Apples and Oranges: 6 Different Types of Hospital "Costs"

Healthcare costs have faced an ample amount of scrutiny in the past few months, and detailed information on hospitals' prices has become much more accessible. While this publicly available data is a step in the right direction for transparency in healthcare, it also demands a finer understanding of hospitals' various types of costs.

Many financial figures fall in the big "cost" bucket, but one has been getting the most attention: chargemasters. These are the list prices hospitals establish for services.

In March, journalist Steven Brill made waves with his TIME cover story, "Bitter Pill: Why Medical Bills Are Killing Us," which investigated hospital billing practices, especially those of nonprofits. The article criticized hospitals' chargemasters, saying prices were not consistent with other hospitals and did not appear to be based on anything objective, such as cost.

In May, for the first time ever, CMS released hospital chargemaster data to the public for the 100 most common Medicare inpatient diagnostic related groups. It did the same last month for outpatient DRGs, providing data from calendar year 2011 on hospital-specific charges for the 30 most common ambulatory payment classifications, or APCs, for hospitals paid under Medicare's outpatient prospective payment system.

Despite the influx of information, critics have questioned whether journalists' exposés, CMS data and various other resources on hospital costs are truly comparing apples to apples. Some healthcare professionals are especially concerned figures may confuse consumers, who may mistakenly believe hospitals are collecting the full chargemaster amount without factoring in payer reimbursement, charity care and uncompensated care.  

In a recent report from The Advisory Board, Executive Director Michael Koppenheffer explains the six different types of hospital "costs."

1. Hospital input costs. Mr. Koppenheffer defines these as the costs a hospital incurs to provide care. It includes both the fixed and variable costs involved in a patient's treatment. Variable costs include things like salaries for nurses and staff and costs of supplies and medication, whereas fixed costs include overhead costs to keep the hospital running, such as those for electricity, facility maintenance, major equipment and the hospital's land.

Some people may discuss variable and fixed costs as direct and indirect costs, as well, referring to which costs are directly associated with patient care versus those that arise from other overhead expenditures.

2. Hospitalization costs. This refers to the actual money private payers, patients or federal health programs end up paying hospitals to reimburse for care provided. Hospitalization costs are generally higher than hospital input costs because hospitals rely on payments from private payers, which tend to be above hospitals' input costs to balance payments from federal payers. Medicare and Medicaid reimbursement tends to fall below hospital input costs, which would result in unprofitability if not balanced out.

3. Hospital charges. These are the list prices, or "sticker price," the hospital sets for its services. These are the figures that have come under increased public scrutiny. Critics say this is problematic, as a hospital's charges may have little correlation with its actual hospitalization costs, which affect patients more directly. Charges are higher than hospital input costs because hospitals build-in "wiggle room" in that initial sticker price, knowing it will be whittled down throughout the negotiation process with insurers. Regardless, many people, including Mr. Brill from TIME, have criticized hospitals for making those prices so large from the start.

4. Total cost of care. This is the amount a payer expends on healthcare services in one year on behalf of one individual.

5. Health insurance costs. These are what employers and individuals pay each year in premiums to their respective health insurers for coverage.

6. Total cost of care for a population. This reflects the total cost it takes to care for each person in a defined population. The cost for each person is summed to arrive at this figure.

Mr. Koppenheffer ended by noting the one common thread in all six costs: Each has been rising year after year.

More Articles on Hospital Costs:

TIME Journalist Steven Brill to Senators: PPACA Price Transparency Won't Lower Costs
State Websites Don't Share Most Useful Healthcare Prices, Study Says
CMS: Hospital Outpatient Charges Vary Just as Much as Inpatient

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