It’s no secret: health insurance has made everything more complicated and more expensive. Most of the time, we just pay our deductibles and our co-pays and let the insurance take care of the rest. But behind the scenes, a whole host of tricks and tactics take place between health insurers and providers that most of us don’t even think about.

One such arrangement is the use of the contractual DRG, or the “Diagnosis Related Group.” The DRG was originally developed by Medicare in an effort to simplify payments and – supposedly – to make reimbursement more fair. It works like this: instead of counting up all of the individual pieces of treatment, equipment used, and medication administered to a patient, Medicare figured out the average cost to treat each patient with the same condition. For instance, for any patient with the flu, Medicare figured out the average amount of money it costs to take care of a flu patient. Then, it decided to pay hospitals that same amount for each flu patient it treated – regardless of how much the hospital actually spent on that patient’s care. This means that, if a hospital could take care of a flu patient for less than the average cost, it made a profit. On the flip side, if the patient was “more expensive” than the average patient – that is, if he or she required more advanced treatment or a longer hospital stay – then the hospital had to eat any extra cost above and beyond the payment it received.

There are two problems with this model. The first is obvious: it encourages hospital to devote as few resources as possible to any given patient. If the hospital is getting paid $3,000.00 to take care of a patient, but can get away with releasing her after only $1,500.00 worth of treatment – why wouldn’t it take advantage of that? Under this model, it’s easy to see how hospitals can become too intent on maximizing profit in exchange for doing the bare minimum to treat their patients.
The second potential problem is a little less obvious, but it is something that we have started seeing in our line of work. Let’s say you’re hurt in a car accident and you need an MRI that costs $1,500.00, but you have no health insurance. You are going to be on the hook for that $1,500.00, unless you can negotiate some kind of discount with the hospital directly. If you later get a settlement from the accident, you are simply getting reimbursed for what you’ve already paid out.

Now, imagine you’re hurt in a car accident and you need that same MRI, but you do have health insurance. You pay your co-pay or deductible, and your health insurance takes care of the rest. If you later get a settlement from the accident, you may have to pay back your health insurance for what they paid out. In most cases, an insurer has an agreement with a hospital to pay a percentage of the overall cost of a treatment. So, in most cases, your insurer would pay maybe $750.00 for that MRI, so you’d owe them $750.00 out of your settlement. It’s one of the reasons you have insurance, right? You consistently pay your premiums so that you pay less for actual treatment when the need arises.

Not so with DRGs. Take this scenario: you’re hurt in a car accident, you need a $1,500.00 MRI, but hey, it’s cool because you have health insurance like you’re supposed to, right? Not so fast. If your health insurance company has a DRG relationship with the hospital, it might be contractually obligated to pay $3,000.00 for an MRI that only costs $1,500.00. And you can bet they are going to come after you for the full $3,000.00 when you settle your car accident case. You end up paying more than the treatment actually cost – sometimes a lot more – just because of some agreement your insurance company entered into with the hospital that you know nothing about. You end up paying more than you would have paid if you didn’t have insurance in the first place.

Fortunately, you won’t run into this situation unless you get a settlement as the result of the injury you were treated for. But if you are hurt in an accident, isn’t it bad enough that your whole life has been turned upside down without your own insurance company trying to make you pay twice as much as your medical bills actually cost? It’s time for health insurers to take a long hard look at DRGs and ask whether they truly serve their original purpose – fairness.