Reasonable and Customary Charges

To be deemed reasonable and customary, a charge must be in line with the average charge of the same medical procedures throughout your specific medical community. This community includes physicians, hospitals, laboratories and other providers involved in your care.

Unlike most aspects of health insurance, there are very few regulations for insurance companies when determining what they consider reasonable or customary. In fact, only a few states even define what constitutes the terms "reasonable, usual and customary" and even fewer have regulations on the methodology used in determining these charges. Some insurance companies use statistics found in national studies of your geographic area in order to determine reasonable and customary charges. These studies include the fees charged by medical service providers such as doctors and hospitals. However, in some cases, insurance companies determine these charges using information compiled by themselves and regulated by no one.

No matter how they gather the information, insurance companies then chart the statistics from a given area in order to get an idea of an appropriate range for a fee for different services. A common determination of reasonable and customary charges is those charges that fall in the 80 percent range of all providers in a given area. For example, if your doctor charges a fee for a procedure that's above the charge of 80 percent of the providers in that region, then you'll pay the difference between your doctor's bill and the amount the insurance company is willing to pay.

And while a definition of the terms may be easily found in your policy, the actual method of determining a reasonable and customary charge, along with the percentage of this charge they will pay, is usually not included. Legally, insurance companies must tell you how they determine the charges and how much is charged for a given service. While it varies by state, many states require the insurance companies to comply with this request within 30 days. Some good questions to ask your insurance company are how often they update their reasonable and customary charges, the exact geographic area included in determining your charges, and a general description of how these charges are determined.

The use of reasonable and customary charges isn't found in all insurance plans. Instead, these charges are generally applied to fee-for-service plans as well as out-of-network visits in PPO and POS plans.

In fee-for-service plans, or indemnity insurance plans, you have the freedom to pick which doctors or hospitals you want to use, but the insurance company only pays a certain percentage of the bill. In these plans, the insurance company will usually pay 80 percent of the reasonable and customary charge of your medical service. Therefore, you're required to pay the additional 20 percent of these charges. This amount is known as coinsurance. However, if there's a discrepancy between what your provider charges and what your insurance plan is willing to pay, then you'll be responsible for even more of the bill.

For example, if your doctor charges $125 for which the insurance company's reasonable and customary charge is $100, the insurance company will only pay 80 percent of the $100, or $80. Thus, you will be responsible for the remaining 20 percent of the bill in addition to the balance above the customary charge, or $45 total in this example.

In point of service (POS) and preferred provider organization (PPO) plans, reasonable and customary charges don't influence your bill if you stay within the plan's network. When staying in network you're often only responsible for a co-pay. And depending on the service, a deductible. Otherwise, the insurance company agrees to pay 100 percent of the provider's bill. The insurance company is willing to do this because when a provider is in an insurance company's network, he or she has agreed to set fees for a given service. Therefore, an insurance company knows what your service will cost and eliminates the need to apply reasonable and customary charges.

However, once you go out of an insurance company's network, this arrangement is canceled. Therefore, in order to avoid paying high fees and to keep their overall costs in order, insurance plans will apply reasonable and customary charges to a given medical services you receive out-of-network. Normally, the percentage paid by the insurance company for an out-of-network fee is 80 percent of the reasonable and customary charge. In addition, before you can enjoy an out-of-network benefit, your deductible usually needs to be met, no matter what the service.

If you want to avoid getting stuck with an unreasonable or noncustomary charge, you may have to make a few calls, namely:

There's one advantage found in PPO or POS services that isn't found in fee-for-service plans. Both of these plans have what's known as an out-of-pocket expense cap. This cap is the amount you need to pay out-of-pocket for certain medical services or treatments before the insurance company pays for 100 percent of the reasonable and customary fee. These caps are useful when you decide to go outside of the network. For example, if you have met the deductible for your PPO plan, the insurance company will begin paying 80 percent of the reasonable and customary charges of your out-of-network doctor's bills with you paying the remaining 20 percent. Once the out-of-pocket expense cap is reached, the insurance company will then pay 100 percent of the reasonable or customary fee of a provider. It's also important to note that only certain health care items can go toward your out-of-pocket expense cap. To learn more about out-of-pocket expenses, click here.

For more information on reasonable and customary charges, health insurance and related topics, check out the links on the next page.