The Backstory Behind a Hospital Bill

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In recent months, the Department of Health and Human Services (HHS) has released a massive trove of 2011 Medicare claims data for inpatient and outpatient procedures.  The spreadsheets containing this data include information on how much thousands of American hospitals billed Medicare for various services and how much Medicare paid the facilities in return. The disparities between what hospitals charge Medicare and what Medicare pays are striking, as are the difference between individual hospital prices.

A hospital in San Diego billed Medicare an average of $82.24 for a type of outpatient eye exam, while a facility in Los Angeles charged $4,187.25 for the same service, even though Medicare paid each about $74. For a kind of upper airway endoscopy, one hospital in Boston billed Medicare an average of $18,735.33, while a different Boston hospital charged $4,622.25. Medicare reimbursed each about $1,700 for the procedure. As Steven Brill explained in his TIME cover story, Bitter Pill, the price list hospitals have for various procedures and treatments, known as the “charge master,” has little to do with the actual cost of individual services. Rather than a simple calculation, there is a story behind the numbers contained on every hospital bill that’s rooted in the history of Medicare policy and individual hospital operations.

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Take a facility called Scott & White Memorial Hospital in Temple, TX. In 2011, Scott & White billed Medicare for more “level 2 hospital clinic visits”— 155,708 in all—than any other hospital in the country, according to data recently released by HHS. Scott & White billed Medicare an average of $135.48 for each of these visits and was reimbursed by the federal government an average of $69.55. On the surface, it appears that the hospital has a suspiciously high level of outpatient services utilization and missed out on some $10 million in reimbursements in 2011 for this outpatient service alone.

But that’s not the case, according to Dr. James Rohack, director of the Scott & White Center for Healthcare Policy. He points to several rules within Medicare that he says are responsible for charge master prices being wildly out of whack at Scott & White and most hospitals across the country.

For instance, Medicare prohibits hospitals from charging the federal government more than they charge any other payer. This means that sometimes the prices charged to Medicare, which hospitals know won’t be reimbursed in full, reflect the highest amount a hospital might be able to collect from a private insurer or a wealthy uninsured patient who pays out of pocket. Medicare also bans hospitals from billing individual patients beyond what is spelled out by their policies. So, if Medicare has a contract with a hospital that says the facility will get $100 for a certain procedure, the hospital cannot collect this amount and also charge a patient for more if its costs extend beyond the contracted figure. These rules, says Rohack, “started the distortions between what is a charge master amount and what is your net pay…hospitals have created an inflationary [price list] to make up the difference.”

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Rohack says he wishes Medicare reimbursement was based on capitation, in which hospitals were paid per patient instead of per procedure or hospital stay. This payment method is used in some Medicaid programs and has been popular among some private insurers.

As for why Scott & White billed Medicare for so many “level 2 hospital clinic visits,” Rohack says that reflects the kind of health care facility Scott & White is. A “level 2 hospital clinic visit,” according to Rohack, is typically a 10-15-minute appointment with a doctor or nurse practitioner to check up on a health issue that’s already defined. While in some communities, patients might be most likely to get this service as a private doctor’s office, in Temple, TX, they might be more likely to get it at an outpatient clinic connected to Scott & White Memorial Hospital. The hospital, like other integrated health systems, has its doctors on salary. Rather than be simply an inpatient facility, Scott & White is more of a one-stop-shop where patients can get checkups or have surgery in a single location.

Plus, says Rohack, a practicing doctor and past president of the American Medical Association, an outpatient visit might actually save Medicare money. “As a cardiologist, rather than admitting a patient to the hospital with congestive heart failure, I might see them in the clinic and alter their medications,” he says. Scott & White’s outpatient volume is high, admits Rohack, but its inpatient volume is relatively low. Indeed, Medicare data analyzed by the Dartmouth Atlas of Health Care, which compares individual hospitals and regions on a variety of metrics, shows this is true.

Integrated health systems like Scott & White are becoming more common across the country, as hospitals buy up private physician group practices and the health care system consolidates. Part of the reason may be that Medicare, for example, currently pays hospitals more for a typical outpatient doctor visit than it pays a doctor working in private practice. Electronic health records, which Medicare will soon require, is another reason for industry-wide consolidation. A doctor might not be able to afford to digitize his own paper health records and will instead opt to join a large health system, where he can use an electronic health records system already in place.

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