The Costs of Payment Uncertainty in Healthcare Markets

Abstract

What does it cost healthcare providers to collect payment in the complex U.S. health insurance system? We study this question using rich data on repeated interactions between a large sample of physicians and many different payers, and investigate the consequences when these costs are high. Payment uncertainty is high and variable, with 19% of Medicaid visits not reimbursed after the first claim submission. In such cases, physicians either forgo substantial revenue or incur costs to collect payment. Using physician movers and practices that span state boundaries, we find that providers respond to these costs by refusing to accept Medicaid patients in states with more severe billing hurdles. This supply margin is even more responsive to these costs than to reimbursement rates. Using these supply estimates, we calculate that the costs of billing Medicaid consume one-quarter of the average revenue from a Medicaid visit. We estimate a model of the billing process, and find that the variable costs of billing each visit account for 21 percentage points of this total cost. Analyzing healthcare prices without accounting for billing costs and payment uncertainty may substantially misrepresent differences between private payers and Medicaid.