How Hospitals and Health Insurers Collude at Your Expense

By Michael Gorback, M.D., board-certified in Anesthesiology and Pain Medicine. He taught for 8 years at Duke University and is the author of 32 scientific articles and textbook chapters, and one medical book. Dr. Gorback currently practices pain management at the Center for Pain Relief in Houston, TX, and claims that nobody has ever suffered due to lack of knowledge of his opinion.

This article is a WOLF STREET exclusive.

Bookies call it the “vig,” insurers call it a “PPO Repricing Fee”

You’ve made your money and you’ve left your skid marks on the world. Now you want to fulfill one of your teenage fantasies – owning a red ’57 Chevy (forget the other fantasies – those women are by now all either deceased or decrepit).

I’m a car broker. You hire me to find your dream car, and I get 20% of any savings I can negotiate.

Seller #1 has the car you want. Asking price is $60,000, and I get him down to $55,000.

Seller #2 has the same car in much better condition for $54,000, but he won’t budge on the price.

Which car will you end up with?

This is the distorting effect of third-party administrators (TPAs) in the health-care market. A TPA is often brought in to manage the benefits of an employer offering a self-insured plan. It’s big business: In 2013, Kaiser reported that 16% of covered workers at small companies and 83% of covered workers at large companies are covered by either partially or completely self-insured plans.

But it quickly gets complicated, as they say. The TPA is usually a health insurance company. And the “self-insured” plan often isn’t actually self-funded. It buys reinsurance from the health insurer that is acting as TPA. That’s how they get around state regulation. If they just bought insurance outright, it would be state regulated. If it’s “self-insured,” it falls under ERISA, and they can ignore state insurance laws. So they are often hiding the purchase of health insurance inside a “self-insured” wrapper.

The TPA makes money in two ways: it earns administrative fees; and there is what bookies call the “vig” and what insurance companies call a “PPO Repricing Fee.”

That means if I as a physician call a TPA and offer to do a procedure in my office for 1/3 of what it costs in a hospital setting, they aren’t interested. If they haggle me down to $300 from my usual $600 fee, all they can show their customer is a $300 savings. If the patients go to a hospital, the TPA can reprice the cost from the ridiculous hospital fee of $5,000 for the same procedure down to $1,000, “save” their customer a whopping but fictional $4,000, and bank a nice repricing fee – perhaps 20% of the $4,000 in “savings.”

Are you beginning to understand why hospitals crank their charges up so high? Their co-conspirators – the insurance companies – can show their customers even greater “savings.” In exchange, the insurance companies limit the number of facilities that have contracts. It’s win-win for everyone except the employer and the employees who are paying for all this.

You would think H.R. people for these self-insured plans would be on to this scam. But you’d be wrong. The insurers and TPAs give them a dazzling dog and pony show demonstrating how steep the discounts are, and how huge the “savings,” but they invariably fail to mention that 50% off a price that has been artificially quadrupled is not such a hot deal.

They also fail to mention that there are doctors and facilities that can provide the same services for far less who are locked out of these plans. The exclusion can be in the form of simply refusing to offer a contract at all, or in form of offering a fee schedule so low that it’s an offer that must be refused.

In this way, hospitals and insurance companies collude to keep prices higher, instead of trying to lower them. They aren’t adversaries. They’re confederates. By Michael Gorback, M.D. at the Center for Pain Relief. This article is a WOLF STREET exclusive.

Why does Medicare pay almost seven times as much for Dr. Gorback to do the same procedure at a hospital as opposed to his office? He doesn’t know either. But that’s one of the inexplicable intricacies of our health care system. Read… The Sheer Insanity of What You Pay For Medical Services

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  25 comments for “How Hospitals and Health Insurers Collude at Your Expense

  1. robert h siddell jr says:

    Maybe the hospital HAS TO “eat” the services for five or more welfare maggots for every paying patient whereas Dr Gorback can decline to be their physician. Therefore, the hospital pads our bills just as this Socialist government does from Federal, state, county and city levels for everything they provide to welfare maggots from medical, housing, food, child care, phones and computers, education, transportation, legal, parks-recreation and etc. It’s all in their Manifesto and now the Obola ACA which intends to price out any private physicians for the Middle Class.

