practice. Consequently, that smaller insurance company has to offer higher rates in order to get the physicians to agree to see their relatively few patients. One study found that insurers with a marketshare of >15% paid 21% less for primary care visits than insurers with a marketshare of <5%.

Geography matters

There are enormous differences in the cost of medical care in different parts of the country. Medicare realizes that there is a higher cost of living in some areas than others and applies a “geographic modifier” to the Medicare conversion rate to account for cost of living differences. Thus the national average Medicare payment for a level 4 new outpatient visit is $167.10. But in San Francisco, it is $200.69 and in Mississippi it is only $154.51. These geographic cost differences are even greater for commercial insurance reimbursement. The graph below from the Congressional Budget Office shows average physician reimbursement by state compared to Medicare reimbursement.

Physicians in Wisconsin command the highest commercial insurance company rates at more than 175% of Medicare on average. Alabama has the dubious distinction of the lowest physician reimbursement with commercial insurance companies paying Alabama physicians less than Medicare rates on average.

What commercial insurance companies pay hospitals also varies considerably by state. The graph below (also from the Congressional Budget Office) shows that in all states, the average hospital reimbursement is greater than Medicare hospital reimbursement, ranging from a high of Massachusetts at 400% of Medicare to a low of Arkansas at 150% of Medicare.

This is well-illustrated by lung transplants. My patients with end-stage lung disease requiring a transplant who had high-quality health commercial health insurance could get their transplant here in Ohio at either the Ohio State University or the Cleveland Clinic – these health insurance companies were willing to pay OSU and Cleveland Clinic high fees so that insured patients could get their transplant done locally. On the other hand, I had patients with low-cost, poor coverage health insurance who had to travel to Missouri or Kentucky to get a lung transplant at lower-cost transplant centers.

Specialty matters

Specialists rightfully should be paid more than primary care physicians – specialists require more years of training and thus enter the workforce at an older age than primary care physicians. It is appropriate for specialists to be compensated for the extra skill and expertise that comes from those years invested in more training. There are far fewer physicians in any given specialty than there are primary care physicians and the more specialized a physician gets, the fewer and fewer similarly specialized physicians there are in a community. Those highly specialized physicians can demand much higher reimbursement from commercial insurance companies since they do not have much competition in the local market.

Not only does the number of physicians in a particular specialty in the community affect rates but whether those specialists are likely to be hospital-based or outpatient-based has a huge affect on rates. The specialties with the highest commercial rates are anesthesiologists, critical care physicians, and emergency medicine physicians. These are specialists who work exclusively in hospitals and patients going to that hospital cannot chose a doctor. If the emergency squad takes you to your local hospital, you are going to see whichever ER doctor is on-duty that day. If you go to the hospital to get a hip replacement, your anesthesiologist will be determined by the anesthesiology department’s work schedule. And if you have respiratory failure from COVID, you are going to be cared for by the critical care doctors covering the ICU on the days of your ICU stay. Because of this, insurers are willing to pay more for these hospital-based physicians in order to be sure that they are in-network.

In addition, anesthesiologists, critical care physicians, and emergency medicine physicians are often hospital-employed and the rates for their professional services are generally negotiated with the same insurer contracts as the hospital’s. In general, hospitals command higher commercial insurance rates than physicians. Nationally, commercial insurance prices for outpatient hospital services average 240% of Medicare reimbursement and inpatient hospital services average 182% of Medicare reimbursement. Commercial insurance prices for primary care services average 118% of the Medicare rate and for specialty services average 163% of the Medicare rate. During negotiations for health insurance contracts, rates for these hospital-based physicians are often bundled in with the high hospital rates with the result that hospital-employed anesthesiologists, critical care physicians, and emergency physicians often command much higher rates from commercial insurers than other physicians.

Quality matters

High performance on quality measures can translate to higher reimbursement rates from commercial health insurance companies. The graph below from the Congressional Budget office report shows that hospitals with high ratings on the Medicare star quality rating system were more likely to have commercial insurance reimbursement >276% of Medicare rates whereas those hospitals with low Medicare star quality ratings were more likely to have commercial reimbursement <216% of Medicare rates.

There are three ways that physicians can use favorable quality measures to obtain higher commercial insurance rates. First, hospital-employed physicians at hospitals with high quality metric measures can often have the physician fee schedule negotiation bundled with hospital negotiation with insurers, resulting in higher physician reimbursement. Second, many insurers will have bonus payments for quality performance built into physician contracts. Third, savvy negotiators can use historical favorable physician quality metrics to bargain for higher reimbursement rates from insurers when negotiating contracts.

