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Hospital Pricing Background and Disclaimers

UNDERSTANDING THE IMPORTANT DIFFERENCES BETWEEN PUBLIC AND PRIVATE HEALTHCARE INSURANCE PAYMENT RATES

Healthcare reimbursement by public insurance programs (e.g. Medicare) is generally lower than the cost of delivering care. It is critical for consumers, policymakers, think tanks, consultants, insurance companies, and other users of standard charge information to understand this fact, especially for providers that primarily care for patients with public insurance. The following information explains and illustrates this reality.

  • An independent report by the RAND Corporation found that, on average, private prices for hospital care are 241% of Medicare prices, or more than double. For outpatient care alone, RAND found that private prices were 293% of Medicare, or almost 3 times the Medicare rate. The chart below makes this point quite clear.
  • The Federal government acknowledges Medicare payments do not cover hospital costs. For example, if the aggregate allowable cost to care for Medicare patients is $100, the government typically pays about $92. That suggests that a hospital loses almost 10% when it treats patients who have Medicare. Few businesses in any industry would survive for very long with a negative margin that large. However, the situation is actually worse than this math would suggest when we dive deeper on what "allowable" means.

 

  • In evaluating whether Medicare payments cover costs, the government only includes part of the costs, known as “allowable costs.” It excludes “non-allowable costs” such as physician and ambulance services. For example, the cost for a hospital to subsidize a local primary care physician to keep their office open in a low income community is a non-allowable cost. Using the example from above, the “true cost” to the hospital to care for patients with Medicare is more like $120 (not the $100 Medicare uses in its math), which means the loss a hospital incurs is closer to 30% (not the 10% loss the government acknowledges).

Why does all of this matter when reviewing a hospital’s negotiated rates?

  • In general, patients who have Medicare represent a huge portion of the hospitalized population. The 30% described above is multiplied thousands of times, creating a substantial financial deficit for a hospital to recoup, if it is to stay in business. That is where the reimbursement structure of the U.S. healthcare system comes into play, with its complex quilt of reimbursement rates from various kinds of health insurance. Under our nation’s care delivery system, hospitals need a healthy margin from private insurers to cover the considerable losses from Medicare, and any additional losses related to Medicaid.
  • The fewer patients with private insurance a hospital cares for, the higher those privately negotiated reimbursement rates need to be to cover the Medicare shortfall, and keep the hospital open. Some of Temple's payers fully recognize our essential role as a major safety net healthcare provider in the region and are willing to support our mission through higher negotiated reimbursement rates. Some economists refer to this as “cost-shifting”. We refer to it as “survival”.
  • As private insurance plans lower the reimbursement rates they are willing to pay, it becomes increasingly important for Medicare and other public payers to increase their rates, especially for providers like Temple that care for a substantial number of patients with public insurance. In setting Medicare payment policy, regulators must monitor very carefully the extreme end of the safety net distribution, where negative Medicare margins (whether it be -10% or -30%) are simply not sustainable and may jeopardize the hospital’s ability to stay in business and continue to care for its community.

IMPORTANT INFORMATION ON HEALTH INSURANCE PRICING

Straight dollar comparisons do not tell the whole story. We encourage patients to speak to their health insurance company or call us at 215-728-3383 to get the most accurate cost information. Comparison of standard charges across plans is not suitable to draw conclusions about whether one payer pays a provider more than another. Each contract between a payer and a provider is structured differently. Some payers may choose to pay more in the form of value-based lump sum payments—e.g., financial incentive bonuses for meeting quality benchmarks, rather than in fee-for-service prices. The amounts in the Machine Readable File do not include these value-based payments. The amounts posted may represent a per diem amount (i.e. amount paid per day), case rate (the amount of reimbursement for a package of services), an amount derived as a percent of charges, or some other reimbursement method, which will vary by payer. Put into plain language, it means that such apple-to-orange comparisons of simple dollar amounts can be highly misleading. These amounts should not be used by consumers as the expected price they would pay out of pocket for care. The hospital standard charges included in this file are subject to change during the course of the year. Temple will aim to update this file annually, consistent with Federal regulations.