    • NY Geezer says:

      I do not understand this comment since all on welfare have Medicaid and Medicaid pays their bills. Of course, Medicaid does not pay the extortionist $4000 charge, but our insurers, including Medicare, do not either. If Medicaid only pays $300 of the charge that would by fair.

    • Why don’t you just put on your ??????????????.

      ???? ????, doode.

      • Wolf Richter says:

        Steve, I replaced the offending language in your comment with ???. I don’t allow this kind of language on my site. I understand that you disagree with Robert’s comment and find it obnoxious, and you’re not the only one, but keep your disagreement civil.

        Robert, you stepped over the line. There are other forums where this type of language – such as “welfare maggots” – may be welcome, but not here.

        Thank you for your understanding.

  2. David MD says:

    Dr Gorback: This is very interesting, I never heard this before. But I do not understand why HR would want to “be onto this scam” any more than the hospital CEO since they work for the hospital.

    • Michael Gorback says:

      HR is not in on it. They are victims. My office manager used to be middle management at a TPA. I asked her how this could happen and she said, “It’s all smoke and mirrors. They get a presentation showing how big the discounts are but not the actual prices being discounted.”

      I think the self-insured employers are catching on. I am seeing carve-outs for packaged services negotiated independently. For example, I saw a company memo from one large employer that said employees who need a knee replacement can go to any of four designated centers, travel expenses included.

      What’s happening is that some players are side-stepping the TPAs and going directly to HR offering package deals that include the surgeon, the facility and the anesthesia. This has been a common practice in plastic surgery for years.

      Plastic surgeons rely largely on disposable income so people shop around for both quality and price (unlike most medical care). Plastic surgeons negotiate set facility and anesthesia fees, tack on their fee, and present it to the public as a package deal for a set price.

      There’s no reason that others can’t follow this model and indeed this is becoming increasingly popular. I am involved in several projects along these lines.

  3. Kenneth Watson says:

    Why does Medicare pay almost seven times as much for Dr. Gorback to do the same procedure at a hospital as opposed to his office?….

    Joan Rivers

    Which would you rather have in your neighborhood doctors with only outpatient surgery capability or a hospital when you suddenly get sick and need extended care?

    The government leans to supporting Hospitals over doctors. Hospitals are the center of care when you really need it.

    It is costly to run a government regulated hotel that is staffed 24/7 with highly paid employees and the latest expected technologies that will be there when you need it.

    • Michael Gorback says:

      You’re conflating inadequate facilities and staffing with all outpatient procedures, and your logic leads to having all procedures done at the hospital. It’s like citing an airplane crash as the reason we should ban airplanes.

      Do you have your dental work done at the hospital? Unless you have no sedation and no local anesthetic you run the risk of dying in the dentist’s office. You can be over-sedated and stop breathing or you could have an intravascular injection of local anesthetic causing seizures or cardiovascular collapse, either of which can kill you.

      People aren’t dying like flies at ASC’s or doctors’ offices. Hospitals should be for complex procedures or patients with complicated health problems.

      A hospital that can’t maintain sufficient census to stay open is arguably a superfluous hospital.

    • NY Geezer says:

      Regarding Joan Rivers, in my view her death is still wrapped in mystery and was probably preventable. But in no case should it be used to justify hospital over charges.

      : a procedure designed to restore normal breathing after cardiac arrest that includes the clearance of air passages to the lungs, the mouth-to-mouth method of artificial respiration, and heart massage by the exertion of pressure on the chest—abbreviation CPR.

      No explanation has been given for the failure to provide CPR at the upscale state of the art outpatient facility in NYC in which Rivers had her operation. Medical personnel are trained to perform CPC. It is incredible that no one at the facility could or would perform CPR.

      • Michael Gorback says:

        I agree. We don’t have the facts but as info dribbles out it would appear that they were like deer in the headlights. The fault is more in the particular facility and the staff than the general concept of outpatient procedures.

        Although I practice pain management my primary specialty is anesthesiology. I have had outpatient procedures done under both sedation and general anesthesia without giving it a second thought.

        When I was a medical student I had minor surgery done. I was admitted to the hospital the night before, had a huge battery of tests, underwent the procedure, and stayed for 2 more days. The same procedure done today would be in-and-out the same morning with far fewer tests.

