The Ins and Outs of Hospital Rates and How They Affect Healthcare Costs

Question: Do Hospital “Chargemaster” Rates Help Drive Increased Healthcare Costs?

Answer: The short answer – probably “yes.” Hospitals typically set their own rates for procedures, known as “chargemasters.” Most states do not regulate these rates, so hospitals are free to set them at whatever levels they wish. Typically, these “chargemasters” are confidential and the rates are set very high. Hospitals use these high rates to negotiate with health insurers and third-party payors, who typically pay for procedures at amounts deeply discounted from the chargemaster rates. However, uninsured and out-of-network patients are usually charged the full chargemaster rate. According to a recent study by Health Affairs, the chargemaster rates have little connection with the actual costs or quality of the procedures performed, but instead simply serve to drive healthcare costs higher. George Nation, a professor of law and business at Lehigh University, has said “[a] viral upward pressure on chargemasters has led to higher healthcare costs across the board. The list prices have an impact – hospitals have every incentive to keep raising them and no incentive not to.” Economists and healthcare experts have stated that actions such as publishing hospitals’ charge-to-cost ratios, structuring charges around Medicare DRGs and capping charges on the uninsured might help to curb cost increases. Professor Nation has stated hospitals should be required to price their services based upon Medicare DRGs, publish the average payments accepted from private insurers and charge out-of-network or uninsured patients no more than 115% of the average. Some states have enacted laws intended to curb the rise in chargemaster costs, or at least provide for greater transparency in the process, but the competing interests of physicians, hospitals and health insurers make it virtually impossible to arrive at a consensus acceptable to everyone.

Weekly Charting Tip: The Stark Law is often referred to but frequently, with little real knowledge. Let’s clear it up just a little.  The Stark Law is a federal law that is civil not criminal. The Anti-Kickback Law is a federal law but criminal in nature. The Stark Law’s purpose is to limit financial relationships between a physician, his immediate family and another medical entity. The government, generally, does not want you referring Medicare or Medicaid patients to something else you own, for some kind of treatment. You have an incentive to refer, and it might cloud your medical judgment. We can debate why medicine is held to this standard where most other professions are not. However, that is the law. See you next week!  -Larry Kobak, Esq.

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