60 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
To address this charge compression issue, the Centers for Medicare and Medicaid Services(CMS)
have changed the cost-reporting process to identify expensive implantable devices (e.g.,revenue
code 0278) separately and then calculate a more appropriate CCR for these items.* e next case
study extends Case Study 2.4.
Case Study 3.19: Proper Pricing of Pacemakers
e Apex Medical Center is performing a rapidly increasing number of cardiac implants,
including pacemakers. ese devices are quite expensive as technology rapidly advances.
One such device costs $12,000.00. Apex has been advised that the charge for this device
shouldbe priced at least using the cost divided by the CCR developed through the Medicare
cost report. For Apex, the proper CCR is 0.40. is means that the charge will need to be
$12,000.00/0.40 = $30,000.00.
e $30,000.00 charge seems, and probably is, outrageous. However, when Medicare receives
this charge and then converts it back into the cost, the proper amount of $12,000.00 will be cal-
culated (i.e., 0.40 * $30,000.00 = $12,000.00). e overall solution to this situation is to avoid the
charge compression that has produced the low CCR. e changes to the Medicare cost-reporting
process mentioned should help with this situation.
Medicare Charging Rule
Toward the beginning of this chapter, the so-called Medicare charging rule was mentioned.
Twocitations were provided in a footnote:
◾ 42 CFR (Code of Federal Regulations) §1001.701
◾ e CMS Provider Reimbursement Manual (Publication 15-1) §2203
In its simplest form, this rule states that hospitals are not to charge Medicare patients more than
they charge other patients. If discounts are being routinely provided to non-Medicare patients,
then inappropriate payments by Medicare might occur. is is certainly an oversimplication.
is will become evident as we discuss some examples. e Medicare charging rule involves both
the charge structures as found in the chargemaster and the cost report that must be led for vari-
ous types of healthcare providers who participate
†
in the Medicare program.
While a complete discussion of the Medicare charging rule is beyond the scope of this book,
we will look at the basics. No matter how this rule is interpreted, conceptually this rule has a
signicant impact on how hospitals and other healthcare providers establish their charge struc-
tures within the chargemaster.
Note: ere has been a long-standing interpretation from CMS that does not allow CMS to
dictate how hospitals and associated healthcare providers can charge for services.
‡
us, hospitals
can have high charges, low charges, or something in-between. What CMS can do is to require
consistency in setting charges, whether high, low, or in-between.
*
For instance, see page 24104 of the May 22, 2009, Federal Register (74 FR 24104).
†
e word participate is used in the general sense. ere is a more formal use of this word for physicians who
formally participate in the Medicare program and agree to accept the payments made by Medicare.
‡
For instance, see 70 FR 68662.
Healthcare Provider Charges and Charge-Based Payment Systems ◾ 61
Here are two excerpts from CFR §1001.701:
Submitted, or caused to be submitted, bills or requests for payments under Medicare
or any of the State health care programs containing charges or costs for items or ser-
vices furnished that are substantially in excess of such individual’s or entity’s usual charges
or costs for such items or services; [emphasis added]
Submitting, or causing to be submitted, bills or requests for payment that contain
charges or costs substantially in excess of usual charges or costs when such charges
or costs are due to unusual circumstances or medical complications requiring additional
time, eort, expense or other good cause [emphasis added]
is is the OIG (Oce of the Inspector General) section of the CFR. At issue is the OIG’s ability
to exclude a provider or supplier from the Medicare program. e rst statement indicates that
the providers or suppliers must not charge in excess of their usual charges. e second statement
provides for exceptions to the rst statement. In other words, charges can be higher than usual if
there is some good reason.
All of these terms and phrases must be carefully dened to apply these rules. Even for the
OIG, this area has proven very dicult. is is mainly due to the extreme variability of how
hospitals establish their chargemasters (e.g., see Case Study 3.10). is variability includes very
dierent ways to establish markups. e OIG did issue a very interesting Federal Register entry
on September 15, 2003 (68 FR 53939). While the OIG proposed some interpretations, there was
never any nal rule issued. For instance, the OIG proposed that if a hospital receives discounted
payments, then these payments would be imputed as usual charges. Let us visit the Apex Medical
Center to see what would happen if this OIG interpretation were to become reality.
Case Study 3.20: Percentage-of-Charge Payment Contract
e largest private payer contract that Apex has is a contract whereby 80 percent of Apex’s charges
are paid by the payer for services provided both inpatient and outpatient.
e basic facts in Case Study 3.20 are very representative of percentage-of-charges payment con-
tracts. is is a fairly standard contract that pays 80 percent of charges. However, the OIG proposed
interpretation would mean that the 80-percent payment would be construed actually to become the
de facto charges. In the meantime, Medicare beneciaries would be charged at the full charges. us,
the charges to the Medicare beneciaries would be more than the (imputed) charges made to this
private payer. In theory, this would violate the Medicare charging rule.
