What it means
Doctors and hospitals set their own prices, and those prices can differ widely for the same procedure. Insurers needed a way to limit what they pay without simply accepting whatever a provider chooses to charge.
The UCR approach compares each bill with what other providers in the same area typically charge for the same service. The three words each have a job.
Usual refers to what that particular provider normally charges for the service, customary refers to the range charged by similar providers in the area, and reasonable allows for unusual circumstances such as a complicated case. A fee is generally paid up to the lowest of these three tests.
Insurers build their benchmarks from large databases of claims. Many plans pay up to a chosen percentile of local charges, such as the 80th percentile, which means the plan will cover a fee that is higher than 80% of the fees in the data.
The percentile a plan uses is stated in its policy documents, and a lower percentile means more cost falls on the patient. The practical effect is felt mostly when a patient uses an out-of-network provider, one that has no negotiated price agreement with the insurer.
The plan pays its share of the UCR amount, not of the bill, and the provider may charge the patient the difference, a practice known as balance billing. In-network providers, by contrast, agree contract prices in advance and usually cannot balance bill.
For employers who buy health cover for staff, the UCR level is a quiet but important part of plan design. A generous benchmark raises premiums, while a tight one leaves employees with surprise bills and complaints.
Rules about balance billing, especially in emergencies, differ between jurisdictions and change over time, so plan managers should check the current position. Finance teams should also remember that UCR is an estimate, not a fixed price list.
Two insurers can calculate different allowed amounts for the same procedure in the same town, because they use different data and percentiles. Comparing a quote against a plan's allowed amount before treatment avoids most disputes.
In practice
Real-world examples.
Example
A small business owner has a health plan covering 70% of UCR for out-of-network care. She chooses a specialist outside the network who charges $3,000 for a procedure with a UCR amount of $2,000. The plan pays $1,400 and she is responsible for the remaining $1,600.
Example
An HR manager compares two group health plans for a 60-person company. One pays at the 90th percentile of local charges and the other at the 70th, so the first costs more in premiums but leaves staff with smaller bills when they leave the network.
Example
A physiotherapy clinic reviews its price list against insurer allowed amounts in its city. It finds that its fee for a standard session is above the UCR level, so it faces a choice between lowering the price or explaining the difference to patients.
Formula
Calculation
Patient cost = (provider charge - allowed UCR amount) + patient's coinsurance share of the allowed amount
Suppose a surgeon outside the plan's network charges $1,500 for a procedure and the plan's UCR amount is $1,000. The plan pays 80% of the allowed amount, which is 0.80 x 1,000 = $800. The patient's coinsurance is 20%, or 0.20 x 1,000 = $200. The excess over the benchmark is 1,500 - 1,000 = $500. The patient therefore owes 500 + 200 = $700, and the insurer pays $800 of the $1,500 bill.Case study
Seen in the real world.
Greystone Print Works is an illustrative, fictional firm with 120 employees and a self-funded health plan, meaning it pays claims itself and uses an insurer only to administer them. The finance director notices that out-of-network claims are rising and that several employees have complained about large balance bills.
She reviews the plan and finds that the UCR benchmark is set at the 50th percentile of local charges. Many providers charge above that level, so patients are being billed the difference. She obtains a quote showing that raising the benchmark to the 80th percentile would cost about $90,000 more a year in claims.
In this illustrative story she presents the board with a middle path: raise the benchmark to the 70th percentile and add a service that helps employees find in-network providers. The fictional company reduces the number of complaints while holding the added claims cost to about $45,000.
Watch out
Common mistakes.
- Assuming the insurer will pay a percentage of the bill, when the percentage applies to the allowed UCR amount, which may be well below the bill.
- Forgetting balance billing, so that a patient is surprised by a charge for the difference between the bill and the allowed amount.
- Believing UCR is a published national price list, when each insurer calculates it from its own data and percentile.
Questions
People also ask.
Does UCR apply to in-network providers?
Generally no, because in-network providers agree contracted prices with the insurer and usually cannot bill patients for the difference.
How can a patient find out the UCR amount before treatment?
The patient can ask the insurer for the allowed amount for the procedure code, and the provider's office can give the code and the expected charge.
Why would an employer care about UCR levels?
Because the percentile used affects both the premium cost of the plan and how much employees pay when they use out-of-network care.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related