Special Report: Why a Hospital Bill Costs What It Costs

Reader’s Digest investigates the shocking ways we overpay up to thousands of dollars on medical expenses, and how you can understand where your money is going.

By Kimberly Hiss from Reader's Digest Magazine | September 2012
Special Report: Why a Hospital Bill Costs What It CostsAnn Elliott Cutting

While the value of a house is based on an assessment, and the cost for an antique is determined by an appraisal, a full explanation of medical costs is hard to come by. After we asked 18 health-industry sources, we learned that no one seems to know the whole story. But one point was clear: Paying attention to the billing process may save you money.

Here, four eye-opening facts about medical bills—and how to use that knowledge to save money on your health care.

1. Hospital prices are shockingly complex.

Considering that industry analysts claim that hospital price calculations are arbitrary, we asked hospitals nationwide a simple question: How do you calculate your sticker prices? Five declined to comment or didn’t provide an answer, leaving Murray Askinazi, senior vice president and CFO of Lawrence Hospital Center in Bronxville, New York, to offer this explanation: For an outpatient MRI, as an example, his hospital calculates its charge based on such factors as the cost of buying or leasing the machinery, the wear and tear on that machine, staff salaries, the climate control and electric bill, cleaning costs, local competitive pricing, and other costs related to the hospital’s overhead, like malpractice insurance.

Surprisingly, medical services can vary wildly from one hospital to the next. The median charge for acute appendicitis admissions at 289 medical centers and hospitals throughout California, for example, ranged from $1,529 to almost $183,000, an Archives of Internal Medicine
study reported in April. Within San Francisco alone, the range between the lowest and highest charge was nearly $172,000.

But hospital sticker prices matter only to a limited extent because they typically get trumped by a higher power: the amounts that insurance companies are willing to pay for those services. The figures are determined by a negotiated contract that dictates the rate at which the companies will reimburse the hospital on the patient’s behalf. (In addition, the rates paid by Medicare and Medicaid, Askinazi adds, often fail to cover the hospital’s cost of providing the service in the first place, which means some of those costs are often shifted to commercially insured patients.)

Now, all those factors affect the math for one simple outpatient test. For an inpatient hospital stay, those computations sprout into an intricate vine in which every service (from radiology to pathology) generates its own charges. The hospital also has facility charges, covering room and board, certain room-use fees (such as the operating room), and nursing services, all of which get consolidated into the bill sent to you and your insurance company.

As technology advances, those charges rise. Palmer had a client from Louisville, Kentucky, who was astonished to receive a charge of $45,330 for a prostate surgery and an overnight stay (insurance would cover only $4,845). The billing department told Palmer that the steep price was not only because it was a robotic procedure but also because patients who receive the high-tech surgery shortly after the hospital starts offering it are helping to recoup the facility’s equipment costs.

To save money: Shop around. Compare prices in advance. “When you schedule your procedure, say ‘This is my insurance. How much will this cost me?’” advises Healthcare Blue Book’s Jeffrey Rice. “If the hospital can’t tell you, that’s a warning sign they might not be a good deal; once you make two or three calls, you can usually find a good-value facility.” To learn what a reasonable price should be, check out the free, online cost-comparison tool from Healthcare Blue Book (healthcarebluebook.com), which lists “fair” rates in your zip code based on the average insurance reimbursement fee. Also try FAIR Health (fairhealthconsumer.org), a nonprofit that lists estimates of providers’ charges for services in your area plus how much of that charge insurance should cover if you go out of network. Research your own resources. For a more precise prediction of a procedure’s cost with your insurance policy, check your insurance company’s website, which may provide a members-only cost-comparison tool, says Nancy Metcalf, Consumer Reports senior program editor and health insurance expert. Some hospitals post procedure charges on their sites as well.

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