Tuesday, March 11, 2014

Provider Charges

For years now, hospitals have been charging ridiculously high rates for their services.  Medicare beneficiaries are accustomed to getting reports showing how much the hospital charged and how much Medicare paid, with the latter usually being but a fraction of the former.

I have finally learned how we got into this crazy situation.  It is partly due to insurance companies that negotiate and contract with providers to pay a percentage of charges.  Those contracts periodically come up for renewal and the negotiating process being what it is, a common result is an increase in the charges and a reduction in the percentage paid.

The other and possibly more important factor has to do with what are called “outliers” in Medicare.  For standard cases like joint replacements and heart attacks, Medicare pays hospitals a predetermined lump sum.  Cases that do not fit any of the established categories are known as “outliers” and payment is determined by an algorithm in which the hospital’s prevailing charges play an important role and which work in such a way that the hospital can increase outlier payments by increasing its charges.  Hospitals have fallen into the pattern of counting on generous payment for outliers to compensate for the rather stingy Medicare lump sum payments, and hospitals for which Medicare covers a large percentage of their total patient load have come to be financially dependent on payments for outliers.

The result has become an embarrassment bordering on a scandal but so far nobody has come up with a remedy.  If, as many are urging, the fee-for-service system of reimbursement is replaced by some form of capitation (monthly prepayment), charges will become irrelevant and the problem will go away.  But that is not likely to happen for a while.

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