April 22, 2008

Discounts at the Doctor’s Office Naturalist Essay #1

Recently I had the wonderful opportunity to have my wisdom teeth yanked from my skull by an oral surgeon and had the annoying puff of air directed at my eye by the optometrist. So I have had some work done that is usually covered by extra coverage in normal benefits offered by an employer. I had opted to not take the extra dental and eye coverage seeing that they only covered up to $125 a year for visits and the price I paid for coverage for the year was $150. So going into these doctors offices I was ready to pay the full bill. However, when I asked how much everything was going to cost, they gave me a 35% discount for not having insurance. Well I thought to myself “shoot dang! I just worked the system!” but later my inner-economist started to think about the whole situation.

I know I saved myself the money on the dental and eye coverage because I would pay more than I would get out of it. But did I really work the system over and save even more money by getting a discount at both the dentist and optometrist’s offices? After some thought about it and putting a bit of economic analysis to work I don’t think I work the system over at all but both the dentist and optometrist made out like bank robbers.

From what I can gather about economics I feel that doctors’ offices are practicing third degree price discrimination and are doing a very good job of it. Third degree price discrimination is where the seller can differentiate between customer classes to capture more of the market surplus. The doctor’s office can differentiate between the people who really care about the price of service (people without insurance) and the people who do not have as much at stake with how much it costs (people with insurance). The doctors ‘ offices can do this because the insurance company has no big say in what the costs are when the person that is insured goes to a network doctor. There is a disconnect between what the people perceive that they are paying and what the total cost of everything is.

The doctors’ offices are capturing this disconnect in two ways. First, they are charging their full price (which I think might be higher than average) to people who have insurance and don’t have to pay the full price. Second, they are giving big discounts to people who do not have insurance because these people are more sensitive to the total cost. When they give the discount to these people they are capturing business that they might otherwise lose out on because of their high prices. And the profits that they lose from giving the discount might be offset by the higher profits they receive from charging people with insurance.

My theory on how the pricing works in a doctors’ office is, that the true cost of service lies somewhere between the price charge to people with insurance and the price charged to people without insurance. This would make doctors try to become part of every insurance network that they could. Being a part of more insurance networks means more people are able to come to their offices that have insurance so they can charge the highest price possible to increase revenue. So did I work the system, no, I just saved $25 by not going with insurance. Did I save money at the doctor’s office, probably not; I think I would have paid the about the same with insurance as I did without. For me, it all depends on how much the insurance costs and how much I am going to need; it doesn’t really depend too much on how expensive the doctors visit is.

1 comment:

Roman Kozhevnikov said...

I disagree about the insurance companies not having a say in the prices. Insurance companies usually put a cap on the money they will pay for services, and if a doctor wants to accept that insurance (and the customers it would bring) then that doctor must also accept the caps on the prices for services.

For example, my wife had a C-section and follow-up surgery a couple of years ago, and we about hit the roof when the bill came. It charged about $20K for services, and out insurance company only "approved" $12K. We thought we would have to pay the additional $8K. Nope. We onyl paid about 200 bucks, because the insurance company paid $11,800 of the $12K approved.

I think doctors charge so much to insurance companies, because some insurance companies will "approve" higher costs, but doctors can't get paid those higher amounts if they don't ask for them.

So, while insurance companies do have more money to hand out for services, I think they do take an active role in determining and influencing prices (at least the prices that they will pay).