For eight years I was a medical data analyst in the financial department of a large public hospital. The last time I did that was about fifteen years ago, but I doubt that much has changed during the intervening years.
When I read Cindy Ross' recent post "We went broke paying medical bills--and we're insured!" my first instinct was to say "of course you did."
But that would be neither helpful nor polite, so I decided to publish a post that might help people to understand hospital charges and costs, to help them "look under the hood" so to speak, and understnd how all of that works with insurance.
What follows is overly-simplified, but probably adequate for having a basic understanding.
First, Some Definitions
Gross patient revenue -- this is what shows up on your hospital bill. It is also referred to as charges. It is typically an extraordinary number, the kind of number that elicits expletives rarely used even by sailors. It has nothing to do with the actual "cost" of the service rendered, except sometimes by accident (which I'll explain later). The CFO at my hospital used to call it "funny money" because it often had absolutely nothing to do with what the hospital ended up getting paid. Of course, to the patient it is not funny.
Contract allowances -- these are adjustments to gross patient revenue that reduce that number to what the hospital expects to get paid between you and your insurance plan. These are often substantial, and one of the reasons why you want to have insurance. A contract allowance can easily cut the gross patient revenue number to less than half.
Net patient revenue -- this is what the hospital actually collects in the real world. For the sake of simplicity, think of this as "cash."
Bad debt -- what the patient was supposed to pay, but didn't.
Cost -- this is an estimate of the cost of providing care, but it's only an estimate. No one knows what the "real cost" is, nor can that number ever be known. Not even God knows. It often doesn't really make sense at tle level of the individual case, but it does make sense when you start looking at hundreds or thousands of cases.
There are two kinds of cost:
Direct costs -- these are the detailed costs that show up on the general ledger. These include payroll, supplies, payment for services by a particular department, and so on. These are the costs that can be directly attributed to specific departments.
Indirect costs -- these are things such as depreciation, phone, utilities, insurance, advertising, building maintenance, chaplain services, and so on. They are real costs, but costs that typically aren't assignable to any single department. The hospital cost accountants figure out how to allocate these costs to the various hospital departments.
So you add up direct and indirect costs for a department, and that gives you the total cost figure.
Hospitals have various ways of figuring out what to charge for a particular service or item, some of which are related to cost and some of which arent. These include
- Charging based on what you think you can charge
- Charging based on what other hospitals charge
- Charging based on certain "public relations" considerations. For example, the hospital where I used to work basically charged for hospital rooms no more than what they cost. Why? Because hospital room rates often get reported in the local newspaper, so you don't want to get bad press from having room rates that are significantly higher than other hospitals.
- Charging so as not to be embarrassed. For example, you don't want to charge $10 for a box of Kleenex, because people will ask about that and it will be embarrassing to try to explain that. In reality, it doesn't matter what the hospital charges for Kleenex, or if they charge for it at all. More on this later.
- Charging so as to increase revenue. Let's say that it turns out that a lot of people with commercial insurance that pays a percentage of charges use a particular service, and that another service is often used by people whose insurance pays a flat rate. You can do a "strategic rate increase" in which you raise the charge for the first item and reduce it for the second. Overall, that has the effect increasing net patient revenue without increasing gross patient revenue.
The Bottom Line
The bottom line is that public hospitals have to stay in business. This includes not only making enough to cover toal cost, but also making perhaps an additional 6 percent above that to pay for improvements in equipment and facilities. If your facilities and equipment start to become outdated paying patients will go elsewhere and then you end up going out of business or becoming a charity hospital.
Hospital departments develop "cost-charge" ratios. Take, for example, a hypothetical X-ray department:
Direct Costs: $750,000
Indirect Costs: $250,000
Total Cost: $1,000,000
Total Charges: $1,500,000
This department would have a cost-charge ratio of 1.5: $1.5 million divided by $1 million. So as you looked at hundreds or thousands of cases with X-ray charges, you can use the charges as a way of estimating cost. In fact, most of the time, that's how hospitals use charge information -- as a way of estimating cost through the cost-charge ratio. They use these estimated costs in negotiating contract rates with insurance companies.
