Outrageous Hospital Charges – Don’t Blame the Hospital

Dr. Ronald HirschFebruary 3, 2022

Glasses sitting on billing statement paper

There has been a lot of media attention to hospital charges recently. With the COVID-19 pandemic, The Centers for Medicare & Medicaid Services (CMS) worked miracles to allow health systems to be paid a facility fee for many remote visits to cover the overhead costs of such visits. The price transparency regulations require more public-facing data about charges for health care. The No Surprises Act requires certain patients to be given a good faith estimate of charges and provides an arbitration process if provider and payer disagree on a payment rate for an out-of-network service.


When I was in private practice, we set our charges based on what Medicare and the other insurers were contracted to pay us. It certainly made no sense at all to charge $40 for a service when the payer had already agreed to pay you $50 for that service so you used contracted rates as a guide. We expected there to be contractual adjustments made so even if we had one payer who would only pay $50 but another would pay $60, we would charge everyone at least $60, and write off the difference.


Unfortunately, it is not so simple for hospitals. First, a disclaimer. I am not a hospital finance expert and not an MBA. But I am certified in revenue integrity so I know at least enough to pass that exam. So, understand that what I write is my semi-educated explanation of the system. Payment for hospital services is much different than for physicians. When an insurer is “buying” an office visit from me, they get an office visit for their insured patient. But with hospitals, while they do provide medical services to patients on an individual basis, like an imaging study, surgery, or course of therapy, there are also a myriad of added factors, like payment for medical education, disaster planning, community health initiatives, care for uninsured patients, and so on, all of which get figured into how much the hospital is paid.


And the way the hospital is paid for these added services is beyond complex. In overly simplistic terms, for medical education, there is a direct government payment to the hospital for each resident and there is an indirect amount paid to the hospital as part of each Medicare inpatient admission. Hospitals get paid what is called a Disproportionate Share Hospital payment with each Medicare admission to cover the cost of providing care to other patients without insurance, and so on. Somehow all these payments get calculated and paid and balanced by the hospital staff and the Medicare Administrative Contractors through cost reporting. If you want to sound like you know how this all works, just refer to Worksheet S-10. People will assume you are an expert and stop asking hard questions.


But back to charges. CMS also does something strange with hospital charges. They know that because of the complexity of the system and the myriad of payment arrangements and contracting with payers who pay a fixed, negotiated percentage of the charges, hospitals will charge more than it actually costs to provide a service. But who doesn’t? Do the parts and labor that goes into manufacturing a Ferrari F4 actually cost $284,000? Of course not. The price also includes the costs of running the factory, advertising, developing new cars, paying for a Formula 1 team, and so on. What is the actual cost of the plastic and water that goes into that $2 bottle of water you buy at the convenience store? Maybe a few pennies. Figuring actual costs is beyond complex. If an MRI machine costs $2 million and can be expected to last for 100,000 imaging studies, that is $20 per study. But then you have to add in the cost of the technician, the cost of the room, the supplies used, any repair and maintenance costs, and so on.


To compensate for this complexity and uncertainty, hospitals are assigned a cost to charge ratio (CCR). (There are actually multiple CCRs but that would make this totally incomprehensible, especially to me.) The 1:5 CCR tells CMS that if a charge is $500, the actual cost of the service, as best as can be estimated, is $100. CMS would then look at that $100 when it comes to deciding how much it wants to pay for that service. Somewhere in giant computers, every hospital claim for every service is inputted, compared to the hospital CCR, and CMS now knows what it costs across the country to provide care.


Now here is how CMS describes this, from the 2022 OPPS Rule, “For the proposed CY 2022 OPPS payment rates, we used the set of CY 2019 claims processed through June 30, 2020. We applied the hospital-specific CCR to the hospital’s charges at the most detailed level possible, based on a revenue code-to-cost center crosswalk that contains a hierarchy of CCRs used to estimate costs from charges for each revenue code.” In case you are curious, CMS traditionally will use the most recent complete fiscal year data for rate setting, but because of the COVID-19 public health emergency, they used 2019 data to set 2022 rates instead of 2020.


