By Ray B. Lefton

At a Glance 

Patients without effective coverage frequently must pay charges for medical services that are higher than the hospital's contracted rates. 

  • A national survey of hospitals shows great variation in how charges are set and accommodations made for patients with low income. 
  • The government is taking a more active role in examining charging practices. 
  • Hospitals can take several steps to help stave off government intervention. 
  • Cost shifting, a practice that can often result in significant financial burden on self-pay patients, is leading to greater scrutiny of hospital charging practices. 

After raising a family and working 30 years in the same jobs, the Browns decided to retire at age 60 while still in good health. The couple earned modest pensions and had saved some money. Healthcare benefits were of no concern to the two since each had insurance benefits that would hold them until they became eligible for Medicare.

Unfortunately, this carefree attitude was about to change.

One day a minor accident landed Mrs. Brown in a hospital emergency department. Although she eventually was released with no remarkable findings, staff needed to perform a physical evaluation, conduct a computed tomography scan, and order several lab tests to ensure no serious injury had occurred. A short time later, the Browns received an explanation of benefits statement from the insurance company showing that it would pay only $900 of the $5,000 bill because the plan did not participate with the hospital. (The $900 was almost double what the hospital would have received from Medicare or most other HMOs or PPOs.) The hospital expected the Browns to pay the remaining balance of $4,100 in full.

Even after the Browns made several calls to the hospital's collection department, the best arrangement they could work out was a 15 percent prompt-pay discount. Although the couple eventually managed to pay their bill, the experience left them somewhat shaken. With the hospital's average charge per day exceeding $10,000, had Mrs. Brown been admitted, the resulting bill could have been financially ruinous.

Unfortunately, such sticker shock isn't unusual. Many patients not covered by insurance are charged substantially higher amounts for medical services than third-party health plans, such as medical insurers, HMOs, Medicaid, and Medicare. Currently, the U.S. Census Bureau estimates about 44 million Americans lack health insurance, and many millions more are underinsured. Even patients with adequate insurance may be financially vulnerable should they obtain care from a nonparticipating provider.

With such a large portion of hospital revenue coming from self-pay sources, it's useful to examine how hospitals establish their charging practices and what they are doing to accommodate patients with low income or those who qualify for charity care.

How Are Charges Set?

One reason that patients often pay more than hospitals' contracted rates is cost shifting. As hospital expenses continue to outpace payments from Medicare and Medicaid, hospitals are forced to transfer this economic burden to commercial payers and to patients without insurance to remain solvent. Hospitals use cost shifting, also known as procedural rate pricing, as a way to increase all or selected service charges to a high rate to optimize payment. The rationale for this practice is that some insurers still pay for some services on a percentage of charges. It is not unusual for some hospitals to exceed the underlying fully allocated costs of providing care by as much as five times. Most patients with insurance are insulated from these inflated prices, but for those who are underinsured or without insurance or whose plans aren't in effect, the resulting bills can be staggering.

Many different philosophies exist for setting charges. One reasonable approach, assuming insurers purchased goods and services like other industries, would be for hospitals to set prices at double the Medicare fee schedule or at 10 percent above the highest paying insurer or a markup over fully allocated costs. Any higher would simply generate more write offs, and the high prices would be difficult to explain to patients. Whatever approach a hospital uses needs to be sensitive to the fact that insurers will pay the lesser of their fees or hospital charges.

For some payers and for some services, "usual, customary, and reasonable" limits do not exist. Often an insurer that does not have a contact with a provider or that pays a percentage of charges will have to pay the hospital in proportion to its charges. Therefore, the higher the hospital's charge, the higher the payment. Because of this reality, charges for many hospitals are irrationally high and not based on underlying costs, relative value units, or a reasonable multiple of a standard fee schedule, such as Medicare. Charges are set artificially high to maximize payments.

What's Being Done at Other Hospitals?

To assess where hospitals stand with respect to setting rates and managing charity care, the author recently surveyed 100 hospitals of various sizes throughout the country. A 30 percent response rate was realized.

Rate-setting trends. One area examined was current rates charged for commonly performed emergency department (ED) services. Charges varied substantially from one hospital to another. About 50 percent of the respondents represented the average hospital daily charge to be between $3,000 and $6,000. Thirty percent responded that their charges were under $3,000, and 20 percent charged over $10,000.

Location of facility appeared to have a big influence on rates. Urban hospitals appeared to charge roughly twice as much as rural hospitals. No noticeable correlation occurred between rate-setting behaviors and hospital size for either the average per diem cost per day or ED encounter.

Type of facility also appeared to be an influence. For-profit hospitals reported higher charges than not-for-profit hospitals. A Pennsylvania Health Care Cost Containment Council report of 2002 claims corroborated this trend. It also showed charges from for-profit hospitals were much higher than those of not-for-profit hospitals-in excess of $10,000 per day.

