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Charging for Hospital Care Based on Cost Instead of Profit

By Sabrina Morello

The cost of healthcare is very important to consumers, especially those on tight budgets.  No one should have to choose between getting a needed medical procedure and putting food on the table.

We have previously blogged on the problem of overcharging in hospitals, and in this installment we highlight a solution to overcharging that will not only improve care but will also bring down health care costs.

Ballooning costs

Health care in this country costs $2.7 trillion a year, and according to a study by The Journal of the American Medical Association, about one third of that, or just under $1 trillion, accounts for hospital care.

And, by 2015, the government expects total costs to surpass $3.3 trillion, with more than $1 trillion attributed to hospital care. Our health care system is far more expensive than that of any other country, but our results are not far better. With hospital care alone accounting for such a large portion of the total health care cost, it is important to focus cost-related solutions on hospital systems in order to lower bills for consumers without sacrificing the quality of care.

Cost v. Charge

One possible solution for cutting costs is for hospitals to use a “cost master” system instead of a traditional “charge master” system, which has been the standard procedure in hospital pricing. Under the charge master system, hospitals estimate what something costs and then mark it up, sometimes as much as 400-500 percent. The New York Times published examples of charge master prices from California Pacific Medical Center in which one Tylenol with codeine pill, which should cost about $0.50, was charged to patients at $36.78.

In contrast, a “cost master” system tracks and displays the actual cost of each procedure, piece of equipment, and supplies used, which allows them to determine whether doing one thing is really more important than doing another thing, thus standardizing care and eliminating waste.

Based on a story in the Wall Street Journal, it was reported that Intermountain Healthcare, a hospital network in Utah and Idaho consisting of 22 hospitals and 185 clinics, has had great success in this area. The network’s mission statement is “the best medical result at the lowest necessary cost” and it has developed methods to accomplish that goal which are now being imitated across the country. Intermountain already has saved around $250 million and about 1,000 lives a year with its data-driven clinical management system, which Dr. Brent James, Chief Quality Officer for Intermountain, calls a “cost master” system as opposed to the widely used “charge master” system. Intermountain expects even greater savings once the system is incorporated into their electronic medical records system.

The “cost master” method has been successfully used in other industries, but the Intermountain example is the first time it is being used in healthcare. The network employs a team of management engineers to survey the hospitals and gather the necessary information regarding the length of specific procedures and tests, what and how much supplies are used, etc. This information is used to assess the true cost of a procedure, which allows the network to measure and manage total costs. In an effort to promote transparency, Intermountain will make these costs, as well as the quality outcomes, available to patients so that consumers will have the opportunity to learn the actual cost and quality of the care they receive.

It is encouraging to find examples of where medical care was delivered in a safe, effective way without charging excessive prices to patients. Hopefully more hospitals will start to follow the “cost master” approach.

Sabrina Morello is a Public Citizen health policy fellow