Rural vs. urban physicians

In general, physicians practicing in rural areas have incomes 5-10% higher than those practicing in urban areas. This is in part due to rural hospitals paying physicians more to attract physicians to rural areas that are often perceived as being less desirable to live in compared to urban areas. However, in many cases, rural physicians have an advantage over urban physicians when it comes to negotiating with commercial insurance companies for reimbursement contracts because with fewer physicians in a rural area, the physicians have more of a monopoly in the healthcare delivery market. If you are the only cardiologist in the county and the next closest cardiologist is 60 miles away, then insurers will be willing to pay you more to keep you in-network for the patients in that county. A number of years ago I got a cold call from a small hospital in rural western Ohio offering me just over double the salary I was making in Columbus but I learned that I would be the only pulmonary/critical care physician in the area and would essentially be on-call for the ICU every night, every day of the week – definitely not worth the money!

Acquisition by private equity firms

Over the past two decades, there has been an increase in private equity firms buying physician practices, especially dermatology, ophthalmology, gastroenterology, and primary care practices. Between 2012 and 2021, the number of private equity firm acquisitions increased 6-fold. Overall, 8,000 physician practices have been bought by private equity firms in the past decade for a total price of $1 trillion.This can result in single ownership of many, previously independent, small group practices. One study found that in 28% of metropolitan areas, a single private equity firm has more than 30% market share of physicians in at least one specialty, and in 13% of metropolitan areas, a single private equity firm owns 50% of marketshare of at least one specialty. With single ownership comes a larger number of physicians and more efficient economies of scale when it comes to managing overhead expenses, electronic medical records, and billing operations. Private equity firm ownership can also bring better business management and better bargaining power when it comes to negotiating commercial health insurance contracts.

The graph below shows the increase in commercial health insurance rates for physician services for practices after acquisition by private equity firms. The largest increase was for oncology practices that saw a 16.4% increase in reimbursement by insurers after the practices were acquired by private equity firms.

When private equity acquisitions resulted in a large local marketshare for a specialty, the increase in reimbursement by insurers was even greater. For example, reimbursement for gastroenterology services increased by 14% overall after acquisition by private equity but increased by 18.2% when the marketshare commanded by a private equity firm exceeded 30% of the gastroenterologists in a metropolitan area.

The goal of the private equity firm is to improve the profitability of the physician practices so that those physician practices can then be re-sold at a profit in the future. In other words, the strategy for private equity is “buy-buff-sell“. A typical goal will be to sell the practice within 5 years at a 50% profit. More than half of practices purchased by private equity firms are resold within 3 years of initial acquisition. In order to ensure a 50% return on their investment, private equity firms will seek to eliminate unfavorable payers in their payer mix with tactics such as eliminating Medicaid patients, limiting self-pay patients to those who can pay in full in advance, and in some cases, eliminating Medicare patients. This can make it increasingly hard for low-income patients to find medical care in their communities and places an additional burden on not-for-profit physician groups to provide that care.

The Patient population matters

When a commercial insurance company contracts with an employer to provide healthcare for the employees, the demographics of those employees can have a huge impact on healthcare utilization and can have an impact on the health insurance premiums the insurer charges the employer. Physicians can use this information in their own contracts with the commercial health insurance companies. For example, insurers are permitted by the Affordable Care Act to raise premiums by up to 50% to cover people who use tobacco. Insurers can charge premiums for older people up to 3 times what they charge for 21-year-olds.

So, for example, an insurance company whose biggest contract is with the local factory that has been in operation for 50 years employing people straight out of high school will have a large percentage of older smokers. On the other hand, if the insurance company’s biggest local contract is with a software company that just started up 5 years ago employing college-educated people, there will be a lot of younger non-smokers. Knowing this may allow the physician group to negotiate higher rates from the insurance company that brings a lot of patients with more complex medical problems since those patients can translate to more uncompensated patient phone calls, greater risk of malpractice suits, more time-consuming prior authorizations, and more office staff time to manage.

Tactics to improve commercial insurance rates paid to physicians

Now that we have examined some of the factors that affect the rates that commercial insurers pay physicians, if the physician practice develops a business strategy to increase its commercial insurance rates, there are several tactics the practice can implement to achieve this goal.

