The controversy surrounding hospital pricing resurfaced last week after the CMS released hospital charges and payments for the top 100 diagnosis-related groups. The data revealed a wide disparity between DRG payments made to different hospitals in the same regions or states. It also showed a wide disparity between submitted charges and average payments, which received much less attention.
It's the second time in recent months that the issue has made headlines in the popular press. In March, Time magazine ran a 26,000-word cover story, “Bitter pill: Why medical bills are killing us.” Writer Steven Brill focused most on the exorbitant prices that hospitals nominally charge without shedding much light on the disparity between charges and payments.
Inside the industry, it's no secret that the charges hospitals send to Medicare have almost nothing to do with eventual reimbursements. The CMS pays no attention to the bills submitted to its fee-for-service program, which still covers about 75% of beneficiaries. The agency makes a preset DRG payment—usually a third or less of the submitted charges—and adjusts for factors such as the severity of the condition, whether the institution is a teaching hospital and whether it treats a disproportionate share of the uninsured.
The submitted charges also have nothing to do with what hospitals get paid from Medicaid, which is run by individual states and generally pays the lowest rates. Nor do they reflect the payments received from private insurers, which usually negotiate steep discounts from published charges based on the promise of delivering a high volume of patients from the covered lives they represent within a hospital's service territory.