What's the price, cost, charge or payment?
To most, this is a single, redundantly worded question. To the financial
manager at a hospital, it's four different questions.
That's because health care has a financial jargon all its own to reflect
the varying prices that get charged depending on (among other things)
whether a patient is insured and by whom, and whether the provider is
part of the plan network.
In place of price, health care has charges, costs and payments to refer
to different prices and other financial matters—generating no small
amount of confusion.
What's the SKU for a hernia?
The financial jargon might seem innocuous enough—if maybe tedious—to
those unfamiliar with it. But it lies at the heart of pricing in today's
health care system.
A "charge" refers to the retail price of a health care service for
someone walking in off the street and paying cash. Providers keep what's
called a chargemaster file that lists the undiscounted price for every
conceivable service or product provided to patients, reportedly running
to 25,000 items in large hospitals. Charges apply to very few
patients—mostly those without insurance, but also those with insurance
but no pre-negotiated contract for care (like workers' compensation
claim filers or auto accident patients).
Hospitals and other providers are quick to note that few patients pay
the full charge rate. Even for those without insurance, providers will
negotiate discounts for poor patients or those unable to pay
inordinately high bills—though there have been high-profile cases of
hospitals aggressively going after patients with overdue bills.
Certain traditionalist groups who shun modern medicine—the Amish, for
example—at times are forced to seek professional treatment in critical
situations, like when an older mother has complications giving birth.
Not ones for insurance, these groups often negotiate cash discounts in
In a nutshell, listed charges are mostly the starting point for
negotiating price discounts, often with health plans, but also for those
savvy enough to ask.
"Cost" is a widely used term, usually referring to the resources (and
resulting fee) necessary for a provider to offer a service—in essence,
what it takes to keep the doors open. But it's also semantically
misleading, because rarely does a hospital have a single "cost" for a
discrete service; rather, cost is more of a benchmark price.
Cost is often invoked regarding Medicare and Medicaid reimbursements,
which are the fees that these federal programs pay providers—sans any
negotiating—for treating their participants. Providers have long
complained about reimbursements being "below cost," which means they
lose money (on average) for every Medicare and Medicaid patient treated.
"Payment," finally, is simply what a health care provider receives for
services rendered, whatever the original charge or negotiated discount.
For operating budgets, total payments are made to align with total costs.
Who's on first? If you're still following, go to the head of the health
care line because, not surprisingly, these distinctions are lost on
most. "The nomenclature is still problematic. Sometimes the discussion
goes past each other," said Arnold "Chip" Thomas, president of the North
Dakota Healthcare Association.
Cash, check or charge?
Differentiating between charges, costs and payments might seem like mere
semantics. Seeing the dollar signs hung on each might dispel that
notion, because there is a large and widening spread between provider
charges and average costs, or the payments that providers settle for in
treating patients, particularly those with private or public health care
According to data from the federal Centers for Medicare and Medicaid
Services (CMS), every state in the district saw its so-called
charge-to-cost ratio increase significantly from 2002 to 2007, topping
200 percent in each state and rising in rural as well as urban hospitals
(see charts below). In other words, the sticker price for a typical
service was more than twice as much as the hospital received on average
for that service. As recently as 1984, hospital charges nationwide were
just 35 percent over payments, according to a Health Affairs article
this past summer by Gerard Anderson of Johns Hopkins University.
In dollar figures, Minnesota hospitals reported charges of more than $20
billion in 2005, according to hospital data reported to the state
Department of Health. But net patient revenue, after adjustments and
uncollectibles, was $9.8 billion—a charge-to-cost ratio of 210 percent.
The ratio swings wildly among hospitals. The top 10 ratios in
Minnesota—each above 240 percent—were all in the Twin Cities metro. From
there, ratios can be found at virtually every level, including two below
100 percent, meaning that original charges were lower than net patient
revenue. (Both were tiny rural hospitals that likely received upward
case-weighted adjustments on reimbursements for their Medicare or
Health care providers have used the confusing terminology to occasional
advantage. For example, hospitals have been making a lot of noise about
skyrocketing levels of uncompensated or charity care. Those numbers
could be considered inflated because undiscounted prices—charges—are
typically used to calculate such costs.
But generally, hospitals and other providers are simply using this
multiheaded pricing structure to help balance the books. Hospitals are
low-margin businesses—just 3.1 percent for Wisconsin hospitals in 2006,
according to the Wisconsin Hospital Association. How can this be, given
the widening charge-to-cost ratios? It mostly relates to Medicare and
Medicaid reimbursements, which are typically below hospital benchmark
costs. According to CMS data on common hospital and clinic procedures,
Medicare charge-to-cost ratios regularly exceed 300, even 400 percent.
In other words, Medicare often pays a much smaller fraction of the
sticker price (or charge) than most payers.
That might sound like a good deal for taxpayers, but it has huge and
cascading ramifications for privately insured and uninsured patients,
driving up the prices they pay. In fact, much of today's disjointed
pricing in health care can be traced to federal pricing policy for
health care programs. At a deeper level, many would argue that today's
pricing system is out of whack because of the broader third-party payer
system that insulates most patients from the full cost of their health
care consumption. But the actual mechanics of price-setting today
springboard from the largest payers—in this case Medicare and Medicaid,
which are infamous for reimbursing treatment below a provider's average
Because many hospitals lose money treating Medicare and Medicaid
patients, margins on all other patients have to increase to keep the
doors open. That means charge-list prices go up; even if few patients
pay the going retail price, it sets the bar higher when it comes to
negotiating price discounts, whether for insured or uninsured patients.
"Does government pay their bill? No they don't. Then you have a cost
shift. If government isn't paying their bills, then someone else is,"
said Cindy Morrison, vice president of public policy for Sanford Health
in Sioux Falls, S.D.
Medicare's reimbursement system also has embedded geographic
disparities—a remnant from its creation in the 1960s when policymakers
wanted a reimbursement formula that was weighted for regional cost of
living and a provider's fixed costs. While accounting for such factors
may make sense, over time it has created a skewed pricing system that
penalizes efficient, lower-cost providers—historically, those in the
Upper Midwest and Great Plains—and rewards higher-cost facilities,
typically in coastal states.
Recently released Medicare reimbursement data show that hospitals in
district states often receive reimbursements lower than the national
average. The disparity for North Dakota is particularly stark. For
example, the average hospital payment nationwide for a heart valve
operation in 2006 was almost $40,000, and the range of payments (from
25th to 75th percentile) was $31,000 to $43,000. In North Dakota, the
range of payments for the procedure was about $26,000 to $31,000.
This payment disparity is one of the underlying drivers of a
transparency initiative being spearheaded by the North Dakota Healthcare
Association. "The point we're trying to make in all this is not to
(just) go along with the crowd" that is pushing for greater
transparency, said Thomas, the NDHA's president. Rather, the association
is hoping the sunshine of transparency will help tell the world that"North Dakota has shown itself to be low cost and high quality, and we
don't want to leave any doubt about cost control and health outcomes"
among in-state providers, he said.
While transparent pricing will be useful to consumers, Thomas hopes it
sparks conversation among federal policymakers over Medicare and
Medicaid reimbursement disparities. "We're just stunned by the different
payment structures depending on where the service is rendered. … So we
don't find (transparency) a fearsome thing."