A brief history and explanation of United States hospital charges and their impact on consumers.
Why are charges at United States hospitals so high? This questions is often an issue with consumers. Not only do hospitals and doctors charge a very great amount for their services, but managed care insurance companies and government payers do not even pay what is charged. Only patients without insurance ever have to pay charges. If you have ever seen a complete bill from a hospital, the amount paid by insurance or Medicare can be 30 to 70% of charges, with the rest written off as a discount, also known as a contractual adjustment.
A little of bit of history can help explain why this happens. Prior to 1966 and Medicare, hospitals charged patients and insurers amounts, and generally, those payers paid the amount requested. There may have been prompt pay or volume discounts, but by and large charges were the benchmark for payment. Hospital charges were set to reflect the costs of services.
When Medicare came about in 1966, the regulations specified that Medicare would not pay charges, but would pay hospitals the cost of services provided. Charges became less important, and attention was focused on the best way to incur and report costs. Insurers and patients still paid charges, so that in order to make any return on investment (profit) hospitals increased charges above cost, in order to derive the return from insurers and patients.
With the advent of Managed Care in the 1980’s, insurers also obtained discounts from charges. Medicare changed to the Diagnosis Related Group (DRG) methodology in 1982. This system pays hospitals an amount based on the diagnosis of the patient. A patient is assigned to one of approximately 500 DRG’s based what the diagnosis was that led to the admission, as well as procedures that were done to the patient during their stay. It does not matter it the patient stays 5 days or 10, and charges are $50,000 or $100,000, the hospital still gets paid the same amount. There are additions or reductions for very long and costly or very short stays, and as well as add-ons for capital costs and medical education. However, the result is that payment bears no relationship to charges anymore.
Is this important to the average patient? If a patient has to pay charges, or a percentage of charges, it has a major impact. Otherwise, think of it like the sticker price on a car. Other than for comparison purposes, it really is not important what the sticker price is. So, if you feel good that you and your insurer negotiated a great discount, just remember, the only important thing is what the final price was.
