Weapons of Mass Corruption: Hospital Chargemasters
Insurance carriers are taking employers for a ride, and patients are suffering as a result.
Over 100 million Americans (nearly 1 in 3) get their health insurance through an employer that is self-insured (often referred to as “self-funded”). That means it’s the employer, not an insurance company, that’s bears most of the financial risk of providing healthcare benefits for their employees.
In the case of employers with self-funded plans, the insurance carrier pre-negotiates rates with providers on behalf of employers. Some employers may be government offices, or non-profits, but most employers are for-profit companies participating in a normal economy, something we don’t find in healthcare. And in normal economies, employers are used to seeing the cost of many things go down over time, or go up slowly. That’s not how it works in healthcare.
When it comes to healthcare, employers have become accustomed to seeing costs rise at two-to-three times the rate of inflation. In fact, a report just came out pegging the increase in health care costs for 2018 at 4.6 percent. That’s more than twice the inflation rate in the same year.
Employers can be demanding. They expect their insurance carriers to negotiate the very best possible prices. But they don’t. In fact, one health insurance executive told us that her annual bonus was based on keeping annual hospital price increases to five percent. That’s right–maximum bonus if you can hold prices to only twice the rate of inflation. Only in America’s crazy healthcare system would you find something like that….
So how do insurance companies convince employers that they are doing their job of keeping costs down when they really aren’t? It’s simple–they play the chargemaster game
Here’s how the game works…
The insurance executive walks into the hospital and says, “We’re currently paying you 40% of billed charges. We need to knock that down to 35% so we can tell the large employer down the street that we’re driving costs down for them.”
The hospital executive says, “No way, man. Too low. We can’t do 35%.”
That’s when the hospital executive winks, and says, “Hey buddy, relax. Remember, I didn’t tell you what you could charge me.”
The document that the hospital uses to establish it’s “billed charges” is called the chargemaster.
The chargemaster was originally created shortly after Medicare became law in 1965 and it’s turned into more and more of a Weapon of Mass Corruption ever since. Today, because of years of the chargemaster game, chargemasters often have prices in them that are five, ten, sometimes 100 times what they actually charge insurance companies. And yet they call these chargemasters the equivalents of “list prices” in other business (MSRP for autos).
So every year the chargemaster price goes up and the negotiated price goes down, but not enough to offset the increase in the chargemaster. And since it’s all kept secret from employers and patients, no one really knows what the cost of anything is. The result: 4.6% in 2018, twice the rate of inflation.