Hospitals Finances

Hospitals are difficult to run. They have a high fixed overhead, massive amounts of regulation, and an an unavoidable legal obligation to their community. Recently, they have been criticized by the Institute of Medicine and the press for errors, avoidable complications and deaths. Their finances should be described as “robbing Peter to pay Paul”.


Imagine all that it takes to run a business, employees, utilities, insurance, security, computers, and then having your client arrive with urgent problems, which consume a large number of resources and supplies, and your client cannot afford to pay for your services. This would be a difficult business to run. Now imagine if that business were a hospital.



Running a hospital is costly and somebody has to pay for it. First, the hospital administrators need to understand their expenses. They calculate their fixed and variable costs, based on their prior experience with patient volume, current wages and current prices for supplies, etc. Then they divide this amount among those who can pay. This is the origin for an old joke in the emergency department. The person with insurance in room A is paying for the uninsured person in room B. Cost shifting makes it difficult, if not impossible, to determine the actual cost for an individual’s hospital care. What is the fair price for the care you received? No one seems to know. The detailed hospital bill will not provide any help or insight. Keeping track of all of the supplies and services during a hospitalization is a daunting task. A medical bill review company will find multiple errors in the billing document. I can hear the commercial, ” Tylenol for your headache –12 dollars. Batteries for the monitor that was not used — 30 dollars. Staying alive — priceless.


Hospitals and insurance companies simplify billing by contracting or agreeing on rates based on the length of stay in the hospital and the diagnostic related group (DRG’s). These average rates are easier to calculate. For example, the daily rate for a fractured wrist might be 2900 dollars. Multiplying by the length of stay gives you the total cost. However, additional amounts are allowed for complications which increase the use of resources and extend the time in the hospital. These are called outliers. Both, the hospital and the insurance company closely monitor the length of stay; and know the average length of stay. This reduces the number of disputes, having to review only the longer hospitalizations. In turn both parties monitor and try to limit the length of time the patient stays in the hospital. This decreases the price for the insurance company and the overhead or expenses for the hospital. The conclusion can be drawn that each party is trying to make money and not lose money.


However, the hospital or emergency room itemized bill is much larger than the contracted rate. One year ago I fractured my wrist, which required surgery and a 24 hour hospital stay. The itemized bill totaled 52,000 dollars. The contracted rate was 2900 dollars. The Blue Shield contract protected me from the hospitals retail price. In another instance my friend was hospitalized for one week for a heart attack and bi-pass surgery. The bill was 152,000 dollars. Since his insurance company was not contracted with the hospital, the insurance company only paid $40,000 leaving my friend to pay the difference. (By the way, my friend is doing great).


Those with insurance, children with Healthy Families coverage, Medicare, MediCal or County (CMSP) are protected by contract. The uninsured with assets, a home or some savings, are vulnerable. Be careful about being judgmental. Can you or your employer continue to pay for your own private policy that is increasing 10 -15 % a year and even more as your age increases? Unemployment is increasing and a recession is looming. Can you afford the COBRA payment to continue your group coverage, if you lose you job due to the economy or illness? A preexisting condition may make you uninsurable, if you lose your current coverage?


When you find yourself in this situation, the large difference between the retail hospital charge and the contracted payment is impossible to understand. The hospital will offer 25% discount — still difficult to understand. Most are shocked and overwhelmed by the amounts and are unable to pay. Medical bills, I believe, are the most common cause for personal bankruptcy. We need a new billing system for people who pay cash for their medical care. Basic economic principles support the following conclusion: as the price declines, payments will increase. More people would pay their medical bills, if the amounts were closer to the insurance contracted rates.


So why is there such a difference? The primary reason is in the details of the hospital’s contract with the insurance company. The outlier adjustment charges, for those patients who have complications and extended hospital stays, are a percentage of the retail rates. High retail rates increase the insurance payment for these patients.


Hospitals also prefer to have the insurance company pay the bill. They know they are going to receive a payment. Many patients faced with massive retail bills are overwhelmed and simply try to walk away. Collections from these individuals are unpleasant. It is bad publicity to attach a home of someone who is sick and unemployed due to an illness. Bottom line — the large difference forces people to purchase and keep their insurance.


Insurance companies benefit from this arrangement. A strong incentive to purchase insurance allows them to increase their prices. They are selling insurance as well as the contract. To maintain enrollment as their prices increase, they remind their subscribers of this savings on their EOB statements.


The high retail charges must allow the hospital to maximize their income. Some people with assets are paying these bills. History suggests this conclusion. Two years ago CHW, the parent of Mercy Medical Center paid millions of dollars to settle a class action suite for overcharging patients. The results; the hospital continues to generate the high hospital bills. It must be working.


Perhaps this is another example of why health care costs continue to increase. The legal fees on class action suites for overcharging patients.



As easy as it is to complain, when you are seriously ill, you are glad your hospital exists. However, it is my belief that a portion of the health care crises would be solved, if the hospital administrators determined a fair cash price for each individual’s hospital care.

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