Again, this discussion is oversimplied. Volume of charges must also be considered. e basic
idea is that if the volume of lower charges is not too high, then the Medicare charging rule is not
violated. Again, let us join Apex.
Case Study 3.21: Preferential Laboratory Fee Schedule
e Apex Medical Center has a single set of charges for various laboratory tests. To have the com-
munity physicians use the hospital’s laboratory, a proposal has been made to develop a discounted,
preferential fee schedule for community physicians.
For Case Study 3.21, the issue is that Medicare patients would be charged the full fees for labo-
ratory tests, while other patients would be charged less. Of course, because laboratory services, for
62 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
Medicare, are paid on a fee schedule basis, there would be no increased payment from Medicare
even if there were a preferential fee schedule.* Here is another example in which there may be a
need to establish lower, preferential charges.
Case Study 3.22: Sports erapy Preferential Charges
e Apex Medical Center has several satellite physician therapy clinics. ere is an increasing demand
for self-pay services for special sports training provided by physical therapists. However, Apex’s charges
for physical therapy have become quite high over the years to gain the highest possible payment. To
attract these self-pay customers, a proposal has been made to develop a lower, preferential set of charges.
Most likely Apex will go ahead and establish the preferential charge schedule. It could also
simply provide a steep discount; that is, self-pay patients would only have to pay, say, 60 percent
of the usual charges. Based on cursory discussion of the Medicare charging rule, do you think this
preferential set of charges could be a problem? Technically, the answer is yes, but the volume would
probably be low enough so that the rule is not violated.
ere is yet another aspect to the Medicare charging rule, and this is found in the Medicare
Provider Integrity Manual (PIM) at §2203.
To assure that Medicare’s share of the provider’s costs equitably reects the costs of
services received by Medicare beneciaries, the intermediary, in determining reason-
able cost reimbursement, evaluates the charging practice of the provider to ascertain
whether it results in an equitable basis for apportioning costs. So that its charges may
be allowable for use in apportioning costs under the program, each facility should have
an established charge structure which is applied uniformly to each patient as services are fur-
nished to the patient and which is reasonably and consistently related to the cost of providing
the services. While the Medicare program cannot dictate to a provider what its charges
or charge structure may be, the program may determine whether or not the charges are
allowable for use in apportioning costs under the program. [emphasis added]
is language can be interpreted in dierent ways. However, the general directive indicates that
charges are supposed to be uniformly based on costs.
While we have discussed a number of concepts, there is a very basic question. If charges are based
on costs, then the hospital or related healthcare provider must know their costs. is sounds very
simple. If a healthcare provider has invested in cost accounting, then there is a good chance that the
costs for services can be accurately determined. If we are dealing with a drug, supply items, or device,
then the acquisition costs will be known. While some hospitals and other larger healthcare providers
may have cost accounting, many, if not most, smaller hospitals and healthcare providers do not have
cost accounting. us, the costs for various services are simply not accurately known.
Case Study 3.23: Setting a Charge for a New Procedure
Sylvia, the chargemaster coordinator at the Apex Medical Center, has a request to place a charge in
the chargemaster for a new procedure. She has spoken with the service area, and a charge of $560.00
has been suggested. is is a guesstimated charge based on roughly similar services. Sylvia decided
to contact another hospital on the other side of the state to see if it performed this service and what
it charged. She was surprised to nd that its charge was $1,800.00.
*
is assumes that the preferential fee schedule does not go lower than the payments from the Medicare
Laboratory Fee Schedule (MLFS).
Healthcare Provider Charges and Charge-Based Payment Systems ◾ 63
In Chapter 6, we will look at this case study again from a purely compliance perspective,
which involves the concept of price xing. For our purposes, do you think Sylvia will be inu-
enced to raise the charge above the guesstimated $560.00? Will the charge chosen correlate to the
Medicare CCR as developed through the cost report? Will this charge appear as reasonable from
a patient’s perspective? While the answers to these questions are subjective, setting charges for
healthcare services is less than a precise process.
Let us join Sylvia, the chargemaster coordinator at the ctitious Apex Medical Center. For this
case study, assume that the CCR for these devices is 0.40 as derived from the Medicare cost report.
Case Study 3.24: Pricing Drug-Eluting Stents
A new drug-eluting stent is starting to be used for coronary (and vascular in the future) catheter-
izations. e acquisition cost for the stent is $2,800.00. Because the CCR for Apex is 0.40, for
Medicare patients the charge is $2,800.00/0.40, which equals $7,000.00. For self-pay patients, the
top tier in a graduated pricing scheme is to multiply the $2,800.00 by 1.50, which equals $4,200.00.
