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Top 10 Hidden Facts About Hospital Prices

Here are the top 10 hidden facts about hospital prices that answer questions about why it is so expensive and why the bills are so complicated.

Hospital prices are confusing to patients. What will you owe? Why is it so expensive? Why are the bills so complicated?

Here are the top 10 hidden facts about hospital prices that answer those questions.

1) Hospital cross-subsidization – Hospitals are paid much less by Medicare and Medicaid from the Government than by commercial insurance companies. Hospitals cannot raise prices to the Government, but they can to insurance companies. Therefore, hospitals constantly raise prices to health insurance companies to ‘Cross-Subsidize’ (i.e. make up for) the lower prices they are paid by Medicare and Medicaid.

2) Hospital accounting – The vast majority of hospitals in America do not know what it costs them to deliver each particular medical service. Gallbladder surgery? A single MRI of the brain? Heart catheterization? A hospital does not know what each of these costs. The reason is because most hospitals in America do not perform ‘Activity-Based Cost Accounting.’ The majority of costs in a hospital are labor. Therefore, in order to measure the cost of a service, the amount of TIME each doctor, nurse and technician spends on the care must be measured. Most hospitals do not measure the time spent on each ‘Activity’ and accordingly, do not know what each service costs.

3) Complex patient care financial impact – Highly complex patient care such as in the Intensive Care Unit and complex surgeries like Coronary Artery Bypass Grafts make up the majority of a hospital’s own costs. However, these costs are generated by a relatively small percentage of the hospital’s patients. Approximately, 80 percent of a hospital’s costs are generated caring for 20 percent of the patients. This fact exists in many organizations and is referred to as the Pareto Principle.

4) Hospital billing – A hospital never expects to be paid the full amount of its initial bill. Rather, the price on the initial bill that is sent to the insurance company is ‘discounted’ based on the prior negotiation between the hospital and each health insurance company. The amount the health insurance company pays the hospital is called the ‘Allowed Amount.’ The allowed amount can be as much as 90% less than then billed charges. For example, a hospital may bill the health insurance company $250 for a basic blood test and then only be paid $25. Overtime, hospitals have continued to increase the bill in order to increase the paid amount. This process is why the hospital bill for a short emergency room visit can be $8,000 or more. The hospital never expects to be paid $8,000. They just keep raising the bill in hopes of being paid more by the insurance company.

5) Hospital prices – Hospitals might charge $5 for an aspirin that costs less than a penny or $30,000 for a knee implant that costs $300 to make. The internal, ‘secret’ list of what a hospital charges for each item is called the ‘Charge Master.’ The prices on the Charge Master are set using a process called ‘Strategic Rate Setting’ or ‘Strategic Pricing.’ Strategic Pricing looks at how much of a discount the hospital has agreed to give the insurance company and then over-charges for each item in order to negate the decreased reimbursement of the discount. It’s the equivalent of marking the price up 100% so that the hospital can offer at a 50% discount.

6) Hospital-insurance networks – When a hospital agrees to give an insurance company a discount, the insurance company in return includes that hospital in their ‘network.’ However, there are additional ‘strings’ attached. The hospital might require the insurance company to never let its members know what the discounted hospital prices are in advance. The hospital might also require the insurance company to include all the doctors that practice at the hospital in the network as well even if the insurance company would want to exclude some outlier doctors that have poorer quality metrics.

7) Patient referrals – Referring patients from one doctor to another is one of the main ways hospitals grow their patient volume. Accordingly, hospitals monitor doctor referrals closely and may put rules on doctors that they employ regarding their referrals. For example, a hospital might require a primary care physician they employ to only refer to specialists that practice at the same hospital.

However, the primary care doctor may feel as though a specialist at a competing hospital would be better for the patient. In this situation, the primary care doctor’s hands are tied.

8) Future sources of hospital revenue – More and more hospital revenue comes from outpatient tests and procedures. Outpatient means the patient has a test or procedure and then goes home the same day. The problem is that hospitals charge much more for outpatient procedures compared to an

independent doctor’s office. For example, an ultrasound of the heart is called an echocardiogram. An echocardiogram performed at the hospital might cost $600, whereas that same echocardiogram performed at a doctor’s office might only cost $250. In fact, some hospitals are even buying doctors’ practices and then ‘saying’ the doctor’s office is ‘part of the hospital’ and changing the price of the office echocardiogram from $250 to $600. The test is exactly the same at the same location, but the price has just more than doubled.

9) Certificate-of-need laws explained – In dozens of states, hospital systems must obtain approval from the state government in order to build a new hospital. That approval is called a ‘certificate-of-need.’ The problem is that if a town only has one hospital, then it has a local monopoly and can charge very high prices. If a competing hospital wanted to open in the same town, it might be denied permission by the state government because existing hospitals lobby to prevent competition.

10) Hospital charity care – Most hospitals in America are ‘not-for-profit.’ That means they do not pay any taxes… specifically no property tax. In exchange for this ‘tax-free’ status, not-for-profit hospitals are required to provide some care for free or at discounted prices to the poor. The problem is many hospitals make their charity care application process hidden and very complicated. This strategy allows the hospital to reap the rewards of not paying taxes while not keeping up their end of the bargain.

Photo: nito100, Getty Images

Dr. Eric Bricker is an internal medicine physician who graduated with Honors from the University of Illinois College of Medicine and completed his residency at Johns Hopkins Hospital in Baltimore. He is the former Co-Founder and Chief Medical Officer of Compass Professional Health Services. We are thrilled to have his industry expertise here at SimplePay to help us better serve our members and clients.

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