Who Pays for Your MRI? (Hint: It's Not Your Insurance Company.)

You may think that your insurer pays the imaging center for your MRI. But you'd be wrong. Don't confuse the payment conduit with the party responsible for the bill.

Every time you receive services through your medical plan, someone pays. You may have to pull out your wallet to pay a copay, or receive the care and wait for the insurer to process the claim to tell the provider how much you owe. You may pay little (coinsurance, or a percentage of the bill) or none of the bill directly.

But don't think for a moment that your insurer is assuming financial responsibility for the claim. Because ultimately, you (or you, along with your/your spouse's/your parent's company, if you're covered by employer-sponsored coverage) are paying for that care - if not directly, then indirectly.

Community-rated Versus Experience-rated

Medical insurers are permitted to calculate the risk associated with underwriting a particular company's medical claims, although they're subject to some limitations that we'll discuss a bit later. The method that they use depends on how large your company is.

Community-rated. If your company has 50 or fewer employees eligible for benefits, it's rated as a small group. Under federal law, insurers can't take factor in the group's claims experience when setting the price of care. Instead, insurers calculate and project all small groups' claims (based on experience and projections that reflect changes in price and units consumed, new technology, changes in where patients receive care, and other factors) into a single bucket and determine how much it costs to insure each person. It then applies this price to each small group in the form of a premium, adjusting it somewhat to reflect the ages of the employees and dependents covered (the older they are, the higher the average claims) and where they live (reflecting the cost of care in that area). That's it. Insurers can't even use a proxy for relative utilization, such as adjusting premiums for downward for a law form or retirement advisory (better claims experience on average) and upward for a restaurant, bar, or construction company (higher claims on average).

For companies with between 51 and 99 employees eligible for benefits, insurers typically use a variation of the community rate - called community rating by class, or CRC - to set premiums. This calculation starts with the community rate, then blends in other factors - like type of industry - to set the premium.

Experience-rated. Insurers can factor a company's claims into its calculation of the following year's premium. Most insurers will use just a company's claims experience to set premiums only if more than, say, 250 or 400 employees and dependents are enrolled. If between 101 and, say, 250 employees and dependents are enrolled, the insurer may blend the group's experience and the community rate. This blending smooths the claims experience by not factoring in the full cost of several very expensive one-time claims and also not reducing premiums if the group has an unexpectedly good year after nine average or higher-than-average claims years.

The key takeaway is that if your company has 101 or more employees eligible for benefits, your and your co-workers' claims experience will be used to calculate premiums in whole or in part. If you work for a small group, your claims will be placed in the much larger pool, where they'll have an infinitesimally small effect on the experience of the large population.

Insured Versus Self-Insured

There are two ways to fund a medical plan. Which approach your company takes has some important implications. Our discussion above about community-rated versus experience-rated premiums applies only to insured plans, as outlined below.

Insured (also called fully insured). You're familiar with this arrangement because it's how your personal insurance policies (like auto, homeowners, or life) work. You play a fixed premium to protect against catastrophic loss, like a fire that burns your home to the ground or an accident that destroys your vehicle. When you purchase your policy, you transfer the risk of loss to your insurer. You willingly do so because the annual premium represents only a fraction of the potential financial loss. Your insurer willingly sells the policy because it can project fairly accurately the likelihood that you will experience a loss and, thanks to the law of large numbers, can predict how much it will have to pay in claims among all policy owners.

A medical insurer assesses the claims risk and sets the premium. It then assumes the claims risk. If you and your co-workers are healthier than the insurer projected, the insurer earns a surplus (which it probably then applies to groups with worse-than-expected claims costs. If your group is less healthy than projected, the insurer takes a loss on your business and must make up for it with healthy groups' lower-than-expected claims. It then factors those higher claims into your premiums for the following year if you're a large company (51 or more employees eligible for benefits).

Self-insured. The alternative funding mechanism is a self-insured arrangement. This often looks like an insured plan - administered by a familiar insurer name, with the same benefits, network, and customer service, and even the same discounts for eyewear, gym memberships, infant care seats, and exercise equipment. But the employer doesn't shift the risk to the insurer. Instead, it hires a company - often an insurer, and increasingly an independent administrator - to manage the plan. The insurer or administrator assumes all the functions of an insurer in an insured model. When it processes claims, it pays them - but then bills the company for the cost rather than the insurer's absorbing it in exchange for a fixed premium.

