Understanding hospital prices can explain health system investments. Today we delve into twelve hospital pricing concepts.
Today in health, it understanding hospital pricing. My name is bill Russell. I'm a former CIO for a 16 hospital system and creator of this week health. The set of channels dedicated to keeping health, it staff current and engaged. We want to thank our show sponsors who were investing in developing the next generation of health leaders.
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I've learned so much from it that I thought this is an important topic to continue to dive into. And it is the top 10 hidden facts about hospital prices. And this is somebody I had on the show a little while back it's at Dr. Eric Bricker. Who, , has, has, he was a, , trained, let's see, graduated with honors from university of Illinois, college of medicine.
Completed his residency at Johns Hopkins in Baltimore, former co-founder chief medical officer at compass professional health services. And you've probably seen him do some shows on social media, a to Z. A to Z healthcare, I think is what it's called. And he talks a lot about these kinds of topics.
And I like this articles had med city news and it captures an awful lot of things about hospital pricing. And when I came into healthcare, I didn't understand any of these. And I learned them a little bit over time, a little bit at. , in pieces over time as I was the CIO and each one was important to really understanding how the business of healthcare function and that was important to understanding.
How and why we invest the way we do in technology. So let me just give you these 10 and they're they're , again, they're I think they're really good. I learned a ton from it. Number one hospital cross subsidization hospitals are paid much less by Medicare Medicaid from the government. Then by commercial insurance companies, I think we all know that hospitals can not raise prices to the government, but they can.
Two insurance companies, therefore hospitals constantly raise prices to health insurance companies. To cross subsidize that is make up for the lower prices that they are paid by Medicare and Medicaid. We used to talk about this a fair amount. We had this concept of make a bunch of money on commercial insurance break, even on Medicare and lose as little money as possible on Medicaid because we lost money on Medicaid.
And the thought was at some point we needed to drive the cost of delivery down far enough so that we actually make money on. Medicare. And that was one of the goals in hospital cross hospitalization talks about that, that idea that you lose money on Medicaid. If you're lucky you break even on Medicare, although a lot of hospitals, most hospitals do not.
And then you make all of your money on commercial insurance. So, as I'm saying some of these things, some things that are going on at your house and some are going to crystallize, you're going to go, oh, that's why that happens. All right. Let me keep going. Number two hospital accounting. The vast majority of hospitals in America do not know what it costs them to deliver each particular medical service.
Gallbladder surgery, a single MRI of the brain, heart catheterization. A hospital does not know what each of these costs. The reason is because most hospitals in America. Do not perform activity-based accounting. And we talked a bunch about this with Rob D Ms. Shay. Former CFO for UPFC hospitals, do not know how much everything costs.
, and it says the majority of the cost of the hospital or labor, therefore, in order to measure the cost of service, the amount of time each doctor, nurse or technician spends on care must be measured. Most hospitals do not measure that time. Spent. On each activity and accordingly do not know what each of these services costs.
However, I will say when Rob and I talked about this, , , we really, the, the thing we identified was those systems that do understand what their costs are. We'll have a significant competitive advantage. And so he was highly encouraging people and health systems. To understand their costs of delivering care.
And it gives you a whole host of new information to determine which, , areas of care are profitable and non-profitable which, , service lines are profitable. Non-profitable which buildings are profitable, not profitable. , which communities are profitable non-profitable and it can help you to make decisions on how to approach it. Every other business in the world functions this way.
What's profitable. What's not profitable. You might say, well, hospitals should run like a business. Well, hospitals do run like a business because no money, no mission. And it's talked about all the time, , that there has to be a profit center and we're seeing that more and more as more and more health systems.
, struggle. Number three, complex patient care. , financial impact, highly complex patient care, such as intensive care unit complex surgeries like coronary artery bypass, grafts. Make up a majority of the hospital's own costs. However, these costs. Are generated by a relatively small percentage of the hospital's patients. Approximately 80% of the hospital's costs are generated, carry for 20% of the patients.
This fact exists in many organizations refer to as the Pareto principle it's by the way, the Pereda principle is just a common. , concept 80, 20, 80% of your costs come from 20%. Of your patients, but the same, thing's true. In most businesses, we talk about it in other industries as well that, , 80% of your profit comes from 20% of your clients.
, so forth and so on. So the predo principle is a pretty common in business, but he's saying that is, , that is a, a, a significant portion of your costs in healthcare is only generated by 20%. , the patients that you care for. , number four, hospital billing and hospital never expects to be paid in full for the initial bill. Rather, the price on the initial bill that is sent to the insurance company is discounted based on the prior negotiation between the hospital and each health insurance company. The amount the health insurance company pays the hospitals called the allowed amount.
The allowed amount can be as much as 90% less than the bill charges. And that amazing. For example, a hospital may build a health insurance company, $250 for a basic blood test, and it only be paid $25 over time. Hospital overtime hospitals have continued. To increase the bill in order to increase the paid amount.
This process is why hospital bills for a short emergency room visit can be $8,000 or more. The hospital never expects to be paid $8,000. They just keep raising the bill in hopes of being paid more by the insurance company. All right. Number five hospital prices. Hospitals might charge $5 for an aspirin that costs less than a penny.
