When you go to buy a car, there’s often a difference between what a car dealership charges – the sticker on the car window – versus what you end up paying. Few people consider this same concept applies to health care.

When the Medicare program began, it paid providers on a “reasonable cost” basis. This means that Medicare essentially paid its share of days (how long a patient stayed in the hospital) based on average cost per day.

At the time, the length of the average patient hospital stay was very long, over 30 days. Thus, Medicare paid how much it cost for a hospital to care for the patient over that time. This was subject to a reasonable cost test to be sure the payment amount was appropriate.

But there was second factor in determining reasonable cost. Medicare paid this reasonable cost but that had to be lower than what the hospital charged for the service.

Thus, hospitals had to assure that their Medicare reasonable cost (no matter how high they were) would be no higher than that the hospital’s charges for the service for that stay. This meant that hospitals needed to keep their charges higher than their cost. For hospitals, this was easy; make your charges really high.

Keeping hospital charges high is still in existence today. Hospitals have set charges to ensure the Medicare requirement is met. When this translates to the other payers, such as insurers, it looks problematic to anyone not familiar with Medicare’s outdated methodology.
To be clear, commercial insurers don’t pay that high cost either.

Each negotiates different rates for services with each hospital. These varying rates are based on what the insurer thinks it ought to be paying. As an example, if a hospital has lab test charges way higher what Medicare pays, that hospital cost is still likely higher than what a commercial insurer pays (has negotiated).

This difference is the write off; the difference between what the insurer pays versus what the hospital charge was. It’s not unusual to see large variations in what a hospital paid versus what is written off, etc.

Medicare decides what it will pay (and Medicaid has followed a similar path), and that can result in underpayment to a hospital. Because Medicare is now a very large portion of the hospital’s payer mix and cost this can lead to issues of sustainability for the hospital. This can cause a hospital to further vary their charges in hopes of getting a better Medicare payment down the road, resulting in exacerbated rates and differences that are written off.

Therefore, the hospital must get resources from other sources. Those sources are typically other insurers and patients.

While few people see true hospital charges, uninsured patients receiving a bill should be able to talk with someone and negotiate their own lower payment, it’s helpful to understand the path that got us where we are today.

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Jayne Koskinas Ted Giovanis
Foundation for Health and Policy

PO Box 130
Highland, Maryland 20777

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