"3.5"
is the multiple that hospitals charge relative to what they get paid. That is, for every $1.00 a hospital collects for their services, they are billing $3.50. This number varies substantially from one hospital to another and inflation in charges in rising faster for some hospital services than others. For example, in a study published in 2019, it was demonstrated that the cost of emergency room visits has risen by 176% in a decade! So where do these prices come from? With the widening gap noted above, they clearly are not coming from information that aligns what they charge with what they get paid. Most often, they are made up. Setting Prices is More Art Than Science For hospitals, the baseline for pricing was set many years ago when the chargemaster was introduced. The chargemaster is a list of each service offered by a hospital and the amount they charge for it. Each year, the prices are revised. Because there are as many as tens of thousands of items in the chargemaster and hospitals do not have access to what their competitors charge, they guess at how much rates should increa`se. This prompted the CEO of one of the largest healthcare providers to make the following statement in an interview:
“There is no such thing as a legitimate price for anything in health care. Prices are
made up depending on who the payer is.” - Former chairman of Kaiser Permanente
Depending upon their market share, hospitals use this chargemaster as their starting point for negotiations with private health insurers. As such, they never want their prices to be too low and there is no penalty for them being high. You may think that it is a totally different story for medical providers that are not part of a hospital. It isn’t. At best, they may have a general idea what other providers charge. The reality is, they never want to charge less than the highest amount they will be paid by private health insurance.
No provider expects to get paid what they charge. They just never want to charge less
than what they think they can get paid.
It's a Marketplace
In any given market providers will charge (sometimes wildly) different rates for the same service. They also get compensated at different rates. Your objective is not to find “the price”, but to establish a reasonable range of value. This is why Casentric provides a range of reasonable prices when we examine medical billing. Medical services have negotiable value just like services in any other market.
So how do you put this knowledge to work? In short you should: 1. Negotiate the fair value of services. Don’t fall into the trap of thinking that if you don’t get the other side to accept your number, you have to accept theirs. Start with defensible numbers and consider information provided by the other side that suggests the fair value may be higher.
2. Start with what providers get paid. Casentric uses data about what private health insurers pay. Data from private health insurers makes sense because they pay at the top of the market. You are starting out on a reasonable basis.
3. Never assume that all the burden for demonstrating what a “fair price” is lies with you. The medical provider who came up with the pricing first needs to demonstrate why their “charge” should be used at all. Ask the plaintiff attorney to have the medical provider supply their data. Keep in mind that this issue does not change in litigation. If the plaintiff attorney wants to “board” large numbers, they need to be prepared to defend where they came from.