Do you believe hospital prices are too high? What about fees from physician offices?

1946 Hospital Bill
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If so, you’re not alone. Everyone has had to deal with a hospital or physician bill at some point in their life, whether for themselves or family members. Most people talk about how the cost of health care keeps going up, and they place the blame on hospitals, with physicians a close second.

I’m here to tell you that you’re blaming the wrong entities. Sure, some hospitals are gouging patients with what they charge, but that’s not actually the majority.

Health care providers conduct business differently than any other type of organization has to deal with. You go to a store because you want to go; no one ever wants to go to the hospital except maybe to see newborn babies. Otherwise, unless they’re employees, no one ever wants to be in a hospital willingly.

You go to hospitals or physicians most of the time because you don’t feel well. In every other business you have to pay your bill up front when you buy products or services. Most health care providers only charge you for co-pays or deductibles up front, then have to wait at least 30 days, sometimes much longer, to get paid.

The amounts they’re paid aren’t all that good either; let’s look at physicians first.

Imagine you had to go to medical school for 8 years, then do internships for a couple more, all the while having to take out big loans to finance everything. Finally, you’re ready to be a physician, where your malpractice can run anywhere from $30,000 to $350,000 a year, depending upon specialty and what state you live in. Add to that the cost of renting an office, hiring staff (you must have some staff by law), paying for the costs of services such as billing services, cleaning services, pharmaceuticals in some cases, etc,… it all adds up.

What about hospitals? Malpractice insurance is much higher because most physicians aren’t actually paid staff, but you’re liable for things they do within the facility. Hospitals still have to cover all the liabilities for the specialties the facility offers such as lab, radiology, physical therapy, etc. Add to that having to pay all the staff, pay for all the supplies, cleaning services, pharmaceuticals, utilities, etc. And then add to that mandatory, money-losing areas such as emergency room services, and hospitals aren’t making the money you believe they are.

My Hospital Bill
Jonathan Smith via Compfight

That plus the majority of hospitals are not for profit (82%), which means their profits must go back into the hospital or hospital system, along with having to offer charity care discounts, belonging to and accepting all Medicare and Medicaid patients, and can’t send any patients to collections until they’ve waited 120 days. After waiting for insurance to pay some accounts can take up to 2 years for payment and still not get all they’re allowed to collect. Every other business would close within a few weeks.

Would it be fair if hospitals just charged you high fees without any regard for how it impacts patients? Not at all, and for the most part it doesn’t happen. The rules are different for not for profit versus for profit hospitals, but things don’t change that drastically. I’m going to tell you how most of it works, hopefully in a way you’ll understand it.

Health care providers set charge rates based on one of two principles. The first is based on hospital costs; the second is based on reimbursements from specific insurance carriers, mainly Medicare. Let’s talk about cost based charging first, because it’s the most complicated.

Basically, what this means is that medical providers have to figure out what their costs are in all the departments of the facility as well as areas they have to worry about otherwise such as waiting rooms, the cafeteria, salaries etc, and then base their rates off that. For physicians, this is easier to do, because they only have so many employees, rent is what it is, and supplies are easier to keep under control.

For hospitals, it’s a lot more complicated to do based on the fact that many departments actually don’t know how much everything costs. This doesn’t mean there aren’t facilities to try to do it, first determining what those costs are, and then marking charges up anywhere from 200 – 4000% (the 4000% is an extreme I’ve seen, and it’s something I try to get hospitals I work with not to do).

These are average figures by the way. Some areas have items such as inexpensive supplies marked up higher, and some very expensive items such as pacemakers increased much lower.

All of this is legal, but is it right? Sure it is; how much do you think your hardware store actually pays for screws and nails you buy from them? Don’t even get me started on large retail conglomerates!

Hospital with the Family
Jeremy Wilburn via Compfight

Now let’s look at the second way. Many facilities and physicians base their prices on what they theoretically get paid by some of the insurance companies that pay them. One reason Medicare is a good one to use is because Medicare’s one of the few insurances that shares its reimbursement rates with everyone (who knows where to find it), whereas almost no other insurances does. For physicians, Medicare will post a fee schedule; for hospitals, Medicare posts what’s called an APC list, or Ambulatory Payment Classifications. Both are based on procedure codes, or the services that were provided.

