Charges, payments and costs, oh my!

CMS last night released 2011 data on the charges and payments for the 50 most common hospital discharges for every hospital in the USA (Aaron McKethan put me onto this via twitter @A_McKethan). A quick primer and then selected comparisons for UNC, Duke and Wake Med hospitals.

  • Charges are a fantasy amount that no third party insurance company would ever pay. However, the uninsured might pay this amount (they would often be ‘charged’ this amount and go bankrupt trying).
  • Payments are the amount that is actually paid for care (in the data released it is combined amount paid by Medicare, other insurers, and patients).
  • Cost is a truly elusive concept in health care, but hospitals of course have systems that state their costs (and likely have many versions depending upon what is included).

Payments are sometimes greater than costs, but in other cases less; this differs by type of care and payer. And of course it depends upon what measure of cost you might use (does it include capital financing costs? If you build a new Cancer hospital, how broadly are those costs apportioned, etc.). Note that no data on costs was released. Charges and payments are an imperfect means of saying something about costs.

The table below compares the charges (fantasy) with the total payments received (actual money changing hands) by UNC, Duke and Wake Med hospitals (Duke and UNC are ~ 8 miles apart, and Wake Med is about 20 miles from each) for 3 DRGs in which I have some interest and which Aaron McKethan was tweeting (280=Heart Attack; 292 Heart Failure & shock; 638 = Diabetes; note that there are other codes relevant to these conditions, I just picked 3; this is based on my analysis).

ScreenHunter_03 May. 08 12.10

Several points:

  • You cannot easily perform a significance test on the differences here because we don’t know the standard deviation or standard error of the total payments (is Wake Med’s $5,844 in total payments significantly different from Duke’s $8,267 on DRG 638)? And the sample sizes are fairly small. You could make some assumptions, but I haven’t done that.
  • The spread on total payments is much less than on charges. Payments are a more meaningful number because it includes what Medicare actually paid to these hospitals and what patients paid OOP along with what other insurers (like private Medigap, employer provided retiree gap plans, or Medicaid) paid in the way of co-pays/deductibles.
  • Why do hospitals bother to greatly inflate charges if they are a fantasy in the sense that no third party payer (the uninsured might) would ever possibly pay them? Charges are likely a starting point for negotiations with private insurers for one thing, and having high charges also allows hospitals to estimate a larger value of charity care most likely.
  • Were charges ever important? You betcha. In the ‘good ole days’ (from a hospital bottom line perspective, think late 60s-70s) Medicare paid hospitals on the basis of Usual, Customary and Reasonable (UCR) charges. This was essentially cartel pricing whereby the few sellers (think 3 hospitals in an area) had every incentive to elevate charges since they were typically paid a percentage of this by Medicare and private insurance.
  • In the 1980s, Medicare began paying on the basis of prospective payment (average amount based on diagnosis plus adjustments for teaching, DSH payments for caring for the uninsured, capital expenses, etc. and so the rank ordering of private as highest and Medicare below was generally locked into place.
  • Charges may/must have some impact on amount paid for care by different payers, but how is unclear. For example, UNC has explicit policies for the uninsured, but as you can see the discount is based on charges; so charges aren’t irrelevant.
  • The real question is whether any differences in the amount paid to hospitals are related to quality? That is what we need to get after and it will be hard for both technical and political reasons.
    The ACA nudges us in that direction.
  • I could imagine someone reasonably saying that the teaching mission of a hospital is a societal benefit that might not improve quality (could be the opposite). This would argue for more explicit support of this mission and not burying the indirect medical education support in each payment as is now done (there are also direct subsidies to medical schools/hospitals). Note all three of the above hospitals have a teaching mission.
  • Any hospital administrator will answer when being questioned about anything related to charges/payments/costs: but we have to care for the uninsured. There is some true amount of cost shifting, that is likely smaller than many think. Expanding insurance coverage is also important for doing away with what you might think of as “the negotiating impact” of the uninsured; when hospitals answer most any question about charges/payments/costs by saying “but the uninsured”. I believe this is more consequential than actual cost shifting.
  • I don’t think the release of this data is “a game changer” but I do think that it will serve to increase awareness among the public (along with this Time piece) about the opaque nature of hospital prices, and the word jumble that is charges, payments and costs.

cross posted at freeforall

Author: Don Taylor

Don Taylor is an Associate Professor of Public Policy at Duke University, where his teaching and research focuses on health policy, with a focus on Medicare generally, and on hospice and palliative care, specifically. He increasingly works at the intersection of health policy and the federal budget. Past research topics have included health workforce and the economics of smoking. He began blogging in June 2009 and wrote columns on health reform for the Raleigh, (N.C.) News and Observer. He blogged at The Incidental Economist from March 2011 to March 2012. He is the author of a book, Balancing the Budget is a Progressive Priority that will be published by Springer in May 2012.

