A couple of weeks ago CMS unveiled charges and reimbursements data for about 3,000 hospitals across the country. The information demonstrated a dramatic variation between hospitals treating similar patients in different parts of the country. The information created a media feeding frenzy and a lot of political banter. Hospitals are taking heat and blame but is it justified?
There are two major problems with CMS’s report. First, the “costs” they were reporting came from hospitals’ chargemasters, which is not a true or accurate reflection of “cost”. Second, the “charges” that were reported have little to do with what hospitals are actually paid by Medicare.
Health care finance and reimbursement is difficult to understand so let me simplify.
Pretend for a moment that you (Shoppper A) stop by the grocery store after work to pick up a gallon of milk. The price tag on the milk is $87.42, you go to the register, the clerk rings up the sale and you pay $3.42. You only have to pay $3.42 because that’s the rate set by The Dairy Farmer’s of America* for a gallon of milk and the store can not ask you or force you to pay a penny more (*disclaimer – I mean no offense at all to The Dairy Farmers of America by comparing them to CMS).
The person behind you (Shopper B) in line also has a gallon of milk but that person participates in a group grocery plan through their work and their plan promises to send business to the store in exchange for a discount on certain goods so they agree to pay the store 20% of what ever the charge is so that person pays $17.54 for the gallon of milk.
The person behind them (Shopper C) is buying a gallon of milk as well but that person doesn’t have a group plan through their work nor do they get any love from The Dairy Farmers of America (again dairy farmers I apologize and I know you love everyone). The price for their gallon of milk is $87.42 like everyone else but this individual reaches into his pocket and realizes that he left his wallet at home but the store lets him have the milk anyway because he looks really thirsty.
The stores “cost”for each gallon of milk is $7.15 so the three gallons of milk cost the store $21.45. Shopper A paid $3.42, Shopper B $17.54, Shopper C $0.00 for a grand total of $20.96 which is $0.49 less than the stores cost so the store lost on average $0.16 per customer.
The store won’t stay in business very long if it losses $0.16 on every gallon of milk it sells so what does it do….it starts to charge everyone a little more in hopes that Shopper B, the only shopper it has any ability to get a little more money out of, will cover the loss from Shopper A and Shopper C. Overtime as more of Shopper A and Shopper C’s friends visit the store Shopper B is charged more and more to cover the loss and charges go up and up and up.
What happens next, well the media begins a negative firestorm about how the store charges way too much for a gallon of milk and how milk is unaffordable. But is it really unaffordable. Shopper A’s price is set and never changes, Shopper C doesn’t have to pay anything so milk seems affordable to Shopper A and Shopper C to me. Shopper B, well Shopper B decides that the cost of milk is difficult to justify so he encourages his employer to negotiate a greater discount and says “hey I will pay a little more each month if you can keep my cost of milk where it is”.
Shopper B’s employer negotiates a new group deal with the store and now the group only has to pay %18 of the price tag on the milk so you know what happens next – you guessed it, the store raises the price of milk – AGAIN….
And that is how charges get inflated. It’s easy to point a finger at the store but don’t forget, milk does a body good and everyone needs milk at some point in their life!