fah hospital policy blog

Perspectives on health policy affecting America’s hospitals and the patients we serve.

Words Matter: Defining Hospital Charges, Costs and Payments – And The Numbers That Matter Most to Co

June 05, 2015 | Chip Kahn

Category: Financing, General, Health Care Delivery

“Charges,” “costs,” and “payments” are three separate terms with three entirely separate definitions when it comes to hospital financing.  Unfortunately, these words are often –and inaccurately – used interchangeably. In recent years, with a greater focus on data transparency, there has been tremendous confusion by some that Medicare pays hospitals the “charges” they submit on a claim, when, in fact, Medicare payments and the beneficiary copayments are fixed by law.

The differences between charges, costs and payments matter, most importantly, to the patients we serve every day. It is important to disentangle these different words so consumers can clearly understand what is paid by their insurer, what they pay out of pocket, and why.

Defining Key Health Care Finance Terminology

CHARGES are the initial, individual list prices a hospital must set for what can be tens of thousands of items and services it provides. The internal list of all these charges for, among other things, procedures, pharmaceuticals and supplies is known as a “chargemaster.” The historical chargemaster has little or no relevance to contemporary hospital patients and to the payments a hospital actually receives. The charge setting process is rooted in legacy systems that have evolved over decades and vary significantly across hospitals.

Although Medicare requires hospitals, for regulatory reporting purposes, to submit full charges (i.e., prices from the chargemaster) when submitting claims, the charges have no direct relation to the pre-determined Medicare payment that a hospital receives, nor to the out-of-pocket/copayment amount that a patient is expected to contribute for care.

While it is sometimes used as a benchmark or reference list price to negotiate payment rates with insurers, the chargemaster is irrelevant to the vast majority of patients, particularly those covered by Medicare and Medicaid. Medicare and Medicaid payments constitute approximately 50% of hospital revenue.

What is relevant? The fixed payments hospitals receive from Medicare and Medicaid and the payment rates hospitals negotiate with private insurers.

Neither the government nor, in most instances, private insurers actually pay a hospital’s full charges. Even patients not covered by Medicare, Medicaid or private insurance are almost never expected to pay full charges. Hospitals have generous discount payment policies for uninsured or underinsured patients which limit how much these patients ultimately will be expected to pay out of pocket. Typically, that payment amount is no more than the amount a private insurer would pay for the same service. In other words, uninsured patients are only very infrequently expected to pay “charges”; instead, they receive discounts that take into account a patient’s ability to pay, and are similar to what the hospital negotiates with private insurance plans or even the Medicare rate.

COSTS are the expenses incurred by a hospital in providing patient care. This can include the direct costs of patient care such as nursing, room and board, medicines and supplies, as well as, and equally important, indirect costs such as overhead for administrative expenses including complying with federal and state regulatory requirements, infection control, medical records, building maintenance, and equipment.

PAYMENT is the amount a hospital actually receives for providing patient care. The chief sources of payment are:

  • Government (e.g., Medicare and Medicaid)
  • Private insurers, and, to a much lesser extent,
  • Patients

It bears repeating that in the world of hospital financing, the ONLY term that appropriately refers to that which consumers, insurers or governments pay to hospitals for care is PAYMENT. The media’s myopic focus on “charges” is unfortunate because it masks the truth about the disconnect between charges and payments, especially the amount that insured and uninsured patients are ultimately expected to pay.

Payment amounts for health care services vary, often widely, by the source:

Payments by the Government.  In practice, the Federal government sets in advance a fixed payment rate for hospital care delivered to seniors and disabled Americans (Medicare beneficiaries). This includes the amount the government requires beneficiaries to pay the hospital directly as their share of the total payment, also known as cost-sharing. These payment amounts are based on the patient’s diagnosis and the procedures and tests performed and are non-negotiable; a hospital must accept them as payment in full. Hospitals submit charges to Medicare as a formality because regulations require them to do so. In actual practice, government payments have nothing to do with “charges.”

It is important to note that for twelve consecutive years, Medicare payments have fallen well below the cost of the hospital care provided to seniors and disabled Americans. This means that hospitals are operating at a financial loss even after they receive payment.  The Medicare Payment Advisory Commission (“MedPAC”) projects a Medicare hospital payment shortfall (i.e., the difference between “payment” and “cost”) in 2015 of 9%.

Payments by Insurers.  Private insurers set their payment rates through direct negotiations with hospitals. These negotiations result in a mutually agreed upon payment rate for services, but are separate from the process of determining the amount the insured person, or consumer, will pay “out-of –pocket.” Those providing coverage (insurers and, in some cases, employers and unions) alone determine the premium amount the policyholder pays the insurer. Further, those providing coverage are solely responsible for determining the extent to which a policyholder is responsible for paying some portion of the care they receive directly from the hospital.

Payments by the Patient.  Consumer payments from insured Americans, known as “out-of-pocket” payments, “copayments,” or “cost sharing” (not to be confused with the “cost” of care defined above), are the payments patients make directly to a hospital or other health care provider.

  • For those Americans who are Medicare beneficiaries, out-of-pocket payments are determined by the government acting through the Centers for Medicare and Medicaid Services (CMS).
  • Cost-sharing payments for Americans covered by private insurance are determined under the insurance policy they have with a private insurer. “Copayments” – partial payment for the service, and “deductibles” are common examples of out-of-pocket payments.

Uninsured patients and others who may be financially challenged are generally asked to pay an amount that is often based on negotiated insurer rates, or sometimes Medicare, or what they can reasonably afford based on their income and financial status.

Uncompensated care is, in general, the amount by which payments received fall short of the cost of the care provided. Uncompensated care includes charity care provided to uninsured patients for whom payment was not expected based on the individual’s financial condition, as well as out-of-pocket amounts not paid by insured patients who do not meet their financial obligations. The American Hospital Association reported that, in 2013 hospitals provided $46.4 billion in uncompensated care costs.

*****

At a time when major changes in national health care policy are being considered and implemented, and there is so much at stake, words really do matter — precision is important to avoid confusion and distortions. “Charges” are neither the fixed government nor insurer-negotiated payment a hospital receives for providing care. “Charges” are not the payment a patient is typically expected to pay upon receiving care.

It is the responsibility of all those in the health care sector to understand and explain these critical differences between cost, charges and payment. You, as the consumer, have every right to know the “how” and “why” that determines what you pay for your health care.