Hospitals get reimbursed by insurance companies based on contracts that they have with the insurance companies. (Thus the "contract allowance" referred to earlier.) There are several typical ways that hospitals can be reimbursed:
Per diem -- the hospital is paid a certain amount for every day the patient is in the hospital. Typicaly per diem reimbursement is only used for services in which the cost of the service is stable and predictable (e.g., routine vaginal deliveries).
Flat rate -- the hospital receives a defined payment based on the kind of case. This treats hospital stays as if they were "products," so to speak, with each product having a different payment. This is typically how Medicare and Medicad pay, in addition to many commercial insurances.
Percent of charges -- the hospital receives a certain percent of charges (gross patient revenue). This is one situation in which "funny money" isn't funny.
Let's say that a hospital wants to make $1,000 on a particular kind of stay, and this stay involves only a room charge and a box of Kleenex. Let's also say that the hospital has contracts that will pay only 50 percent of charges. That means that the hospital needs to charge $2,000.
So what to do? There are various possibilities:
- Charge $2,000 for the room and give the Kleenex for free.
- Charge $1,999 for the room and $1 for the Kleenex.
- Charge $2,000 for the Kleenex and give the room for free.
From the point of view of reimbursement it doesn't matter. Granted, the $2,000 box of Kleenex would be embarrassing to explain, but from an overall financial point of view how the total charge is generated doesn't matter.
This is why it's hard to criticize any particular line item on a hospital bill. You may be outraged over a $200 EKG that only took five minutes to do, but then you might actually be charged less for the room and nursing than what it cost to provide.
Putting It All Together
Somehow, in the mix of all of this cost accounting, various ways of charging, and various kinds of reimbursement, the hospital has to say in business. The hospital where I used to work basically had to collect around 66 percent of overall gross patient revenue in order to stay in business.
Flying Blind, or Trying to Select An Insurance Plan
Assuming that you are employed (an increasingly inaccurate assumption) every year you have to figure out which of your employer's health plans you are going to select. Most of these health plans talk about their payments as a percent of "covered charges."
The problem is that you don't know what the covered charges are. Covered charges are what's left over after the contract allowance is processed. But the amount of the contract allowance is defined by contracted rates that you are not allowed to see. That's considered proprietary business information.
So great, your insurance plan pays 70 percent of covered charges. But that's 70 percent of WHAT? Or for inpatient psychiatric care it pays $250 per day -- but how much does that leave you paying, and how long is a typical admission? Well, no one knows. Actually the insurance company and the hospitals know, but they aren't talking.
In order for people to make informed decisions about health insurance they need to be able to compare estimates between insurance companies of likely real-world financial outcomes for different kinds of cases.
I think all insurance plans should be required to prepare realistic estimates of treatment costs for a standard set of procedures and diagnoses, a kind of medical "market basket." These could include
- Outpatient annual care for adult with type-2 diabetes
- Routine vaginal delivery
- Single vessel coronary bypass
- Emergency room visit for a simple fracture
- Gall bladder removal
- Cataract surgery
- Knee or hip replacement
- Outpatient annual routine care for a child
- MRI and CAT scans
- Cost of an inpatient psychiatric stay based on average length of stay
Such estimates would include both hospital costs and physician professional fees.
That way people could make realistic comparisons between health plans -- and at least have some idea of the financial consequences in the event that they actually had to use the insurance. Otherwise they really are flying blind.
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Comments
Thanks for for this post and for sheeding some much needed light in a dark and often opaque place.
Pawed!
Thanks for putting this all together.
Rated
It's hard to know what 'socialized medicine' means. It means different things to different people. To some Medicare is socialized medicine. To others it means that the practice and delivery of health care is strictly a governmental enterprise. That's why I don't find labels particularly helpful.
That said, I think a single payor system could greatly reduce the overhead costs of billing and reimbursement. The delivery of health care could continue to involve a mix of nonprofit and private entities operating under a single set of rules provided by the government. The point is to have the best system possible rather than having a system that is driven by ideology on either side.
