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Study: Hospitals still using chargemaster markups to maximize revenue

A higher chargemaster price can increase the payment from private insurers, which often pay for services based on discounted chargemaster prices.

Jeff Lagasse, Associate Editor

For-profit hospitals, hospitals that serve a high number of uninsured patients and facilities with market power are more likely to rely on chargemasters as a reimbursement tool, a new Health Affairs study shows.

In a way, said authors Ge Bai and Gerard Anderson, the results are surprising. Since Medicare changed its hospital reimbursement formula to the prospective payment system in 1985, the chargemaster -- a list of billable items and prices for all services provided to patients -- has diminished in importance in determining Medicare reimbursement.

It is, however, still used in determining Medicare outlier payments; those are the extra payments for cases involving extraordinarily high costs. Commercial insurers pay hospitals, after negotiation, based on either diagnosis-related groups, per diem, or the discounted chargemaster price. Most public and commercial insurers don't pay hospitals their full chargemaster prices.

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Because of this, the authors said, many hospital executives and economists have argued that the chargemaster essentially performs a bookkeeping function, with the price set for convenience and largely irrelevant to patients.

The study claims that the chargemaster has remained an important revenue-seeking function because it affects patients who lack negotiating power with hospitals. A higher chargemaster price can increase the payment from private insurers, which often pay for outpatient and ancillary services based on discounted chargemaster prices. Hospitals with considerable market power can also use high chargemaster prices to gain leverage against private insurers because the existence of such prices motivates insurers to keep hospitals in their networks. If a hospital leaves an insurer's network, the insurer's subscribers would be forced to pay high out-of-network prices for services provided in the hospital, thereby reducing the value of the plan to potential enrollees.

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The authors found that the charge-to-cost ratio varied systematically across hospitals and between departments, and was associated with higher patient care revenue per adjusted discharge -- suggesting that hospitals were still using the chargemaster price to maximize revenue in 2013.

They cite another recent study showing that some hospitals set their chargemaster prices more than 10 times higher than the costs allowed by Medicare. In their own study, they found that two departments, CT scan and anesthesiology, charged more than 20 times their Medicare-allowable costs. Bai and Anderson said that these markups can impose financial pressure on uninsured patients, out-of-network patients, auto insurers and casualty and workers' compensation insurers. Those charges, they said, can lead to personal bankruptcy or avoidance of needed medical services, as well as higher auto, casualty and workers' compensation insurance premiums. They're also associated with surprise medical bills, and can raise insurance premiums for privately insured patients and their employers.

Bai and Anderson reference previous studies identifying three types of policy options to address excessive hospital markups: improving transparency of hospital charges, setting a cap on the maximum markup that hospitals can charge, and requiring all patients to pay the same rates, or use the same payment system to derive the actual rates. These strategies have worked well in Maryland, where the fee schedule is determined by an all-payer rate-setting system; at 1.4, that state has the lowest average charge-to-cost ration in the country.

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The authors suggest a couple of additional policy measures. The first is to improve the transparency of hospital markup. Given that hospitals typically have more than 20,000 items in their chargemaster files, it's virtually impossible for a patient to compare prices across hospitals for individual services, especially since the patient doesn't choose the services. This approach, the study said, should be combined with a benchmark such as the average cost or amount Medicare would pay for the same service; patients would then have a metric for comparison.

To make a tangible difference in price transparency, the study said financial statements should be easily accessible by patients and private insurers, with mandatory disclosure of financial statements on each hospital's website being a potential option.

Their second policy recommendation is to require all hospitals to set a uniform charge-to-cost ratio across all departments and services. Having access to the overall markup for the hospital is not very informative for the patient, they say, because there's quite a bit of variation between departments. From a patient's perspective, significant variation among services makes it difficult to compare markups across hospitals since they do not know exactly what services to compare. While hospitals might find it challenging at first, an initial goal, they said, could be to have a consistent markup across services within a hospital.

Twitter: @JELagasse