  4. Petunia says:

    We need a single payer system and the democrats didn’t have the courage to do the right thing when they had the chance. The doctors can choose to participate or not. BTW, I am a republican and have always supported national health insurance. There are many of us out here.

    During the past five years I have had what would be considered good insurance but due to lack of income could not cover the deductibles or drugs so I didn’t use it. My son suffered for a month from a tooth ache because they would not approve the procedure he needed. He almost lost two toes because we didn’t have the $300 (20%) deductible for foot surgery. Every doctor’s visit became a battle with the insurance company. My husband’s and my health have suffered due to lack of money for the deductibles.

    We need to get insurance companies out of healthcare. Healthcare is not an insurable risk because we all get sick. The insurance people are the ones controlling health outcomes and it needs to stop.

    • Michael Gorback says:

      Do you really think there would be no outside interference between doctor and patient under single payer? “Whose bread I eat, his song I sing”, or if you like, “The Golden Rule: Whoever has the gold makes the rules”.

      Whoever is paying for the medical services will want control over how the money is spent and by virtue of controlling the purse strings they will do so.

      You also assume that under single payer there would be no deductibles or out of pocket costs, which may or may not be true. Medicare only covers 80%.

      The problem we face as a society is that we don’t want people to lack for care because of financial concerns but when something is (1) free and (2) managed by the government costs tend to explode. The most efficient pricing mechanism in human history is the free market, but a market implies prices.

      So you can have universal care or you can have cost-efficient care but you can’t have both. The real argument is how far along the spectrum you want to slide the pointer.

      • Petunia says:

        At this point I am willing to accept across the board average healthcare that is available. I want to be able to be seen without it being about the money. The first question I get from any doctor is “How are you going to pay me?”. I would prefer to hear “What is wrong with you?” instead.

        • Michael Gorback says:

          Well you certainly seem to have stumbled upon an interesting subset of doctors. I don’t know anyone who starts off an office visit that way.

          I understand that you don’t want money considerations to stand between you and your health, but when you remove the price barrier you remove the hesitation to use limited resources. How do we deal with that?

          If you want to see socialism in action go to the Canadian web sites that display wait times for various services. I went to the one for Ontario ( and queried wait times to get an MRI scan in the city of London, Ontario. It runs 79-100 days, while the official target is 28 days. The entire province averages 71 days. Note that these are the times for 90% of patients to get their scan. 10% take even longer.

          Are Americans willing to wait even a month for their scan, let alone 2-3 months? The patient I saw yesterday is having her scan this morning.

          As the engineers are fond of saying, “speed, quality, price – pick any two”.

          What do you mean by “across the board average health care”?

      • Bill H says:

        “…when something is (1) free and (2) managed by the government costs tend to explode,” is a claim easily debunked by looking at several countries in Europe which provide free health care to their citizens. In all cases the care is at zero cost to the patient, the care is managed by the government, the amount spent per capita on health care is about one third what we spend in the United States, and they get better heath results.

        • Wolf Richter says:

          True, kinda. Except that in cases with a true single-payer system, such as in France, the public system is bankrupt, produces big deficits every year, and gets bailed out every year by the general taxpayer.

          There’s a huge shortage of doctors and nurses in France, who regularly go on strike because their staffing levels are kept too low, as are their wages, in order the keep the system from going off the rails entirely.

          And the system isn’t “free” either. People pay out of their nose for it through very hefty payroll taxes.

          There are a lot of issues in the US healthcare system, and the overall per-capita costs are a scandal, especially since life expectancy in the US (the ultimate test of a healthcare system) is so crummy. But France, for example, would not be the model to aspire to.

      • Beth says:

        Eventually, people will realize that Petunia is right. The fact is that we pay 18% of GDP to cover some people well, some poorly and some not at all, while Canada, Denmark France, Finland, Germany, Japan, and Sweden cover everybody for 11% GDP. Don’t talk efficiency to me. It’s a myth that more than a few of us get better care that those countries. Stop blaming the poor for our expensive care and mediocre quality. Stomp on the people at the bottom; don’t blame your friend next door.