Excellent post, Mishima. A public service to boot. I agree, there should be some basic estimates available so that we can make informed decisions.
Thumbed.
Without seeing the bill it looks to me like what happened was that "late charges" were added. Not all hospitals charges are billed in a timely manner, unfortunately.
Here's what I would do. Call the collection agency and tell them that you are disputing the bill. Then contact the hospital's patient accounts office. They owe you an explanation of what the additional charge was for, and why it wasn't billed to the insurance company. They should be able to explain that to your satisfaction. They should also be willing to provide you with a detailed bill of all charges if you request it.
There could be a valid reason why the additional charges weren't sent to insurance billing, or it could just be sloppy work on the patient accounts office. It happens.
The "Flying Blind" part points up one of the fundamental false assumptions of free market economics. Sure, the free market can work well if everyone has equal access to complete, accurate information about products and prices. But the health insurance industry, as your post makes clear, is a perfect example of why it makes no sense whatsoever to apply free market principles in a context where information is inaccessible, confusing, and not necessarily accurate.
For that reason, I part company with you on the "What We Need" section. I grant you that it might be an improvement just to provide health insurance consumers with more complete and timely information. But the fact is - as shown by the ability of the mortgage industry to push all those bad loans onto people - that the average consumer (thanks in part to the dumbing-down of the US public education system) is not exactly well-equipped, or much inclined, to assimilate all this information and use it to make rational decisions. As Cindy's post showed, even when we try to make rational decisions, the vicissitudes of life can make them look awfully irrational in the cold light of hindsight.
So why force consumers to bear the risk of these bad decisions, when ultimately the result is adverse not only to them but also to the health care delivery system, the economy, and the society as a whole? We need a single-payer system that gets profit out of the picture altogether. Profits are a big part of the obscene cost of health care in this country. The inefficiency caused by complex, incompatible insurance billing systems is another. Eliminate the health insurance industry, and substitute a single-payer system funded with government money and dedicated to combining quality care with reasonable cost containment, and the savings will pay for universal coverage.
Cindy's problem is that she was only given partial information. She was told exactly what the insurance would cost, and exactly how the insurance company calculates payment. What she wasn't told was what all of that means in terms of the real-world situations she might actually face.
If you have a maximum out-of-pocket of $11,000, the interesting issue is how likely it will be that you will end up paying that. It's the "of what" issue -- 50 percent of what, 80 percent of what? And there isn't anything that says "by the way, you could end up owing $11,000 just from three days in the hospital."
We are given more information than that when buying a lottery ticket. But when it comes to health care people can't even gamble intelligently.
Organian: "Eliminate the health insurance industry, and substitute a single-payer system funded with government money and dedicated to combining quality care with reasonable cost containment, and the savings will pay for universal coverage."
I agree. But does that happen before or after the Second Coming? I hope I'm wrong, but I don't think we'll ever see it. You are no doubt aware of how much money insurance company lobbyists give to politicians. Imagine how much they would be willing to give under the threat of their entire industry being eliminated.
We must return transparency to the system. There is no way for anyone, not patients, not doctors, not hospitals, to make informed decisions about obtaining or providing care when literally no one has any idea what the payment will be.
Rated.
The bill I got nearly gave me a heart attack, and that was many years ago. Fortunately, my employer kept up my insurance payments through my recovery and held my job for the 5 weeks after my discharge from the hospital.
It was only a hairsbreadth away from sending me into bankruptcy at the time. Medical collectors from the doctors who treated me were difficult and even though I figured out the fairest payment plan I could and told them what they could count on, did what I said, paying it off exactly when I said I would, they hounded me and spoke to me as if I had some character defect. I worked in bankruptcy practice at the time and I knew that I could file and stiff them for the whole thing, and no one would have thought badly of me for doing it. But I paid.
The whole experience soured me on just about everything about the how modern medicine is conducted.
The hospital actually wrote off whatever the insurance company didn't pay. The doctors didn't have one ounce of mercy on me. They charged the highest interest rate allowable by law since I was making payments.