14 thoughts on “Charges, payments and costs, oh my!”

  1. I’ve heard that charges are actually paid by rich foreign patients, engaging in a spot of medical tourism. Although why they don’t go to India is beyond me. Top-end Indian medicine is quite good, and the hospital nursing (often the life-or-death difference) is far better. It’s not that US RNs are bad. But outside ICU’s, an RN is basically a line administrative position these days, in charge of less well-trained people.

    1. “Although why they don’t go to India is beyond me.”

      Who is “they” these days? I don’t know about India, but most of the wealthy Asians I know go to Singapore, and Thailand is working hard to get its foot in that business.
      If you go to Bumrungrad International Hospital in Bangkok you see something that should make any American weep for his country: a beautiful hotel, built explicitly to capture the foreign trade, and run on insanely efficient principles.
      When I passed through it picking up a standard physical, I passed through a carefully timed and choreographed system that had me out in maybe 40 minutes or less, had people at every station who knew who I was and had everything ready for me, and was clearly handling large numbers of people well, with very little hanging around doing nothing by either medics or patients. The (many) patients clearly came from all over the globe, and signs everywhere included English, Arabic, Russian, and two other languages (I’m guessing one was Chinese, but I can’t remember).

      If I had to undergo a procedure costing more than a few thousand dollars, and which was not an emergency, I’d strongly consider doing it there.
      Don might find it interesting to comment on their prices which are pretty transparent, and published on the web:
      along with a helpful spread showing not just the mean cost but how it can get worse or better depending on whatever.
      To me the prices look reasonable. Not ridiculously cheap, but the fact that they are published and provide some spread info is already putting them way ahead of the US.

      The US has managed to secure a pretty good lock on the global higher ed market. If it ever had something similar in medicine, I think it’s losing it as we speak.

  2. Invites a plug from me for my attack on haggling, of which this sort of market represents a modern form. Any price signals that might lead to efficiency are lost in the smoke of creative price discrimination. If you want clear price signals, you have to impose them.

  3. My personal suggestion, back when the Clinton’s attacked the problem and failed in the 90s, was to pass a simple law. It would require hospital bills to list three things:

    1. Actual cost of any service, medication, or personnel. Actual cost being exactly that: the aspirin cost 0.0001 cent, the x-ray cost $20 for supplies and $50 for amortized cost of maintenance and purchase of the machine over 5 years, nurses cost $15 per day per patient, an amortized cost for administration.

    2. The markup for profit, future improvements, etc. Whatever the hospital thought it needed to charge to remain in business. Most people understand paying a reasonable charge so the hospital will be there next year.

    3. The amortized cost for providing uninsured care.

    My thought was the #3 would trigger the public response for providing insurance or other public support to reduce that number to $0. Such a billing statement would also answer the question raised by this article. Basically it might cut the bullshit.

    1. To further explain #1, there are further charges that would be applied to the aspirin: $1.27 for the pharmacy to extract from bulk packaging and package for patient, $0.23 for delivery to floor, etc. The charge could be summarized but the hospital would need to have a website that listed all the details.

      1. I’m not crazy about prices that go into this level of micro-detail — see your ATT bill for why. It’s an invitation to get people’s eyes to glaze over, to allow advertising on the basis of numbers that have no relationship to money changing hands, and to making up whatever creative add-ons can be invented.
        I’d like the info you describe to be mandatory, for professionals and others to be able to attack them, but for consumers I’d much rather see the type of price I described above being provided by Bumrungrad: the median price, along with an upper and lower spread.

  4. Charges are still highly relevant because non-Medicare payers frequently pay on the basis of percentage of charges. A consolidating hospital market resists DRG or per diem payment methodology. In my view, if this doesn’t change, ultimately, hospitals will find themselves becoming a primary reason why Medicare “for all” is the only viable option for long term sustainability of providing health care services. Hospitals do not want that outcome but they are more likely to put their efforts into lobbying than becoming more efficient.

