Healthcare Insanity: “Why Are Widget Charges So Dang High?”

by | Mar 26, 2014 | Healthcare

I promised an explanation of the outrageous medical charges on the first line of your “EOB“.

What determines the price of any good or service?

Right. Supply and demand. But let’s leave medicine for a minute and talk about the historical price of, say, widgets.

So, why are widget charges so dang high?

In this country, widget-buyers have never –  until recent years and the ready availability of information –  had any  real understanding of widgets. They just knew that they were expensive, it wasn’t polite or professional to discuss the price, and that everyone, sooner or later, would need one (or several). So people bought “widget insurance” to pay for widgets.

Actually, widget insurance was paid mostly by the employers, so people had no real way to tell if they were getting a good value in their widgets, since they were shielded from the direct cost (because of the “third party payer”) and had no knowledge of the quality of various widgets.  They were at the mercy of the widget brokers. They had to trust the widget brokers to tell him when they needed a widget, and what kind of widget they needed. This was a perfect set up for widget inflation, especially since with every generation of new, better, and more expensive widgets, the widget insurance companies just raised their premiums, and employers just passed along the increased expense to their customers.The rising cost of widgets was covered up for a time.

But escalation of widget costs eventually made an impact and it all had to end. Corporations were taking a big hit in their bottom line and they complained loudly. So the government, having long ago passed the WMO (Widget Maintenance Organization) Act of 1973, enabled insurance companies to institute a cost-control/management method of paying for widgets called: “Managed Widgets”. This delighted big business at first because widget insurance premiums stabilized. This was because prices for widgets of all sizes and descriptions were fixed by contracts between widget insurers and widget brokers. Each insurer established its own networks of contracted brokers.

But before long, the escalation of prices and costs of widgets resumed at a pace more furious than before. This was because the widget-buyers now had even less control and knowledge of the widget market. They only paid a “co-pay” but had to depend upon the insurer to approve, pay for, and deliver the widgets. Obtaining widgets had become so administratively cumbersome that timely delivery of the correct widgets was nearly impossible. (Widgets have a short shelf-life. Widgets were ruined. Widget wastefulness necessitated substitution by yet more widgets).

Widget brokers did not even get to set their fees anymore by any logical means. Because they all belonged to more than one widget insurance network, the payment they were allowed to collect for any particular widget they supplied could vary widely according to the whims of the insurance company. Some companies paid way below market value for a widget while others would pay several times market value for that same widget.

So what was a widget broker to do? His fee schedule was meaningless. What he did know was that in order to make sure he was able to get the maximum possible fee from the widget insurer for any particular widget that he sold,  he had to make sure that his submitted charge was higher than even the highest “allowed charge”. (He knew that he would not get paid the highest fee if the charge he submitted were lower than the “allowed charge”. After all, the widget insurer would never voluntarily say, “Oh, broker, you made a mistake and didn’t charge enough. Here, let us pay you the maximum fee that we think you deserve!”

So, the first line on the Explanation of (Widget) Benefits? An outrageously high charge. Pure fiction, of course. As was the last EOB I personally got from my widget insurer. It had a highlighted note at the bottom of the EOB.  After specifying it would not “allow” that higher fee and paid a lesser rate, it said:



Oh, in case you missed it: in the above article, just substitute “Healthcare” for “Widget” and “Provider” for “Broker”.