Most companies with 250 or more employees are self-insured. And smaller groups - sometimes as small as a couple dozen employees - may self-insure since they can purchase a form of insurance that protects them against extraordinary losses as they assume the cl aims risk.

Companies that self-insure roll the dice that they will pay less in claims than they would in premiums. For most, it's a safe bet, especially since they can avoid expensive benefits mandates imposed by states on insured plans and can buy stop-loss insurance (a policy sold by another type of insurer) that protects them against high claims incurred by one person or the group in aggregate.

Who Pays Your MRI Claim?

By now, you should be able to answer the question of who pays for your MRI.

Applied to the deductible. If the service is applied to the deductible, the answer is simple. You pay it. And you should be motivated to do a little research to see how much the imaging costs from various providers in your area. In general, a free-standing facility is less expensive than a community hospital, and a community hospital charges less than an academic medical center. But those are rules of thumb that don't always hold.

You work for a small group. If your company has 50 or fewer employees, your premium doesn't reflect your and your co-workers' claims. Instead, imagine that you're eating in a 50-seat restaurant. Everyone agrees to split the bill 50 ways. What you order has very little effect on the total cost of food and, ultimately, your responsibility. But the decisions that each diner makes has a collective effect on the entire group. The difference between everyone's ordering pasta or everyone's dining on steak has a meaningful difference on the total bill, even if your individual entree selection has little effect.

You work for a large group. Your experience directly affects your company's future premiums (insured) or current costs (self-insured). You may tell yourself that you're affected by only the 25% or 30% of the premium that is deducted from your paycheck. But you're wrong. If your premiums (or what are called working rates for self-insured plans) increase from $2,000 to $2,100 (a 5% increase), you're affected by more than the extra $300 that you pay annually. Your company pays the other $700, true. But that money doesn't come out of thin air. It comes from somewhere - diverted from other employee benefits, or the profit-sharing plan, or the marketing campaign that increases sales and profits.

Insurers Don't Pay

Final point: Insurers don't pay for your MRI, any more than the bank that administers your personal checking account "pays" your mortgage. You pay your mortgage. Your financial institution merely writes the check which transfers money from your account to your lender's.

And, as you've seen above, that's precisely how your claims are paid. The insurer (or administrator of a self-insured plan) writes the check. But the money is coming from you or your employer, either directly and immediately (self-insured), directly but delayed (insured, with adjustments to the following year's premium), or indirectly (small group fully insured).

It's an important point to remember when you're thinking about your next MRI. Or whether to visit the emergency department versus an urgent-care center versus a telemedicine consult. Or the right balance between physical therapy visits and diligent rehab work at home or at the gym.

You may want to stick it to the insurance company because premiums are so high or to compensate you psychologically for a perceived wrong in the past. But when you do so, you're playing with a loaded financial weapon. And it's pointed not at the insurer, but at you, your co-workers, and perhaps, depending on your company's size, your extended family, friends, fellow congregants, and neighbors.

The Bottom Line

Insurers are, at the end of the day, merely financial conduits. They are intermediaries between patients (and patients' company, in the case of employer-sponsored plans) and providers. They pay bills as presented. Traditional insurers don't mandate that patients shop for the best value. The insurance plan may provide some incentives to spend the first dollars wisely, but ultimately a patient's choices matter. It matters either directly or indirectly, but make no mistake, it matters.

I'm director of strategy and compliance at Benefit Strategies, LLC, a provider of Health Savings Accounts and other tax-advantaged benefits. You can read my biweekly Health Savings Account GPS blog and subscribe by clicking here and my weekly HSA Monday Mythbuster and HSA Wednesday Wisdom columns, as well as my occasional Healthcare Update column, on LinkedIn. My book, HSAs: The Tax-Perfect Retirement Account, is the definitive guide to navigating the intersection of Health Savings Accounts, Medicare, and retirement planning. It's available in book and e-book forms from Amazon.

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