Every year, an eager young reporter will call up hospitals in some large U.S. city and ask how much they charge for procedures like a hip arthroplasty, MRI, or obstetric delivery. He or she will become outraged to find out that there is enormous variation in the amount that different hospitals charge and write a newspaper article exposing the “high cost” hospitals and hoping to be rewarded with a Pulitzer Prize. All I can do is shake my head and sigh.

If you are a foreign prince coming to the United States to get your hip replaced, this information may be valuable to you but if you are an average American, the hospital charge is irrelevant. The reason… almost nobody pays the amount that appears on the hospital charge list.

If you are 68 years old, the cost of your hip replacement is going to be (almost) the same at any hospital you go to and that is because the hospital and the orthopedic surgeon get paid the amount that Medicare will pay for a hip replacement regardless of what the hospital or the doctor charges. I say almost the same because there are some minor adjustments in what Medicare will pay based on the geographical location of the community, whether the hospital is a teaching hospital, etc. but the amount is pretty close for all hospitals.

For people under age 65 on Medicaid, it works the same – regardless of how much the hospital “charges”, Medicaid pays only the same fixed amount. For those people under 65 who have commercial insurance, it is a little different: the insurance company will usually have a standard rate that they will pay regardless of the hospital charge and when the hospital and the insurance company negotiate a contract every few years, the hospital will agree to what that rate will be. Big hospital organizations can often leverage their size or notoriety to negotiate rates that are higher than the “standard rate” (but that is a topic for a separate post).

For most hospitals and most physicians, the “charge” for a hip replacement will be 1.5 to 3 times higher than what commercial insurance companies will pay. So why set the charges so high if it doesn’t affect how much you get paid? Two reasons:

First, the hospital (or doctor) always wants to set the charge for a procedure higher than whatever the highest-paying insurance company will pay for it so that they don’t leave money on the table. For example, lets assume Medicare pays $400 for an MRI test, insurance company A pays $450, and insurance company B pays $500. If the hospital charges $400 for the MRI, then that is all insurance company A and B have to pay so the hospital will leave $50 from insurance company A and $100 from insurance company B on the table. On the other hand, if the hospital charges $600, then they will get paid $400 from Medicare, $450 from insurance company A, and $500 from insurance company B.

Second, sometimes, the hospital will get paid whatever they ask for with their charges. This doesn’t happen very often but if your hospital has a lot of foreign princes flying in for their hip replacement, then it makes sense to ramp up the charges since that foreign prince will pay whatever you charge him. There are a few rare occasions when an insurance company will pay whatever the “charge” is – in my experience, this mainly happens when a lawyer or an insurance company pays a physician to do an independent medical examination for disability determination. The hospital charge can also apply to people who don’t carry insurance; this was pretty common before the Affordable Care Act when the percentage of our hospital’s patients who were uninsured was running about 13% but since the ACA was enacted and Medicaid was expanded in Ohio, our uninsured percentage has dropped to < 3%. Most of those who remain uninsured have low incomes and the hospitals will usually negotiate some reduced charge based on the patent’s ability to pay or write it off completely if the patient is indigent.

If you want to find out what Medicaid pays your doctor for a procedure or service, you can look up the current Medicare Medicare Physician Fee Schedule Search – regardless of what your doctor charges, this is what he or she is going to get paid by Medicare.

So next time you come across an article about unfair hospital charges written by an infuriated reporter, do what I do… skip to the sports page.

July 19, 2016

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