Charity care. Typical charity policies cover only patients falling within national poverty guidelines. Also, other than offering prompt-pay discounts, few hospitals have procedures for addressing payment of unpaid balances when a patient does not qualify for charity care. None of the hospitals' charity care policies addressed unpaid balances in relation to insured patients. Every responding hospital stated that it has or is in the process of developing a formal charity care policy. Of the charity care policies in effect, about 60 percent of the hospitals reported requiring approval from their board of directors. With regard to the income level required for patients to qualify for a full charity care write off, answers were evenly distributed among patients at or below 200 percent, 150 percent, and 100 percent of federal poverty guidelines.

Unpaid balances. Although hospitals appeared to accept substantial discounts or provide free care for low-income patients, almost all will balance-bill patients with nonparticipating insurance and expect to be paid full charges even if the insurers have paid a reasonable amount. Regarding taking legal action against patients with unpaid balances, the majority of respondents indicated that they do so only when patients are uncooperative or ignore their bills. About 10 percent said they would rarely pursue legal action, and another 10 percent said they would do so only when the unpaid balance was in excess of $2,500.

What Is the Government Doing?

Guidance on establishing charging practices that effectively address inequitable self-pay financial burdens remains largely elusive. Most healthcare professionals are under the impression that Medicare regulations require hospitals to charge all patients the same amount for the same service, regardless of insurance level. This concept is true for purposes of cost apportionment under Provider Reimbursement Manual S2203. However, many misconceptions exist about this section. For cost-reporting purposes, CMS does not care what a provider expects to collect or has agreed to accept as full payment; the agency only cares that the statistic used for apportionment is consistently recorded.

Also, since the inception of fee-based billing, CMS's interpretation of hospital discounting services has changed. Medicare prohibits submitting claims "containing charges" substantially in excess of the entity's usual charges. With APCs, the actual charge on the bill is irrelevant to what Medicare will pay (excluding consideration for outlier payments), except when the actual charges are less than the fee schedule. Discounts above 20 percent of the Medicare fee schedule are allowed if a provider can demonstrate a lower cost structure, such as collecting payment at point of service or avoiding administrative fees.a 

Over the past year, government at the federal and state level has taken several significant actions to address hospital-charging practices. This past July, the House Energy and Commerce Committee began formal investigations into hospital pricing. The investigation subcommittee faxed a seven-page letter to 20 hospitals requesting detailed billing information. A report discussing the findings is scheduled for release in the coming year.

In September, the OIG drafted a proposal in the Federal Register to provide guidance on when charges to Medicare and Medicaid cross the line between reasonable and excessive. The proposal, which unfortunately is rather vague, suggests possible exclusion from participating in Medicare if charging practices are "excessive." This proposal falls on the heels of the OIG initiating an exclusionary proceeding against Tenet Healthcare Corporation's California-based Redding Medical Center.

Recently, states have started examining hospital pricing in relation to regulations overseeing fair business standards. In Illinois, Attorney General Lisa Madigan opened an inquiry this fall to determine whether the state's hospitals charge uninsured patients more than they charge third-party payers. An initial review highlighted a potential breach in the Illinois Consumer Fraud and Deceptive Business Practices Act and has prompted a more formal inquiry.

In Florida, a man recently filed a lawsuit against Tenet Healthcare Corporation based on similar allegations. The suit alleges that Tenet's billing practices raise rates for uninsured patients beyond their reasonable cost and put them at twice the industry norm, a violation of Florida's Deceptive and Unfair Trade Practices Act and Florida's common law of unfair competition.

What Should Hospitals Do?

Clearly, if hospitals don't self-regulate charging practices, the government will step in to deal with rising hospital charges and costs. To help stave off government intervention, hospital executives are advised to consider implementing the following internal controls:

  • Evaluate charge-setting, collection, and charity care policies and procedures of similar hospitals in the region to ensure the organization's charges aren't extreme.
  • Review methods used to set charges for various services. For example, evaluate existing contracts to optimize payments and compare the charges with the underlying cost to provide care.
  • Educate patients about the potential financial obligation they may incur and different payment options.
  • Audit billing and collection policies to ensure they are applied appropriately.
  • Know the resources and assets protected under state and federal bankruptcy laws, and make sure policies reflect these conditions.
  • Develop reasonable payment expectations, and promote charity care policies and the organization's willingness to work with patients.
  • Conduct ongoing training with relevant staff about how to appropriately address hospital charging polices and patient questions.
  • Work with insured patients when significant patient copayments remain. (Just because patients have insurance doesn't necessarily mean they have sufficient financial resources.)
  • Evaluate how collection agencies engaged by the hospital handle debt collection, and make sure their behavior reflects the policies and values of the hospital.
  • Work with the public relations department and educate local media about charge practices.

Now, more than ever, evaluating charging practices and developing effective and equitable charity care policies is essential. Establishing and maintaining sound pricing practices not only supports the organization's mission of service, but it also will best position the hospital for prompt payment from self-pay sources.

Ray B. Lefton, FHFMA, CPA, DDS, is CFO, Northeastern Hospital, which is a subsidiary of Temple University Health System, Philadelphia, and a member of HFMA's Metropolitan Philadelphia Chapter.


a. Dennis Barry's Reimbursement Advisor, Aspen Publications, June 2001.

Publication Date: Monday, December 01, 2003

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