    • Matt R. says:

      Dear Petunia, Every socialist Ponzi scheme the Democrats came up with are now underfunded by hundreds of trillions of dollars while more and more Baby Boomers retire every day. The government doesn’t run anything well and I don’t want my health being at the mercy of it and Big Pharma any more than it already is.

      • Petunia says:

        My point is that the insurance companies don’t run the healthcare system well either. They bankrupt families and charge outrageous prices for cheap basic care. I would rather subsidize other citizens with my tax dollars than the CEO of any insurance company.

        • Matt R. says:

          I would prefer a free market in healthcare to get the government and corporations out of the way. Not surprisingly, more and more Americans are opting to have procedures performed overseas for that very reason, which saves quite a bit of money.

          As an FYI, we are also in the 50th year of the War on Poverty. $22 trillion has been spent on it, but we’re no better for it.

        • Beth says:

          To Matt R
          “I would prefer a free market in healthcare to get the government and corporations out of the way.”
          Opps, tell me one industry in the U.S. that has a free market. Is it telecommunications, food companies, airlines, finance? Certainly not healthcare. It is consolidating more and more as we speak. Firms are buying up their competitors so that they don’t have to compete on price or quality.
          Our free market days are over. It is time to stop thinking Republicans or Democrats; they are all on the same team. They want you to focus on the social issues, so you will not notice what they are doing to the economy.

    • YoungJeezy says:

      Why can’t people see that the only moral system of health care (or anything else) is one of voluntary cooperation? Taxation is theft, so any tax-funded health scheme is rotten at its core.
      Sure, you are virtuous for wanting to help the poor. Jesus would be proud. But what gives you the right to confiscate money from others? Did Jesus ever condone stealing to help the poor?
      If you think a voluntary system is “Utopian fantasy” because no one would contribute, you are either a cynical egotist or hypocrite. Do you think you are the only one virtuous enough to voluntarily help the poor? Or do you secretly know in your heart that you wouldn’t help unless forced?
      Since the state receives it funding by forcibly extracting payments from the populace, any expansion of state-run health care is wrong. Think it’s too complicated or difficult to come up with a moral, voluntary system? That is despair, fed by lies and lazy thinking.
      Consider this: in a voluntary system, the poor are cared for by charity rather than state services. What could be more cost effective? There are no bureaucrats or insurance company to drive up cost. Charitable organizations (staffed in part by volunteers) would distribute money directly to hospitals and doctors. The charitable organization would be motivated to work with providers that offer the lowest rates, or possibly even donate certain services. There would be no vig.

      • hyperalgesia says:

        You are absolutely right. There is no translation for the word “charity” in the liberal dictionary.

  5. Kenneth Watson says:

    “your logic leads to having all procedures done at the hospital”

    Many multiples of ancillary staff to support the patients are available at a hospital vs at a surgery center. One Dr thought that was irrelevant and apparently for a simple surgery a woman is dead.

    In addition, usually more than one specialty is there or on paid call to make sure they are available .

    There is dentistry available at Federally Qualified Health Centers along with the primary care visits with MD’s, DO,s and mid-levels. They even dispense Meds at the same location for minimal costs. This is the government, single payer, model for physician practices.

    Most Dr’s do not want to hear this but Hospitals are more important.

    The community impact of a hospital is greater for many reasons that a physician practice or surgery center. There are Rural hospitals across the nation that would disappear from their communities if they were not funded differently than major hospitals. Maybe it is just politics but the government, single payer, believes in them being effective for the local population.

    Surgery centers do not have emergency rooms that take all comers regardless of ability to pay. They cherry pick the low risk, high insurance population to work on and the hospital gets the questionable patient who may have a lot of complications…and maybe no insurance. Happens here a lot. If I was in the surgery centers shoes I would do the same. It is not against the law.

    Getting or loosing a Hospital is a multi-year, maybe decades sort of thing and a lot more expensive than hiring Doc’s. Today the large trend is Doc’s wanting to work for hospitals in any case.

    Lose a hospital then lose local Doc’s then be required to travel .5 hrs or more to get care, when you are sick is not something to look forward to. We have several critical access hospitals around us and that would be the outcome if one of them no longer existed. Their population would be required to travel to us for care.

    Surgery centers bleeding off the most profitable cases from hospitals is not a good thing for the community.

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