Hospital charges aren’t necessarily related to costs

Hospital charges (which are not the same as prices actually paid) do not necessarily reflect costs, by design:

In an open-ended question about the information that is used in setting charges for existing services, hospitals in large urban areas mentioned using cost information half of the time, while rural hospitals mentioned it only a quarter of the time. Similarly, two-thirds of the major teaching hospitals reported using cost data in the charge setting process compared to one-half of the non-teaching hospitals. A number of respondents indicated that hospital charges do not systematically reflect costs, with some exceptions. Generally charges for new items and procedures are those that are most likely to correlate in some way with hospitals’ actual costs. Hospitals also reported basing charges for supplies and pharmaceuticals on their costs. Methods for identifying costs varied widely for respondents due to different cost accounting systems and different assumptions for allocating costs across multiple departments.

That’s from a now ten-year-old report by Lewin for MedPAC. (Is there anything more recent that suggests things have changed?)

According to the report, other factors that inform establishment of charges include hospitals’ missions, competitive forces, influence of specific payers, community perception, managed care contract terms, and indirect cost allocation. “Many respondents referenced Medicare’s fee schedules and the schedules of other payers being used as a floor and point of reference for setting charges.”


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