What's it worth? Cost shifting, a practice that can often result in significant financial burden on self-pay patients, is leading to greater scrutiny of hospital charging practices

Healthcare Financial Management, Dec, 2003 by Ray B. Lefton

After raising a family and working 30 year's in the same jobs, the Browns decided to retire at age 60 while still in good health. The couple earned modest pensions and had saved some money. Healthcare benefits were of no concern to the two since each had insurance benefits that would hold them until they became eligible for Medicare.

Unfortunately, this carefree attitude was about to change.

One day a minor accident landed Mrs. Brown in a hospital emergency department. Although she eventually was released with no remarkable findings. staff needed to perform a physical evaluation, conduct a computed tomography scan, a lot order several lab tests to ensure no serious injury had occurred. A short time later, the Browns received an explanation of benefits statement from the insurance company showing that it would pay only $900 of the $5,000 bill because the plan did not participate with the hospital. (The $900 was almost double what the hospital would have received from Medicare or most other HMOs or PPOs.) The hospital expected the Browns to pay the remaining balance of $4,100 in full.

Even after the Browns made several calls to the hospital's collection department, the best arrangement they could work out was a 15 percent prompt pay discount. Although the couple eventually managed to pay their bill, the experience left them somewhat shaken. With the hospital's average charge per day exceeding $10,000, had Mrs. Brown been admitted, the resulting bill could have been financially ruinous.

Unfortunately, such sticker shock isn't unusual. Many patients not covered by insurance are charged substantially higher amounts for medical services than third-party health plans, such as medical insurers, HMOs, Medicaid, and Medicare. Currently, the U.S. Census Bureau estimates about 44 million Americans lack health insurance, and many millions more are underinsured. Even patients with adequate insurance may be financially vulnerable should they obtain care from a nonparticipating provider.

With such a large portion of hospital revenue coming from self pay sources, it's useful to examine how hospitals establish their charging practices and what they are doing to accommodate patients with low income of those who qualify for charity care.

How Ave Charges Set?

One reason that patients often pay more than hospitals' contracted rates is cost shifting. As hospital expenses continue to outpace payments from Medicare and Medicaid, hospitals are forced to transfer this economic burden to commercial payers and to patients without insurance to remain solvent. Hospitals use cost shifting, also known as procedural rate pricing, as a way to increase all or selected service charges to a high rate to optimize payment. The rationale for this practice is that some insurers still pay for some services on a percentage of charges. It is not unusual for some hospitals to exceed the underlying fully allocated costs of providing care by as much as five times. Most patients with insurance are insulated from these inflated prices, but for those who a re underinsured of without insurance or whose plans aren't in effect, the resulting bills can be staggering.

Many different philosophies exist for setting charges. One reasonable approach, assuming insurers purchased goods and services like other

industries, would be for hospitals to set prices at double the Medicare fee schedule of at 10 percent above the highest paying insurer or a markup over fully allocated costs. Any higher would simply generate more write offs, and the high prices would be difficult to explain to patients. Whatever approach a hospital uses needs to be sensitive to the fact that insurers will pay the lesser of their fees or hospital charges.

For some payers and for some services, "usual, customary, and reasonable" limits do not exist. Often an insurer that does not have a contact with a provider of that pays a percentage of charges will have to pay the hospital in proportion to its charges. Therefore, the higher the hospital's charge, the higher the payment. Because of this reality, charges for many hospitals are irrationally high and not based on underlying costs, relative value units, or a reasonable multiple of a standard fee schedule, such as Medicare. Charges are set artificially high to maximize payments.

What's Being Done at Other Hospitals?

To assess where hospitals stand with respect to setting rates and managing charity care, the author recently surveyed 100 hospitals of various sizes throughout the country. A 30 percent response rate was realized.

Rate-setting trends. One area examined was cur rent rates charged for commonly performed emergency department (ED) services. Charges varied substantially from one hospital to another. About 50 percent of the respondents represented the average hospital daily charge to be between $3,000 and $6,000. Thirty percent responded that their charges were under $3,000, and 20 percent charged over $l0,000.

Location of facility appeared to have a big influence on rates. Urban hospitals appeared to charge roughly twice as much as rural hospitals. No noticeable correlation occurred between rate-setting behaviors and hospital size for either the average per diem cost per day or ED encounter.