What Hospital’s Charge vs What They Get Paid: A Health Care Blame Game

A recent article by the Washington Post found here, discusses a new era in price transparency at first glance. The Centers for Medicare and Medicaid Services, the Federal agency that pays hospitals and doctors for services rendered to patients, released the prices that hospitals charge for the 100 most common inpatient procedures. The idea is to provide more information to the public about how much hospitals charge and to highlight that one hospital will charge a wildly different amount than what another nearby hospital charges for the same procedure. But before we go any further, it is imperative that you, the reader, and the public understands that what a hospital charges Medicare/Medicaid is almost completely unrelated to how much Medicare/Medicaid reimburses that hospital for those services.


Normally in a business transaction, say for example, a plumber, the plumber provides a service to the homeowner, the plumber then charges the homeowner a certain amount and the homeowner pays or reimburses the plumber for those services. But it doesn’t work that way in healthcare. The hospital (or doctor) knows that Medicare/Medicaid, or whatever insurance company is involved, won’t pay the hospital what the hospital charged for services provided. Medicare/Medicaid pays the hospital based on a diagnosis related group (DRG) which is a “black box” of formulas that tell the government to pay X amount of dollars for a particular disease process or procedure. The variations in what the government pays to each hospital is based on these formulas, which are too confusing to explain here. But briefly, the formulas take into account the complexity of the disease process, the potential costs of complications and even the cost of living in the area of the country where the hospital is located (ie higher reimbursement in New York City vs Bunkie, Louisiana).


But there’s another element at play here, that’s not at play in the plumber’s example. If a homeowner can’t pay for their plumbing to be fixed, the plumber doesn’t fix the plumbing. As simple as that. However, in healthcare, barring a few very extreme examples, everyone can access the health care system through a clinic, emergency room, charitable organization, etc. Health care is a right in my opinion and while the media likes to interview people that were turned away from an emergency room for a life threatening emergency, I believe everyone has the right and does in fact have access to care in a life threatening situation. That means treating patients that don’t have insurance. But how do hospitals treat patients with no insurance (ie no way of paying for services rendered)?


In an effort to survive the health care system, hospitals determine how much it costs them to treat a patient with insurance. They then multiply that cost by a factor of 2, 3 or whatever number they think will help bring in enough money to help cover the costs of treating patients that don’t have any insurance. So they attempt to make more money on patients that have insurance in an effort to treat the uninsured, which is why you don’t see people dying in the streets. And this explains why a hospital charges more than what you’d expect for services – because they’re essentially raising the money from patients with insurance to cover the costs, or cost shifting, to patients with no form of payment. The Federal government knows this, so in an effort to stay one step ahead, the government doesn’t pay the hospital the charges the hospital submits, but rather pays them a predetermined amount (based on the DRG). This is illustrated in the graphic below, courtesy of The Washington Post.


health care costs
The dollar amount the hospital charged Medicare/Medicaid is circled in red but the amount that Medicare/Medicaid actually paid, or reimbursed, the hospital is in green (colored circles were added by Dr. Kaplan, author of this blog and were not part of the original graphic by The Washington Post).


This very lengthy explanation was all to say one thing…this is a game of charges and reimbursements between the hospitals and the Federal government (Medicare/Medicaid). I don’t know who started the game but they both deserve some share of the responsibility. But I will say this – if you think hospitals are paid too much or make too much money, consider that if a hospital doesn’t make enough money to take care of the insured and uninsured, they’ll close. That’s not good for anybody.


Some will argue, as I’ve seen in other articles written on this topic, that when someone doesn’t have insurance, they will be sent a bill with these very large balances that the hospital charges to Medicare/Medicaid. While Medicare/Medicaid doesn’t pay these bills at face value, does the uninsured patient have to? While there are examples when a hospital sends a bill to an uninsured patient with a huge balance on it, I can say from experience, treating patients that have no insurance, they do not have to pay these enormous bills. What happens to a patient that comes into the hospital with no insurance is the following: the hospital assists the patient with getting on disability or Medicaid so that all of their bills are paid. Keep in mind, the bills are paid at the predetermined value that Medicaid decides they want to pay, not the actual amount the hospital charges. So these patients aren’t “on the hook” for the hospital bill. Their accounts are settled after-the-fact. While private insurance won’t pay for health care expenses that occurred before the patient got insurance, Medicaid does in fact pay retroactively. The point here is repetitive and unmistakeable – the figures that hospitals charge are inconsequential to the insured and uninsured patient, alike. The cost to the taxpayer that funds Medicare and Medicaid is what Medicare/Medicaid reimburses to the hospital, not the bill the hospital sends out.


So it’s ironic that the Federal government wanted to “clarify” the costs of healthcare by publishing the amount hospitals charge. But in highlighting what the hospitals charge, they avoid the question of what this costs taxpayers. The hospital’s charges don’t cost the taxpayer a dime. The hospital could charge a gajillion dollars for a knee replacement – it doesn’t matter. What does matter, and what the taxpayer should know, and what Medicare/Medicaid should highlight is what the Federal government actually pays the hospitals for these services. Whether you think they pay too much or too little is another discussion. The point here is that Medicare/Medicaid chose to highlight how much the hospitals charge – a dollar figure that ultimately has nothing to do with how much the government actually pays hospitals and doctors. So if the amount hospitals charge doesn’t reflect how much the government actually reimburses hospitals, why would Medicare/Medicaid release this information? It appears that this latest revelation was used to make the hospitals look like the “bad guy” rather than really trying to educate the public. The Federal government had an opportunity to highlight the costs of health care to the taxpayer but instead they used the opportunity to blame hospitals. Shouldn’t our Federal government be above spin games like that?




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