Or $30,000 for a knee implant that costs $300 to make the internal secret list or what the hospital charges for each item is called the Chargemaster. The prices on the Chargemaster are set, using a process called strategic rates setting. Or strategic pricing, strategic pricing looks at how much of a discount the hospital has agreed to give the insurance company and then overcharges for each item in order to negate the decreased reimbursement of the discount.
It's the equivalent of marking the price up a hundred percent. So at the hospital can offer at a 50% discount. You get that? So it's a negotiated rate before the year starts. There's a certain price. And then what they do is say, all right, that's all they're going to pay. Therefore, we have to charge this amount. They will discount it to this and get to a, what we want to make for those services. That's what the charge master is all about. And that's, what's strategic.
, pricing is all about number six, hospital insurance networks. When a hospital agrees to give an insurance company a discount, the insurance company and returned includes the hospital and their network. However, there are additional strings attached to the hospital might require the insurance company to never let its members.
No, that the discounted hospital prices are in advance. The hospital might also require the insurance company to include all the doctors that practice at the hospital in the network. As well, even if the insurance company. Would want to exclude some outlier doctors that have poor quality metrics. That is an absolute true statement.
There are, , you know, the, the physicians do not allow the lower performing physicians to be cut out of the network because that would essentially put them out of business. And so they act as a group. And you either do business with the group or you don't do business with the group. So there's a chance you're going to a really prestigious and well thought of group, but you're seeing somebody with poor quality metrics.
, because they are a part of that group just happens. And so it's important to do the research on that number seven patient referrals. Referring patients from one doctor to another is one of the main ways the hospital grows their patient volume, accordingly hospitals monitor doctor referrals closely, and may put rules on doctors that they employ regarding their referrals. For example, a hospital might require a primary care physician.
They employ to only refer to specialists that practice at the same hospital. This absolutely is a part of the process. And it's a, what leads to a concept called leakage. And you want to make sure that your referrals happen within your network and within your hospital system. That is how you grow your volumes. Number eight, future sources of hospital revenue, more and more hospitals.
, revenue come from outpatient tests and procedures. Outpatient means the patient has a test of the procedure then goes home the same day. The problem is that the hospitals charge much more. For outpatient procedures compared to an independent doctor's office, for example, an ultrasound of a heart.
It's called, , an echocardiogram and echocardiogram performed at a hospital might cost $600. Whereas the same echocardiogram performed at the doctor's office might only cost $250. In fact, some hospitals are even buying doctors practices and then saying the doctor's office is part of the hospital.
That's absolutely happening as well. We've seen that. Number nine certificate of needs. Law explained in dozens of states, hospital systems must obtain approval. From the state government in order to build a new hospital that approve. , that approval is called the certificate of need. The problem is that if a town only has one hospital, then it has a local monopoly and can charge very high prices. If a competing hospital wanted to open in the same town, it might be denied permission by the state government because existing hospitals lobby to prevent competition.
And there's every hospital system in the country has lobbyists. In the state and the F at the federal level. Number 10 hospital. I should say most. Almost every integrated delivery network has a lobbyist. If not, they're part of groups that are lobbying as well. Number 10 hospital charity care. Most hospitals in America are not-for-profit. This means that they do not pay any taxes, taxes, specifically, no property tax in exchange for this.
Tax-free status. Not-for-profit hospitals are required to provide some care for free or at a discounted price to the poor. The problem is many hospitals make their charity care application process hidden and very complicated. This strategy allows the hospital to reap the reward of not paying taxes.
While not keeping up their end of the bargain. Clearly a little cynicism in that last statement, but, , but yeah, I would challenge you to, to do research on. On hospital, charity care. See what that charity care is, where that's coming from. It is kind of a opaque. , to say the least. So there you have it, , top 10 list about, , hospital, , pricing and how it works. You have hospital cross subsidization hospital accounting, not knowing what a cost for each individual procedure complex patient care, financial impact.
, that's the 80 20 rule hospital billing that is inflating the price in order to get the price that you want. , Let's see, I, maybe I got that one wrong. Let's see. Hospital never expects to get paid in full. , they're allowed amount. Yes. They increase it. Hospital prices might charge $5 for an aspirin.
The cost less than a penny or 30,000, then you have strategic pricing. Hospital insurance networks when, , there's agreements that go on between the hospital and the insurance. To keep patients their patient referrals, any important part. Of the process and something that hospitals watch very closely.
Future source of hospital revenue, more and more hospitals. Revenue comes from outpatient tests and procedures. That can be done a lot cheaper in the, , doctor's office. And some hospitals are buying those doctor's offices certificate of needs law, meaning that a monopoly may continue because of lobbying.
And hospital charity care is opaque. , you know, it's, it's interesting to talk about the economics of healthcare. I think it's important to really understand. 'cause a lot of people sit there and go, I don't understand why aren't we investing more in the clinician experience? Why are we investing more in this? Why are you investing over here and not over here?
A lot of times, I will tell people, follow the money. When you follow the money, you will understand. Why things are happening and in the case of hospital and healthcare, you can follow the money. And in a lot of cases, it will explain the behavior. Of the health system. All right. That's all for today. If you know someone that might benefit from our channel, please forward them a note. They can subscribe on our website this week, health.com or wherever you listen to podcasts.
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