In every case, people make these decisions and pretend that "policy" prevents them from making a different decision. When you explain the 'irony of hospital charges," there is still the part where if you look over the bill, voluminous as it may be, you can dispute charges for things you are certain you didn't receive. Overbilling happens, not because anyone means to cheat, necessarily, but because input of such information can be separate from the process of providing the service or material for which a patient is charged. I did contest about $9,000 on my bill, and in the end, the hospital found more than I did in overcharges because I brought it up. Scrutiny on my part was rewarded by the hospital with a serious audit of my bill and credit that settled out my account.
Thanks Mishima. Excellent information.
Most all of us are only one serious illness away from bankruptcy. The only ones who aren't are
a) those with the very best insurance or massive personal assets, and
b) those who have no assets and little or no income.
Everyone deserves good health care, but everyone has to pay, even those 18-29 year olds that often "opt out" of health care coverage. "Insurance" will only work for all of us when all of us have to opt in. Granted, individuals should only have to pay a reasonable amount based on income. So, I vote for "no choice" but everyone's covered. If this sounds like universal coverage, then so be it.
That's correct. Rather than looking at health care in individualistic terms we have to see it as an entire system in operation from the cradle to the grave. In effect, this is what has to happen: young people have to pay into the medical system in order to fund care for the older people. Why? Because we all get old.
If young people "opt out" of insurance at the front end, we end up overloading the system on the back end, and it makes health care unaffordable for people when they get older and need more care. I mean, I really didn't use any significant amount of health care until I was 50 years old. But I paid into the system most of the time during the previous 30 years.
People in the political right talk about what a terrible thing it would be to "force" people to have health insurance. In fact, that's the only way the system is going to be able to function.
Since then our "insurance" has changed. We pay about $750/year to get $750 worth of "free" care. Whatever we spend up to that $750 amount has no co-pay. So for example if I go to the doctor in January and he charges me $300, I've got $450 to "spend" for the rest of the year. Once I go past the $750, the next $2250 comes out of my pocket, then supposedly I would hit the deductible wall and I'd be "coinsured" for 75% of the rest of the bills. After reading Cindy's story I'm a little concerned that the $2250 could turn into $4500 quick.
There is also another problem. As you can imagine I do everything possible to not get anywhere close to that $750, especially at the beginning of the year. However I've had to fight fight fight with my medical providers. As an example, I also carry completely seperate eye insurance. My eyes are great but I went in last month for my annual eye exam. Because my optometrist could get more money from my health insurance, they billed my health insurance instead of my eye insurance. The bill totaled $400. I had to call them and explain in great detail why it was absolutely not ok for them to do that and why they should bill my eye insurance. This happens a lot. I am constantly haggling with the billing people in my doctor's offices.
If you're eligible as I am, you can got to the VA where it's either free or you pay a nominal fee and THEY DO NOT WANT TO DO A DAMN THING FOR YOU.
I have recent experiences for the above whining.
Maybe someday I'll be a blogbuilder and tell you all about it.
Good point. People have to spend increasingly more time dealing with billing offices and insurance companies. Sometimes I feel like I have a part-time job doing that. Recently I found two errors in billing and payment that would have cost me an additional $200 had I not caught them.
It is a type of what I called "flat rate" reimbursement, the most typical kind. I was thinking of going into more detail on it, but was afraid it might be a bit too technical.
There are over 500 DRGs (diagnosis related groups). Here's how they work: there are people called "medical record coders" who turn information in the medical record into lists of specific diagnoses and procedures, both primary and secondary. Coders are trained in either two or four year programs.
After a case has been coded, it is run through "grouper software." This software looks at the diagnoses and procedures and assigns the case to a specific DRG. DRGs typically distinguish between normal cases and those with "complications and comorbidities." Each DRG has its own reimbursement amount based on the "case weight" -- a measure of resource consumption -- that is calculated for each DRG.