CMS also uses the CCR in calculating outlier payments made to hospitals for extraordinarily costly care. Again, quoting CMS themselves, “Hospital-specific cost-to-charge ratios are applied to the covered charges for a case to determine whether the costs of the case exceed the fixed-loss outlier threshold.” In Chapter 4 of the Medicare Claims Processing Manual, CMS reiterates that, stating “it is extremely important that hospitals report all HCPCS codes consistent with their descriptors; CPT and/or CMS instructions and correct coding principles, and all charges for all services they furnish, whether payment for the services is made separately paid or is packaged.”


What this means is that CMS has created a vicious cycle that cannot be stopped by anyone other than themselves. What are the consequences of this? It was apparent in the 2022 OPPS Rule when CMS set out to set a payment rate for HeartFlow FFR, a computerized interpretation of a CT scan of the arteries of the heart. “For this final rule with comment period, we identified 3,188 claims billed with CPT code 0503T including 465 single frequency claims for CPT code 0503T using claims from CY 2019. Our analysis has found that the geometric mean cost for CPT code 0503T is $807.58. However, multiple commenters have noted that the FFRCT service costs $1,100 and that there are additional staff costs related to the submission of coronary CT image data for processing by HeartFlow.” In other words, the test costs $1,100 but for some of those 3,188 claims, the hospital did not properly apply their CCR to that cost and charge Medicare the proper amount. As a result, CMS was going to significantly cut reimbursement, thinking the cost of the test was much less than they were previously paying. Now if a new company started offering the same service at a lesser charge, then a lower charge would be justified. But that is not what had happened here.


At a national revenue integrity conference several years ago, John Settlemeyer of Atrium Health and Jugna Shah of Nimitt Consulting went through an exercise regarding the pricing of CAR-T therapy for cancer. This is a new, very costly therapy that is quite effective when it works for cancers that had no other treatments available. The patient’s blood is sent to a lab where specific cells are isolated and “engineered” and then injected back into the patient to attack the cancer cells. I could never explain things as well as those two experts but in short, this treatment had an approved add-on payment amount from Medicare, but that payment was only made if the claim was priced properly. That meant that engineering of the cells, for which hospitals must pay the company approximately $375,000, must be listed on the claim as a line item with a charge of over $1.8 million. That charge, as outrageous as it sounds, allows CMS to make the appropriate CCR adjustment, see the therapy cost $375,000 and then pay the hospital the correct amount. The patient who just underwent a life-saving cancer treatment will receive a statement from the hospital, often labeled “not a bill,” that will indicate that $1.8 million charge and may have questions.


But as long as CMS continues to apply the CCR to past charges to determine future payments, hospitals cannot start reducing their charges. If a hospital lowers its charges, CMS will then calculate a lower cost and start paying less. That lesser payment will then be used by other payers who set their rate as a percentage of Medicare rates and they will pay less. I suspect that not one hospital CFO likes to see a $1.8 million charge on a patient statement, but they know the company will soon be asking for their $375,000 so until CMS or Congress acts, we are forced to continue with this concatenation of cost to charge ratio calculations leading to high charges and undeserved media attention.

Author Bio: Dr. Ronald Hirsch is Vice President of the Regulations and Education Group at R1 RCM Inc. Dr. Hirsch was a general internist and HIV specialist and practiced at Signature Medical Associates, a multispecialty practice located in Elgin, IL. He was Medical Director of Case Management at Sherman Hospital in Elgin, IL from 2006 to 2012, where he was Chairman of the Medical Records Committee from 1995 to 2012, and also served on the Medical Executive Committee. Dr. Hirsch is certified in Health Care Quality and Management by the American Board of Quality Assurance and Utilization Review Physicians, certified in Revenue Integrity by the National Association of Healthcare Revenue Integrity, and on the Advisory Board of the American College of Physician Advisors. He is on the editorial board of RACmonitor.com. He is the co-author of The Hospital Guide to Contemporary Utilization Review, with the third edition published in 2021.