Comparing charges & payments at UNC, Duke and Wake Med

CMS last night released 2011 data on the charges and payments for the 50 most common hospital discharges for every hospital in the USA (Aaron McKethan put me onto this via twitter @A_McKethan). A quick primer and then selected comparisons for UNC, Duke and Wake Med hospitals.

  • Charges are a fantasy amount that no third party insurance company would ever pay. However, the uninsured might pay this amount (they would often be ‘charged’ this amount and go bankrupt trying).
  • Payments are the amount that is actually paid for care (in the data released it is combined amount paid by Medicare, other insurers, and patients).
  • Cost is a truly elusive concept in health care, but hospitals of course have systems that state their costs (and likely have many versions depending upon what is included).

Payments are sometimes greater than costs, but in other cases less; this differs by type of care and payer. And of course it depends upon what measure of cost you might use (does it include capital financing costs? If you build a new Cancer hospital, how broadly are those costs apportioned, etc.). Note that no data on costs was released. Charges and payments are an imperfect means of saying something about costs.

The table below compares the charges (fantasy) with the total payments received (actual money changing hands) by UNC, Duke and Wake Med hospitals (Duke and UNC are ~ 8 miles apart, and Wake Med is about 20 miles from each) for 3 DRGs in which I have some interest and which Aaron McKethan was tweeting (280=Heart Attack; 292 Heart Failure & shock; 638 = Diabetes; note that there are other codes relevant to these conditions, I just picked 3; this is based on my analysis).

ScreenHunter_03 May. 08 12.10

Several points:

  • You cannot easily perform a significance test on the differences here because we don’t know the standard deviation or standard error of the total payments (is Wake Med’s $5,844 in total payments significantly different from Duke’s $8,267 on DRG 638)? And the sample sizes are fairly small. You could make some assumptions, but I haven’t done that.
  • The spread on total payments is much less than on charges. Payments are a more meaningful number because it includes what Medicare actually paid to these hospitals and what patients paid OOP along with what other insurers (like private Medigap, employer provided retiree gap plans, or Medicaid) paid in the way of co-pays/deductibles.
  • Why do hospitals bother to greatly inflate charges if they are a fantasy in the sense that no third party payer (other than the uninsured) would ever possibly pay them? Charges are likely a starting point for negotiations with private insurers for one thing, and having high charges also allows hospitals to estimate a larger value of charity care most likely.
  • Were charges ever important? You betcha. In the ‘good ole days’ (from a hospital bottom line perspective, think late 60s-70s) Medicare paid hospitals on the basis of Usual, Customary and Reasonable (UCR) charges. This was essentially cartel pricing whereby the few sellers (think 3 hospitals in an area) had every incentive to elevate charges since they were typically paid a percentage of this by Medicare and private insurance.
  • In the 1980s, Medicare began paying on the basis of prospective payment (average amount based on diagnosis plus adjustments for teaching, DSH payments for caring for the uninsured, capital expenses, etc. and so the rank ordering of private as highest and Medicare below was generally locked into place.
  • Charges may/must have some impact on amount paid for care by different payers, but how is unclear. For example, UNC has explicit policies for the uninsured, but as you can see the discount is based on charges; so charges aren’t irrelevant.
  • The real question is whether any differences in the amount paid to hospitals are related to quality? That is what we need to get after and it will be hard for both technical and political reasons.
    The ACA nudges us in that direction.
  • I could imagine someone reasonably saying that the teaching mission of a hospital is a societal benefit that might not improve quality (could be the opposite). This would argue for more explicit support of this mission and not burying the indirect medical education support in each payment as is now done (there are also direct subsidies to medical schools/hospitals). Note all three of the above hospitals have a teaching mission.
  • Any hospital administrator will answer when being questioned about anything related to charges/payments/costs: but we have to care for the uninsured. There is some true amount of cost shifting, that is likely smaller than many think. Expanding insurance coverage is also important for doing away with what you might think of as “the negotiating impact” of the uninsured; when hospitals answer most any question about charges/payments/costs by saying “but the uninsured”. I believe this is more consequential than actual cost shifting.
  • I don’t think the release of this data is “a game changer” but I do think that it will serve to increase awareness among the public (along with this Time piece) about the opaque nature of hospital prices, and the word jumble that is charges, payments and costs.

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

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