Cost Plus or Medicare-Based Payments And Why It Matters

Written by Jeanne Pinder •Published on February 24, 2012

We’re hearing a lot about “cost plus” or “Medicare-based” reimbursements for providers under various insurance plans.

As you know, in the current health-care system, insured people might often find themselves not knowing what a procedure costs or what an insurer pays.

For example, when I had an MRI of my lower back, how much did that MRI cost? The provider charged $2,380 and I paid $30. The reimbursement was $2,340. That’s what the “negotiated rate” is — the rate that my insurance company negotiated with the provider for the proper reimbursement rate.

This was some time ago; now, as a result of the reporting we’ve done here at ClearHealthCosts, I find that same MRI of the lower back can be obtained here in the New York area for $350. Also, I learned that Medicare, the big government program covering the elderly and disabled, pays $497.28 for that procedure in Manhattan.

So why didn’t my insurance company pay less?

People say that the Medicare rate is the lowest rate in the marketplace. And while we know that isn’t true — take a look at this blog post about the view from the billing office – we could say that the Medicare rate is the closest thing this marketplace has to a fixed or regulated price. And it’s much lower than that $2,340.

So if we were doing a Medicare-based reimbursement, maybe we would suggest reimbursing at that Medicare rate plus, say, 20 percent. Or we could use government figures — including the cost-to-charge ratios published by the government — to establish the cost of the procedure, and then pay a bit more than that cost — say 12 percent, in one of the examples we heard.

That might put the cost of the MRI at $600 ($500 plus 20 percent). If you’re keeping track at home, that’s much less than $2,340.

This is a big question about the Preferred Provider Organization model: if my insurance company has a PPO that pays $2,340 for that procedure, then why are they not negotiating harder, or why are they directing me toward higher-cost care?

Well, you might ask: Why should I care, if the insurance company is paying?

Maybe I care because my premiums are going up. Or because my co-pays are going up. Or because my employer’s premiums are going up. Or because the rising costs of health care may actually not be rising: it may just be that the difference between $2,340 and $600 is going somewhere that doesn’t have to do with health care.

Editor’s Note: Jeanne Pinder is a former New York Times Editor. Her website is