It's more complicated than this, but basically a hospital gets the standard DRG reimbursement regardless of cost or charges. For example, if a case costs $5,000 and the hospital receives $7,000, they make $2K on that case. If it costs $7,000 and the hospital receives $5,000, they lose $2K on the case.
DRG reimbursement schemes per se are not problematic, but if the reimbursement amounts are insufficient over a large number of cases then that's a problem. As a condition of taking Medicare patients hospitals have to agree to accept the DRG payment as THE payment. So if Medicare doesn't pay enough then it's a problem for all hospitals that take Medicare patients -- surely almost all of them.
There was no way I could plan in advance for the costs I was about to incur. What an abusive way to treat a patient and a client. We need to get insurance companies out of the health care business.
That sounds typical. Another complicating factor is that for each of the procedures you mentioned there will be professional fees. So you'll have three hospital charges and three professional fee charges.
I also didn't get why the hospital doesn't bill insured patients the difference between the charges & what their insurance paid. For example, hospital charges $40K, insurer says $10K is reasonable & customary, insurer obligated to pay 80% so it pays $8K & insured patient is billed $2K -- why not $32K? I guess it is in the contract that hospitals can't do that.
It is easy to see how uninsured patients get screwed because they have no contract with the hospital so they get billed the full ridiculous funny money charge.
I have had a couple of medical events in a local hospital that the hospital said "may not" be covered my Medicare and they had me sign a paper that I would be responsible if Medicare in fact did not pay. That turned out to be the case and in one instance I appealed with a doctor's explanation and won and Medicare paid the bill, at their rate.
In the other case, same doctor's explanation, I lost. The hospital then billed me the "funny money" cost and would not negotiate down to what my insurance would have paid had it been approved in the first place. So in that case the "funny money" was real money.
I haven't read the comments here and don't have time to so you have likely already addressed this, but I wanted to mention my situation as an example where the funny money becomes real money.
I think that it is also true, or at least I have been told by patients it is, that when you have no insurance they bill you the funny money price making it all the more painful for the poor. Don't know for sure if that is true but you may know.
Monte
Other units in a hospital, like acute adult psychiatric care, are absolutely not self-supporting. When was the last time you heard of an acute adult psych patient who is hearing voices, living in a park, and picked up by the police for creating a disturbance, actually has a good job with insurance? Never. These people are unemployable. They may be eligible for various types of public assistance (disability, social security, medicaid) but that often only happens when they have a family member who can act for them and help them negotiate the byzantine system of getting public assistance. If they don't have family or a social worker with a whole lot of time on their hands, these people are back out in the park after their expensive inpatient hospital stay. That psych patient hearing voices with no money is one of the reasons why a box of kleenex or a tylenol might cost $15.
Many newer hospitals "cherry-pick" what services they provide. A new fancy hospital near us doesn't even have a psychiatric unit at all. Financially, why should they? They provide services for people who can pay. If they don't build a psychiatric unit, they can turn the patients away and say "sorry" to the police who try to bring them in. "So sorry. We're not equipped for psych patients."
Briefly, I was diagnosed with breast cancer in Feb.08. I went to Sheffield Clinic which is a reduced price clinic at Atlanta Medical Center. They said I needed a simple mastectomy which could be done as an outpatient. I asked how much it would cost; the financial advisor said it would be $1800. She said if I could pay right then it would be $900. I wrote out my check immediately, feeling very lucky.
The first bill I got was for 24K, not itemized. I kept on getting bills, but I didn't pay anything until I had checked to see if I had to pay them. 4K for anesthesia, 4K for pathology,it was quite frustrating. Most of them I didn't have to pay so the total bill for my surgery was about 2-2.5K I refused to spend a night in the hospital so I practically jogged by the nurses station to prove I was ready to go home!
For chemo I went to Grady Hospital, Atlanta's "charity hospital". I priced everything, one chemo regiment was going to cost 4K per dose, another was going to cost 13K. I was psyched up to go into debt but amazingly I did not need chemo or radiation!
I am a hospice RN so I know all about Medicare reimbursements. What a story! Maybe I will write my first blog about that.