Just to get this out of the way, not all physicians participate with Medicare, which means they don’t accept Medicare patients who aren’t willing to pay out of pocket. This also means they’re charging based on their costs, which is lucky for the rest of the world because it shows there’s at least a modicum of oversight on what they’re charging their patients. This is because, per federal law, even if they don’t accept Medicare patients, if they see any eligible Medicare patients they’re only allowed to charge a certain percentage of their costs, and they have to charge everyone else the same rate. I can’t go into any real detail about these types of physicians groups since I’ve never worked with any of them.

Hospital prices can be based on the Medicare payment schedule and charges are marked up the same way as with costs. However, just because charges are a certain amount doesn’t mean that’s actually what either hospitals or physicians get paid.

Now it’s time for the ugly side of health care finance. We’ll use Medicare as a perfect example, though I’m faking the reimbursement rates because they change every year and aren’t the same across the country.

Let’s say Medicare tells patients that they’ll pay $45 for a chest x-ray, and that you, the patient, owes 20%, which means Medicare pays $36. First, this means that no matter what the hospital bills you, they have to adjust the excess amount down to $45. Second, either you or your insurance company will get billed for $9.

Medicare doesn’t come close to paying that $36 though. Based on yearly cost reports, Medicare’s reimbursement usually comes somewhere between 35% and 55%. This means that out of that remaining $36, Medicare might be paying as little as $16.20, and the physician or hospital has to write off the rest. So, the health care provider is only getting around $25, no matter what’s charged, if the physician is a Medicare provider (every public, AKA not for profit hospital, MUST be a Medicare provider). It’s like this across the board for all services provided to Medicare patients.

Welcome, Martin (the Beginning)
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What about other insurances? Other than people without insurance (self pay), every insurance company that a health care provider participates with (meaning the insurance company has contracted with the provider to accept payment directly before billing the patient, if there’s a balance that needs to be billed) negotiates a payment rate of some sort.

Sometimes it’s a fee schedule, which means a certain amount per procedure code; sometimes it’s based on a percentage of charges, which can be more beneficial to the health care provider. And sometimes it’s based on what’s known as UCR, which stands for usual, customary, and reasonable, based on an average of rates other similar providers in the area charge. The insurance companies always know what everyone is charging for, which sometimes gives them a big advantage because providers aren’t really supposed to know what each other is billing for (though they all have ways of finding out).

There are some payers (another term for insurance companies) that hospitals in many states are stuck having to accept that are killers financially. Those payers would be Medicaid, Worker’s Compensation, and No Fault, as well as payers from other state and federal agencies such as prisons. In a state like New York, hospitals must belong to both the Medicare and Medicaid programs by law. Hospitals can’t survive on these payments, so it becomes important for them to try to get as high a rate of payment from other sources as they can.

Unfortunately, this usually means the group that takes it on the chin the worst are the uninsured. In most cases, there are few discounts for them, and they’re at the biggest risk of going to collections for non-payment of bills. Luckily, every hospital has both payment plans and charity care processes, which can reduce how much self pay patients are asked to pay, but sometimes totally erases any financial obligation. It’s based on income; that’s pretty fair. All you have to do is ask, but facilities are supposed to have signs posted telling patients about this; most patient don’t notice them, however.

In some states it’s mandatory for hospitals to reduce the bills they send to patients based on one of their contracted rates with an insurance carrier, which is a major help. This also applies to people who are on state insurance exchanges and have high deductibles.

This is a not-quite simple explanation of how the pricing process works for hospitals and physicians; it’s not comprehensive and it’s probably still pretty complicated stuff. It may not make you feel any better, and it probably won’t garner sympathy from many people.

I’m betting that when you need medical help, you’ll feel a lot better knowing that someone is there willingly to take the chance to make you, or a family member, feel much better. When you think about it, is there a limit on how much you’d pay for that life?

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