  • Don’t settle for the insurance company’s standard physician fee schedule. This is like paying the sticker price for a new car – sometimes you have to do it but most of the time you can negotiate for a better price.
  • Set your “standard charges” appropriately. No insurer will pay you more than your publicly stated standard charge for any service or procedure. If you set your charges at 130% of Medicare, the most any insurer will pay you is 130% of Medicare. You don’t want to set your charges so high that it scares patients away but you should set them higher than the best reimbursement rates you can hope to negotiate with your best-paying insurer.
  • Join a larger physician practice. The days of the independent solo practitioner are all but gone. Solo practitioners have no negotiating power with insurers and have to settle on commercial insurance rates at or below Medicare rates. A larger group practice will have better leverage when it comes to insurance contract negotiations and can usually get higher rates than solo or small group practices.
  • Become hospital-employed. There is a very good reason that the percentage of physicians who are hospital-employed has grown so rapidly in the past 20 years. Hospitals can negotiate higher commercial insurance rates than physician practices can. In addition, the hospital can charge an insurer (including Medicare) more when a patient is seen in a hospital-owned outpatient facility than a physician group can charge when a patient is seen in a privately-owned facility. Thus hospitals can afford to subsidize physician salaries over and above what the physician can bill for professional services alone.
  • Limit (or eliminate) self-pay and Medicaid patients. This is usually only practical by for-profit physician groups since 501(c)(3) organizations (non-profit organizations) are required to provide charity care to maintain tax-exempt status through the IRS.
  • Move to a rural area. In a rural area that has fewer physicians, your ability to negotiate for higher rates from a commercial insurance company improves since there will be more pressure on the insurer to have you in-network to care for local patients.
  • Move to a different state. Just moving from Alabama to Wisconsin can double the rates that you can get from commercial insurers. Physicians completing their residency or fellowship would be well-advised to not just look at payer mix when looking at a job but should also look at what the commercial payer rates are in the state that they would be practicing in.
  • Monitor and report quality metrics. Insurers make money when the people that they are insuring don’t get sick. A physician practice that can show its effectiveness with smoking cessation, weight loss, cancer screening, and vaccination rates can position itself for higher reimbursement rates.
  • Target insurers with a small marketshare.  A commercial health insurance company with a relatively small number of insured people in a community will often be willing to pay higher physician reimbursement rates to ensure that those insured people have access to local healthcare.
  • Be willing to walk away. If a physician practice drops an insurer, then that physician practice becomes out-of-network for all of the insurer’s patients. That translates to higher co-pays and deductibles for the patients and many of them will leave the practice to find an in-network doctor. This can be painful to the physician who has long-standing doctor-patient relationships but it can free up space in the practice to see more of the patients covered by a better-paying insurance plan.
  • Negotiate terms other than just professional fees. The contracted reimbursement amount is one thing but actually getting paid is something else. Sometimes, a practice will have to spend a lot of time and effort just to be sure that it is actually getting paid for services. This extra time and effort means extra overhead expense. In many cases, negotiating for terms such as time to submit claims, time to appeal claims, which services or procedures require prior authorization, expedited prior authorizations, and the process of adding new physicians to the insurance plan can greatly reduce expenses and this can be just as beneficial as getting paid more.
  • Negotiate higher rates for certain services or procedures. This is where knowledge of your own practice’s strengths can pay big rewards. If your practice is particularly experienced and skilled in a certain procedure, then use that to negotiate a higher rate for that particular procedure. For example, if you are an endocrinologist with particular expertise in thyroid needle biopsy, you may want to negotiate a price of 170% of Medicare reimbursement for that procedure and 130% of Medicare for everything else you do.
  • Sell the practice to a private equity firm. I was often approached by solo practitioners who wanted our physician group to buy their practice when they retired. But the reality is that physicians rarely buy other physician’s practices anymore. However, private equity firms will buy them. In the short-term, this can bring a big payoff to the physicians. But the private equity firms’ strategy is to increase productivity and decrease overhead costs of the practices in order to re-sell those practices at a profit in a few years. That means that the doctors will usually be required to see more patients per day and that RNs will be replaced by MAs and LPNs. For some physicians, this can mean a loss of control of their clinical practice and burn-out.
  • Negotiate better. If there was a class in insurance contract negotiation in my medical school, I missed it. Physicians are trained to take care of patients and not negotiate business deals. A successful insurance contract negotiation requires research and interpersonal skills. If you want to get higher rates from a commercial insurer, you have to know your own practice – its strengths and weaknesses – and be able to effectively communicate the value of the strengths. You also need to know what the insurance company values so that you can appeal to those values. You don’t necessarily need an MBA to do this but some additional training other than medical school can help – take a course or two at the local business school or enroll in a training program directed toward physicians in management.
  • Hire a consultant. If the physician practice is still not getting the reimbursement rates from insurers that it thinks it should be getting, it may be time to bring in a consultant who has better knowledge of what the achievable rates are in the community and how to better negotiate with insurance companies to get those rates.

It’s all about a balanced payer mix

As physicians, we feel best about ourselves when we provide medical care to the people who need it the most. The majority of physicians want to find ways to give back to their community and that often means treating patients who are low-income and disadvantaged, either on Medicaid or uninsured. The only way we can do that is if we can increase our reimbursement from commercial insurers to balance out for the financial losses associated with altruistic care of Medicaid and self-pay patients. In countries with universal healthcare systems, physicians can concentrate their professional efforts in direct patient care and do not have to spend time and resources in commercial insurance contract negotiation. But in the U.S., it is necessary for every physician to have a strategy to regularly and successfully negotiate with insurers for the best possible rates they can get. More than ever before, medicine is a business.

June 11, 2024

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital