Explaining Hospital Charges and Patient Costs

Explaining Hospital Charges and Patient Costs

If you’ve ever glanced at an Explanation of Benefits form, you may have seen that it contains an array of dollar figures for the same medical procedure.

The often wildly divergent figures illustrate how the modern health care system works.

For the sake of illustration, let’s say you go to the hospital, where you receive an outpatient colonoscopy procedure. And let’s say the hospital charges $2,000 (not necessarily a true average charge, but let’s use it for our purposes here.)

But “charges are not the same as cost,” as Ellen Ward, a project manager in Hospital Contracting and Policy for Blue Cross Blue Shield of Michigan, points out. “Charges are typically much higher than the total cost of providing a service.”

In setting their charges, hospitals look to recoup their operating, capital and other costs, as well as losses from providing uncompensated care. But most also bake in a profit margin, and that mark-up in price can range widely.

Because insurance companies have an understanding of the actual costs of providing services, they try to negotiate closely to that figure ― say, cost plus a 3 percent margin.

So back to our colonoscopy. While the hospital wants to charge $2,000, let’s say the true cost is $1,000. Depending on the hospital and the negotiated rate, an insurer may agree to pay $1,030 ― or cost plus 3 percent.

Of course, different insurers set rates differently, but most try to provide good coverage at the best price for their members.

“I think all insurers want to do the same thing, but it comes down to how much leverage you have,” Ward said. “Because we have such a large proportion of covered individuals in Michigan, we can negotiate a better price than an insurance company that doesn’t have a lot of leverage with a hospital.”

Patients aren’t responsible for the difference between the provider’s charge and the insurer’s allowed amount, but their plan may require a copayment, coinsurance or deductible. However, those charges are calculated against the allowed amount, not the hospital’s charge.

So if you had a 30 percent co-pay for your colonoscopy, your charge would be 30 percent of the $1,030 negotiated rate, or $309.

 

Photo Credit: DIBP images

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