Hospital and medical costs are receiving lots of attention in this political season. Closures of rural hospitals are damaging rural communities. To understand these issues, it helps to understand some basics of community hospital finance and charges.
Hospital bills are very confusing. The claims and denials moving from hospitals to insurance companies to individuals are packed with obscure terms. Behind all the complex paperwork, there are some basic principles at work.
My explanation is full of generalizations. There are exceptions to every statement. But overall, this is how things work:
For payment purposes there are three kinds of patients:
- Those without insurance.
- Those covered by government programs — Medicaid for low income people and Medicare for people over age 65 and some folks with disabilities.
- Those with private insurance.
Regardless of their intentions, most people without Medicaid, Medicare or private insurance can pay very little toward the cost of their hospital care. Hospitals frequently put self-pay and no-pay patients in the same general bookkeeping category.
Medicare and Medicaid programs pay some, but not the full cost, of the care their beneficiaries receive. Medicare pays a little less than actual costs to the hospital. Medicaid, a joint state-federal program, typically pays a lot less than the actual cost of care.
Hospitals generally lose money on their self-pay, Medicare and Medicaid patients. Those losses have to be covered by charging more to patients with private insurance. If those losses aren’t covered, the hospital will go broke and close. Rural hospital closures are relatively uncommon in states that have expanded their Medicaid programs, because some payment is better than no payment.
Bills for care of patients with private insurance cover the costs of the care of the insured person. In addition, they include hidden margins covering the unmet costs of care of self-pay, no-pay, Medicare and Medicaid patients. Thus, patients with private insurance are charged substantially more than the cost of the care they receive.
Private insurers, though, typically require hospitals to show a “discount” for their insured patient customers. To meet that demand for imaginary discounts, the hospital simply makes up and publishes a list of inflated charges for each service or procedure for uninsured patients. Hospital management rationalizes that these imaginary “full charge” rates don’t matter because no one pays them. They are, however, the figures that are charged to the uninsured, reported to credit agencies and sold to debt collectors for a few pennies on the dollar.
It’s an unfair situation. It benefits legislators, sparing them the necessity to appropriate the full costs of Medicare and Medicaid. It benefits insurance companies by inflating their payments, and hence their premiums, of which they keep 10 to 15 percent. But it causes a lot of distress and bankruptcies for people trying to pay their own bills.
Wayne Myers is a retired pediatrician and rural medical educator. He served as the head of the federal Office of Rural Health Policy 1998 through 2000 and is a former president of the National Rural Health Association. He and his wife, JoAnn, farm in rural Maine.