The typical narrative I hear around large healthcare bills is “racked up large charges because insurance will pay it” which is the opposite of what I would expect given the incentives I understand. Do insurance providers have a non-obvious incentive to keep costs high?
So a doctor can charge you 10k, but the insurance company itself will only end up paying 2k to cover it (and you pay your deductible).
So the charged price is entirely divorced from reality.
You get fucked when you don't have insurance, because you can't participate in this process
In most but not all cases the insurance companies pay less because they have pre-negotiated rates with the hospital and not due to challenging a bill. Even when parts of a bill are challenged by an insurance company the issue is more frequently resolved without involving the courts.
I have a chronic condition which requires monthly visits to a doctor. For every visit the doctor bills the insurance company $380 and the testing lab bills $75. For every visit the insurance company reduces the charges paid to $90.60 and $14 which are the rates they have pre-negotiated with the doctor and lab for these particular services. No court or case by case negotiation required.
This is not accurate. Cash payers just have to go through the administrative part themselves, cobbling together charity and self-negotiation, eventually landing on a payment plan that doesn't get reported to credit agencies.
As well, people don't really go bankrupt from medical costs that often. Hospitalizations cause about 4% of bankruptcies among nonelderly adults. Among uninsured, this rate is about 6%. They mostly go bankrupt because they lose their jobs and income [0].
Of course in a "free market" system, competition based on premium price should counteract this. However, due to another complex set of factors, this pressure does not seem to be very effective. (This includes the US system being employer based, and again the relatively oligopolistic structure of insurers). That said, I'm still very surprised there's not more competitive pricing pressure in the US, despite what seems to be some strong potential corrective forces, like employers self-insuring to reduce their costs.
(setr's comment about the "retail" price not being the real one is true, but it's also true that insurers still pay more in reality in the US vs. other Countries).
[not a pro on the regulations, so please correct me]
A lot of the medical system payments come from the government, and I think this may be the force that sets a lot of the prices, more than, say, private companies negotiating, due to both the aggregate $$$ value and fewer negotiating parties in the gov't group. Thus the high prices might result from poor negotiating incentives on the Gov't side:
1) gov't is bad at it 2) they don't have the proper incentives to control their costs 3) capture by private companies (lobbyists for providers etc.) 4) I think their may be some areas where the Fed Gov't is not allowed to negotiate by law. (drug prices?)
There are also weird rules where sometimes Medicare is legally required to get the best rate of anyone.
Healthcare industry is completely insane and to an earlier comment not a free market
On the one hand you'd think insurance would want the lowest prices possible, but that would also shrink the magnitude of float that they have to generate profit off of. So in reality, prices stay high.
As long as insurance is at the same time generating money via capital allocation and financial management, you'll still have the perverse incentive for price maximization in place.
In other words - if you get a low bill, everyone else will expect a low bill and there will be a lot of drama.
If everyone gets a high bill, but then they get a special discount, they are usually overjoyed and happy. If someone tries drama, they are stuck with the high bill.