National Hospital Charges vs. What Medicare Pays

The debate about hospitals overcharging their patients and playing hide the ball with their prices is just beginning to gain traction. One of the elements feeding the fire on this issue is data about what hospitals charge vs. what it costs a hospital to deliver that service.

Medicare payments for a specific procedure accounts for (that is, includes in its payments) all variable and fixed costs for delivering a specific service. In short, all staff salaries, equipment depreciation, building costs, physical plant costs and every other type of cost that can be possibly included by the hospitals go into what Medicare pays any given hospital in any given state for any given procedure — plus, a slight profit of 2 or 3 percent. In addition, these calculations take into account the geographic cost difference across the country, so Twin Falls Idaho has a very different payment rate for a gall bladder removal than New York, New York.

Therefore, using what Medicare pays any given hospital for any given procedure is a very good rule of thumb to find that specific hospital’s costs for any specific procedure.

Plus, since hospitals are not making their prices known, and to the extent they are the prices are largely meaningless full retail charges — which only foreigners and the uninsured are asked to pay — the hospitals leave no other option but to base any consumer understanding of any specific procedure at a specific hospital on what Medicare pays that hospital for that procedure.

In fact, even the hospitals’ own pricing consultants base their pricing recommendations to hospitals in terms of Medicare prices.

For example, one national pricing consultant to hospitals tells hospital executives in power point presentations, seminars and speeches, the retail price for your hospital services should be 3.5 times the Medicare payment.

The national average payment by Medicare for Heart Valve Operations is $39,671 — for DRG 105 (DRG stands for Diagnostic Related Group).

So, according to the hospital industry, each hospital should charge 3.5 times $39,671 as their price. Therefore, the national average charge by hospitals for DRG 105 should be about $138,848. How would you like to run a business (many with tax-exempt status, with the halo of “non-profit” and “charity” in their charter) and get a mark-up of 3.5 times cost?

How close to the truth is the $138,848 price?

According to Medicare itself, the national average charge by hospitals for DRG 105 is very close to 3.5 times Medicare. It is (drum roll please…): $124,561. It is clear the hospitals are listening to their national pricing consultants who recommend charging 3.5 times Medicare — the actual multiple in this case is Medicare times 3.14.

For those who want to confirm the above information, click here, and review the file titled “Top 31 Elective Inpatient Hospital DRGs, 2006 Data.” DRG 105 is the first listed, in fields D and E, lines 7-9 in the Excel file.

And people wonder why health insurance cost so much, and why the price of health care keeps going up.

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