KK
Most hospitals have a person known as the "patient advocate." Patient advocates deal with screwed-up situations of all kinds. So contact the patient advocate, if there is one.
Something about late charges -- if your insurance plan is making a per diem or DRG payment, or some other kind of flat rate payment, then the late charge has to be adjusted off, NOT billed to the patient. If the insurance payment is based on a percent of charges then yes, the patient would have to pay the balance, but the late charge has to be submitted to the insurance plan.
The important thing is to contact the collection agency and tell them you are disputing the bill. Inform the hospital that you won't pay unless they can provide you with evidence BOTH that the charge was billed, and that any balance is in fact your responsibility.
This is something that you should get nasty about. Tell the hospital that if they don't handle this correctly you'll contact the state consumer fraud agency, usually a division of the Justice Department, and your state's hospital association, and whoever else you have to.
It's not that you don't want to pay, but that you don't want to pay if in fact you don't owe it.
Yes, making people pay full charges for noncovered services is outrageous, because as I mentioned the charges aren't necessarily based on anything. It's like paying $100,000 for a Toyota Prius.
Add to this the fact that most of us don't actually get to pick on the basis of any of these because our companies don't give us an allowance to shop ourselves, they give us a plan. And for all I know the make-or-break between the plans is how the plan appeals to the guy buying the plan, who is probably someone looking to cash out if he does his job well, and so will be impressed by a low footprint on the company as opposed to a low footprint on the individual covered.
Then again, especially in the recent job market with a lot of people unemployed and eager for a job at all, the ability of individuals to be fussy about health care plan details may go down even further. Yes, if you happen to have two valid offers from places you'd really want to work at the same time, you might look to this, but mostly these things are going to be offered to you as is and most people are just going to take it because there is no material option to negotiate it.
Quite true, but disturbing for being true. I mean, we're talking about people's lives being destroyed through medical bills, and about people not even being able to afford care.
It's one thing for a restaurant to charge $20 for a bowl of soup because they can. It's quite another thing for a hospital to charge $20,000 for a simple gall bladder operation when the actual cost is less than half of that.
Kent: "Add to this the fact that most of us don't actually get to pick on the basis of any of these because our companies don't give us an allowance to shop ourselves, they give us a plan."
Yes, even as conservatives claim that single-payer health plans will take away "choice."
Civilized health care simply cannot mean that each person pays for the cost of their own care. (Arguments can even be made for why this isn't mere charity; a great many important inventions and discoveries have come from people who probably couldn't have paid for themselves, or, at least, couldn't have promised in advance that they'd be able to.) But regardless, if we don't admit that health care is a leveling action and not a personal responsibility issue, then the public discussion is not acknowledging what the private intent of many in the discussion is. Whether for reasons of compassion, ethics, or enlightened self-interest, we need to acknowledge that we must defend others.
Ironically, the only place in which Republicans as a matter of policy relentlessly defend government intrusion into medical issues for the sake of assuring what some might say they cannot afford is abortion. They insist that it's essential that abortions not be seen as responsible, when in all other cases they would say that taking on an obligation you can't pay for is irresponsible. And yet, the moment that child is born, the burden is on the person they want to force to bear the child, not on the person who wants to do the forcing. But in that one case we hear “we must at all costs defend those who cannot defend themselves.” Yet on the matter of people who are sick and cannot defend themselves, having now been born, they have lost their innocence, and they are on their own deserving of whatever comes.
I posted something that may be of interest to you about the health care systems here and in Canada:
http://open.salon.com/blog/kanuk/2009/03/11/health_care_comparison_universal_versus_us-style_systems
Thanks for the information you provided. Very interesting. I was told by a provider that he always charges the maximum value any private health insurance will reimburse (on his list of companies he deals with), knowing that the contractual amount is much less. This is why we see "amount billed", "amount paid" and "what we may owe" on the insurance statements.
This issue is so important and I, for one, appreciate the information.
They get a new machine, they make the first patients pay for it I guess. Surely the blasted thing didn't cost a million dollars!!!! Pardon the pun.