Of course, there is a managed care contract that pays 100 percent of the cost for these stents, but
according to the contract, the hospital can only mark up the charge to 10 percent above the acquisi-
tion cost. us, a price of $2,800.00 times 1.10 or $3,080.00 is used for this payer contract.
Among the questions raised in this case study, there are two that should be mentioned. First,
there should be an immediate concern regarding why the Medicare beneciaries are being charged
more than certain other patients. Second, the $7,000.00 charge for Medicare seems quite high.
e rst concern involves the Medicare charging rule. Generally, Medicare patients should not
be charged more than other patients. e second concern involves a seemingly high charge. is
high charge results from the overall charge structure at Apex. In this case, the CCR of 0.40 means
that Apex’s charge structure is relatively high because this CCR represents a 2.50 multiplying fac-
tor when costs are marked up to charges. Because CMS will take the $7,000.00 and then convert
it back into costs by multiplying by 0.40, that is, 0.40 * $7,000.00 = $2,800.00, Apex has little
choice but to charge this amount.
In some cases, hospitals may use only a single set of charges for everyone and thus use the seem-
ingly high Medicare charge. is approach will tend to engender public comment and consternation.
Healthcare Provider Charges and Public Scrutiny
Transparent pricing is one of the later developments in the whole area of setting charges for
healthcare services and products. Individuals who have health insurance are often oblivious to
the charges because their insurance coverage has already negotiated some sort of a discounted
arrangement by limiting allowed charges. However, for those who are uninsured or underinsured,
the charges for even seemingly minor encounters can seem daunting.
e availability of charges to the public, in many cases, is not particularly illuminating.
Certainly, knowing what a particular physician or clinic charges for a routine visit, whatever con-
stitutes a routine visit, can be useful. Looking at a hospital’s chargemaster with thousands of line
items will make little sense to patients. When patients are shopping for healthcare services, they
will be much more interested in the total charge for a particular procedure or tests. While some
healthcare providers do provide charges for packages of services, this is not yet the norm.
Case Study 3.25: Packaging Pricing at the Apex Medical Center
For a number of dierent surgical services, the Apex Medical Center has been receiving more
requests from patients for a at-fee charge arrangement. One of the areas is for cataract surgery.
64 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
Apex has typically developed charges through the chargemaster on a case-by-case basis. Sylvia, the
chargemaster coordinator, has formed a small team to develop at fees for certain surgical services.
Computer reports have been generated showing what the typical charges are for the various surgical
services that are under consideration. e biggest area of concern is that some cases involve compli-
cations that can raise the costs so that the at-fee charge may not be high enough.
Healthcare providers, as with most business operations, will respond to public demand.
Packaged pricing can certainly assist in the public being able to be good shoppers in some sense.
However, the range of healthcare providers available to any given individual is generally limited,
so that comparative shopping is really just beginning in healthcare.
Summary and Conclusion
e charges made by all types of healthcare providers inuence payment systems and overall pay-
ment amount to healthcare providers. In some cases, the given charge will directly aect payment.
is can occur if the payer pays a given percentage of all the charges made on a claim. In other
instances, the charge-based payment is localized to a specic service, item, device, or pharmaceuti-
cal drug. Payment in these cases is on a pass-through process in which the cost of the item is paid
at some small percentage above cost.
In other cases, the charge structures indirectly inuence payment rates. is is particularly
true with PPSs and to a lesser extent with fee schedule payment systems. As a general rule, the
charge structures for all healthcare providers have become inated over the years. While there are
many factors that drive high healthcare prices, one factor is called cost shifting. As various payment
systems have been developed over the past two decades, reimbursement to healthcare providers has
been curtailed. So, those patients who do not have insurance coverage of some sort end up paying
more to make up for the losses incurred from payers using sophisticated payment mechanisms.
Healthcare providers use various approaches for establishing charges. e large providers such
as hospitals and integrated delivery systems use what are called chargemasters. While dierent
terms can be used, such as the CDM, the basic idea is that there is a large list of charges for thou-
sands of items, such as supplies, pharmaceuticals, laboratory tests, radiology tests, surgery charges,
and room charges, and the list becomes quite lengthy.
e general goals for setting charges include that they:
◾ Be based on costs (regulatory requirement);
◾ Be Consistent throughout the chargemaster (regulatory requirement);
◾ Be in conformance with federal and state statutory requirements;
◾ Meet any third-party payer contractual obligations;
◾ Be easy to understand, develop, and maintain;
◾ Be geographically consistent (geographic pricing);
◾ Be competitive with similar types of providers (market pricing);
◾ Be amenable to public scrutiny (transparent pricing); and
◾ Optimize reimbursement across a broad array of third-party payers and dierent payment
systems (strategic pricing).
is generalized set of goals sets a very high bar for achievement. Particularly with the advent
of public scrutiny of charges, that is, transparent pricing, some healthcare providers would like
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