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The Effect of the Charge Master on Price Transparency

By David Koepke/Thursday, May 29, 2014

According to a recent article in The Hill, as part of a new rule proposed by the Centers for Medicare and Medicaid Services (CMS), hospitals will be required to release a standard list of prices for their medical services. This rule is part of the Affordable Care Act, and can also be fulfilled if hospitals allow the public access to the data after an inquiry. As consumers and other entities who play a part in the delivery and payment of healthcare services try to better understand how much healthcare costs, price transparency is increasingly important.

To an extent, hospital prices are arbitrary because they don’t expect to be paid what they charge. Each hospital has a separate payment rate from each payer which tends to be discounted to half or less than the charged amount, or more with government payers, where reimbursement is independent of charges. The hospital receives a legislated amount for a particular service regardless of charge. For each private or commercial insurer (including self-insured employers or their third-party administrator), hospitals must independently negotiate rates, which sometimes include fixed-case rates as with Medicare or Medicaid. At other times, hospitals negotiate a discounted fee for services (e.g. charges discounted 50%), usually with differing discounts for broad types of care (e.g. inpatient, outpatient, emergency and sometimes separate rates for routine care and ancillary services).  However, hospitals with high charges relative to costs or to charges of other hospitals must often agree to a larger discount. So the range of actual payments for services and supplies tends to be much smaller than the charged amounts.

Price Transparency changes graph image

Source: Truven Health ActionOI®

Hospitals often have the leverage in these negotiations. Some hospitals have a unique position in a market, so the insurer has little choice but to include them in its network. On the other hand, most insurers only account for a small portion of a hospital’s revenues, even when the insurer has a large share of the private coverage. So a hospital can benefit from having relatively high charges when insurers with fewer covered lives cannot force them to accept a large discount rate. Thus the smaller insurers must often be price takers. This is an area in which greater transparency could reduce the variability of charges and payments.

The way hospitals set charges differs from hospital to hospital. Each hospital maintains a charge master, a list of nominal prices for services and supplies charged by each unit. Charge master files are difficult to compare across hospitals. The charge master is usually maintained by a committee which assigns charges for new items and periodically reviews charges for existing items. Usually the committee is supported by groups within each major patient care department in the organization that recommend charges. Often charges are set by attempting to mark up estimated costs by a particular factor (1.5x, 2x, etc.). The markup usually differs across hospital service lines, such that services like diagnostics (e.g. imaging, EKG, EEG) and routine supplies tend to have higher markups than routine patient care and clinic visits. Hospitals often have minimum charges (e.g. the legendary $5 aspirin), but also tend to mark up high-price items, such as implantable devices and certain drugs,  by less than lower cost items (e.g. a 50% markup on implantable devices vs. a 250% markup on routine supplies). Since discount rates have been increasing, hospitals have incentive to proactively raise their mark-up factor (“front-run the deductions”). Instead of marking up from costs, some hospitals attempt mark up from expected payments, since they know what proportion will be deducted.

It doesn’t have to be this way. In Maryland, the all-payer hospital payment system establishes, through negotiation, a fixed schedule of payments to all hospitals by all payers. Since each hospital will be paid the same amount for the same services and supplies, regardless of nominal charge, there is no incentive for hospitals to charge an amount appreciably different from what it expects to be paid. By applying these same transparency principles nationwide via the Affordable Care Act, the culture of undisclosed costs and mark ups could be a thing of the past.

David Koepke
Lead Scientist, Center for Healthcare Analytics

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