The IAA One Minute Blog

In an article published by Time Magazine, entitled "Bitter Pill: Why Medical Bills Are Killing Us," writer Steven Brill explores the world of hospital billing practices. What he found was so important, Insurance Administrator of America wanted to share some of the information with you.

The Chargemaster

The main finding in Brill's article is that of the hospital chargemaster. The chargemaster is every hospital's internal price list. Decades ago the chargemaster was the size of a phone book, now it is a massive computer file, thousands of items long maintained by every hospital. This system of charging people is outdated, however, and needs to be updated.

Although every hospital has a chargemaster, officials in the article did not care to speak on it, arguing that it was irrelevant. According to Brill, officials have good reason to hope that outsiders pay no attention to the chargemaster or the process that produces it. That is because there does not seem to be any process, no rationale, behind the core document that is the basis for hundreds of billions of dollars in healthcare bills. Patients see nothing rational--no rhyme or reason--about the costs they face on their bill. Here are a few examples of charges from different hospitals:

• Generic version of Tylenol at $1.50 per pill. According to the article, Amazon sells them for $1.49 for 100.
• Diabetic test strips at $18 each. According to the article, Amazon sells a box of 50 for around $27 or 55¢ each.
• The blanket used to keep patients warm during surgery at $32. According to the article it can be bought new on eBay for $13.

While hospital executives argue that the chargemaster is irrelevant, Brill argues that it is the exact opposite. Insurers with the most leverage (those who have the most customers to offer a hospital) will try to negotiate prices 30% to 50% above the Medicare rates rather than off the chargemaster rates. Unfortunately, insurers are increasingly losing leverage because hospitals are consolidating by buying doctors' practices and even rival hospitals. This then has the insurer negotiating discounts over the chargemaster prices than up from what Medicare would pay.

An argument from a chief operating officer at Memorial Sloan-Kettering Cancer Center is that they charge these rates so when a wealthy uninsured person from overseas comes; the money they pay allows them to serve the poor. There are two holes in this argument:

1. It is not usually a rich person from overseas who is uninsured, but the almost poor who don't qualify for Medicaid and don't have insurance--who are asked to pay the exorbitant chargemaster prices.
2. There is a huge difference between the list prices and the hospital's costs, which enables these ostensibly nonprofit institutions to produce high profits even after all the discounts.

What hospital executives seem to boil the chargemaster down to is that it is merely a starting point for negotiations. Patients don't typically realize that they are in negotiations when they walk into the hospital, nor do hospitals let them know that. Then again, why should they? Hospitals are a sellers market and it is not like patients are going to walk over to the next hospital if they don't like the price the hospital is charging them.

A starting solution to this issue could be to charge patients cost plus overhead and a 15%  margin. Also, disclose pricing before services are rendered. This way the consumer can act as the "pricing sentinel" in the market place. This is how most companies in the U.S. develop prices for products or services.

Looking to the Future

Hospitals and health insurers are locking horns over how much health providers will get paid under the new insurance plans that will be sold as the health insurance exchanges are rolled out. The results of the debate will play a major role in determining how much insurers will ultimately charge consumers for these policies.

To keep costs low, insurers are pressing hospitals to grant discounts from the rates hospitals usually get in commercial plans. In return, participating hospitals would be part of smaller networks of providers. Hospitals would be paid less by the insurer, but will likely get more patients because these people will have fewer choices.

Plans with smaller choices of healthcare providers are a big focus for insurers, partly because many other aspects of exchange plans, including benefits and out-of-pocket charges that consumers pay, are largely prescribed by the law, giving insurers few levers to push to reduce premiums.

What IAA has to Say

IAA hopes that with the coming of new exchanges that insurers and hospitals will be able to come to an agreement that will help clients and patients alike get the healthcare they deserve and can afford. Remember, with IAA one call does it all.

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