    One thing that could be proposed (which I think is the case in Germany) is that hospitals that will not contract with payers (or government programs) be limited in what they can charge to insurers and patients. That might force hospitals to work with instead of against payment methodologies that reward quality (unlike now, where hospitals make more if they screw up — which doesn’t mean they consciously screw up, but it does mean they don’t prioritize six sigma type analyses of problems because the solution is rarely a financial positive for them).

  5. Interesting data, interesting analysis, and (of course) lots of unanswered questions. A couple of mine:

    (a) Of the Average Charges, UNC was substantially lower in all three categories, and Duke was the highest. In two of the three categories, WakeMed was in the middle, but in Diabetes cases it was at the high end, up with Duke. Is there some University policy that causes UNC to consistently “charge” so much less?

    (b) OTOH, of the Average Payments, WakeMed was consistently lower than the two universities, which were almost identical. Is there something about the business of WakeMed that is more efficient? Or perhaps, is the contribution of those actual payments to the educational mission of the other two hospitals really that high?

    (c) Finally, is Rex Hospital not in your survey, or is it subsumed under UNC?

    1. Ken
      Rex is separate in that it has its own Medicare billing number (it is in the database but I didn’t include it; Duke Raleigh is in their as well, the hospitals in Wake county than Duke and UNC own/control). I think that UNC Charges are lower based on policy changes they undertook a few years back to not charge uninsured North Carolinians higher than that amount paid by some actual third party payer. They still phrase the uninsured policy in terms of % discount from charges, but I suspect (but don’t know for sure) that is why their charges are generally lower. An interesting analysis would be to look at the top discharges and decide what ones most relevant for uninsured and test this out.

  6. carried an article today on an effort to get hospital’s chargemaster rates public. Buried in the comments was a note which either I misunderstood, or is totally outrageous. I hope someone here can be definitive. This is best understood as an example:

    Suppose a hospital’s ‘charge’ for a procedure is $10000. The paying 3rd party (Medicare or an ins. co.) has ‘negotiated’ a payment of $2000. The above note’s claim is that the hospital, if a non-profit, can deduct the difference ($8000) from their gross income on their tax statement.

    As I cannot deduct my normal consulting fee when I do charity work, I find this claim remarkable. Where am I wrong?

    1. Phil, I think it’s an innocuous quirk of accrual accounting. When a company accounts on an accrual basis, the “income” side of the ledger is accrued from the billings. If the company subsequently has to write off some bills as “uncollectable,” then at that time the uncollected amount becomes a “loss.”

      The net is still the net, just like in your cash accounting. The one thing that’s not clear to me from your brief explanation is why the non-profit status of the hospital would be relevant. A profit-making business would be subject to the identical accounting procedures. Perhaps it has to do with when the “loss” can be accrued. Perhaps for regular businesses there is a waiting period before such a “loss” can be accounted, but in the case of a non-profit the IRS has waived the waiting period to simplify their accounting of “charge-backs.”

    2. Phil
      I am talking more in terms of the press release that a hospital does saying how much benefit/charity they give to the community….I think in terms of taxes hospital would have to deduct from their costs, which they report in Medicare cost reports, but which have not been made available in the latest data dump (and I don’t think they will be put out).

  7. Regarding Maynard Handley comments about the advantages of going to Thailand for care:
    there is another side to look at.

    When I was in Bangkok a few years ago I saw a story in the English language press about a guy who had undergone eye surgery in BKK to save money. He went to the “best” place in town and ended up blind.

    He was quoted as saying that the Doc had laughed at him when he sought compensation. Foreigner winning against high society Thai–never happen.

    In any event, when I am very sick and weak I don’t want to be staying in a foreign hotel where I can’t even speak to most of the people.

    The “medical tourism” thing appears to be an idea high on the agenda of those who prefer to push the idea of what they call competition rather than the best medical care.

    Nonetheless, the US medical system is insane as far as pricing goes. I certainly see why folks want a decent alternative. I just wonder if fleeing the country counts as an good alternative to decent care at home.

    1. Not only what you said, but medical tourism significantly diverts health care resources in foreign countries to the needs of Americans rather than the needs of people living in those countries. It’s bad enough that we import so many health care personnel from other countries, but actually tying up the people who stayed behind to take care of our needs would make the situation even worse for the people who live there.

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