The 3 Buckets of Healthcare Pricing

When you look at the facts and figures around healthcare costs in the US, it’s pretty staggering. 

The United States spends over $10,000 per person each year on healthcare costs, coming out to a bill over $3.5 Trillion total, more per capita than any other industrialized nation.

The standard argument you’ll hear is that this astronomical cost is a direct result of profit-taking on the part of insurers, hospitals, or big pharma and the medical billing fee structure. However, that’s only partially true. Some industries are far more profitable than others, with pharma and medical device manufacturers taking the lion's share of profits. You can find out who makes all the money in healthcare to learn more.

But the other side of this argument is that the only party impacted by absurd healthcare pricing is the consumer. And that’s the part we should be paying attention to. We’ve seen over and over how consumers are being squeezed out when it comes to skyrocketing healthcare expenses.

Over 18 million Americans are forced into extreme hardship each year (defined by a struggle to pay for necessities like rent, food, or heat) because of healthcare bills. So why is that happening? Let’s dive into the three buckets of healthcare pricing to learn more.

The 3 Buckets of Healthcare Pricing

We’ll simplify the medical bill pricing structure as much as we can by looking at three individual buckets and the role they play in setting a price for healthcare:

Bucket 1: Hospital Chargemaster

Each part of your hospital stay (and we mean each part) has a cost associated with it. Hospitals set a master price list (i.e., “chargemasters”) that make up the line items on hospital bills. These have been a contentious point in healthcare for decades since hospitals have kept their pricing strictly guarded. Like a marked-up hotel room, hospitals have a similar process that takes your bill from fairly reasonable to astronomical.

The problem lies in the fact that this whole process is disassociated from reality. The average markup tends to be >4x hospital costs. However, at Resolve, we’ve seen 10x-20x or even 100x costs very regularly. Hospitals can mark up something as simple as Tylenol to $200. Why? Because someone in Accounting put an arbitrary price on Tylenol in 1960, and it’s been inflated by 10% per year ever since.

It’s incredibly out of touch, to the point where when insurance negotiates rates, they often ignore these entirely. However, hospitals argue that this is why those prices shouldn’t matter - insurance will eventually negotiate them down, which means hospitals don’t get that figure. But regardless, it’s still an issue. Although hospitals are now required to provide this list online, knowing these rates doesn’t do much good as they are usually inaccurate. They’re not reflective of actual market pricing, and it’s just another reminder of how disconnected healthcare is from the people that need it.

Bucket 2: Health Insurance Negotiated Rates

How do insurance companies negotiate rates with hospitals? In short, there is a lot that happens behind closed doors when it comes to insurance companies and hospitals. For each charge at each hospital, an insurance company and hospital negotiate it behind closed doors. And there is no standardized or market rate - we’ve seen instances where the same procedure has varied by 5x or amongst hospitals in the same region.

Confusingly, hospitals will have different rates for different insurance companies, and the same insurance companies will have varying rates for two hospitals near each other. These rates shoot up in smaller and more rural areas due to a low population density and reduced demand for healthcare services. It’s a classic healthcare pricing issue. There isn’t enough population to justify lowering costs, so the people who do seek out healthcare will end up getting charged more for it...and get hit with outrageous medical bills.

However, with an increasing focus on healthcare transparency, there is more scrutiny on this aspect of healthcare pricing. Recent regulation is now requiring this to be more public for several procedures, but not all hospitals are complying. However, that may change because of that increased scrutiny.

There are fines for not doing so, about $300/day, but in many cases it’s cheaper for hospitals to pay penalties than comply, so it may take awhile to get to full healthcare pricing transparency.

Bucket 3: Medicare

The last healthcare pricing bucket that we’ll discuss is the US government and what it pays for Medicare. Here’s a simple breakdown of how that happens:

1. The government determines what it should cost the hospital to provide service
2. The government provides for a small markup on top

Once that price is decided, it’s up to a hospital’s discretion whether or not to accept Medicare patients.

Well-run hospitals actually make money on Medicare, though most claim that they only recover 80%-100% of their costs. Interestingly, however, despite hospitals claiming that Medicare rates don’t cover their costs (or that they “lose money on Medicare”), the majority of hospitals still accept Medicare patients.

This is an overview of medical billing pricing and the various facets that influence the total bill a patient receives. In our next article, we’ll look at hospital chargemasters in more detail and the effects of price gouging on the uninsured.

If you have more questions regarding the medical billing fee structure or need help lowering your medical bills, get in touch with our team at Resolve by scheduling a free consultation with one of our medical billing experts.