Across the country, states want to address health care costs that are too high and growing too rapidly. Knowing what hospitals list as charges for their services – featured in a list called a hospital chargemaster – isn’t the answer.
The call for chargemaster transparency was spurred by the writings of Stephen Brill, a lawyer, journalist, and entrepreneur who founded The American Lawyer magazine and the cable channel Court TV, who highlighted both the outrageous levels of some hospital charges and the variation in those charges from one hospital to another in his book The Bitter Pill.
In response, some states began collecting that information. The Trump administration reinforced the public interest in hospital chargemaster lists by issuing a rule in 2018 that required hospitals to publish their chargemaster prices online. However, this attention to hospital chargemasters is misplaced because the chargemaster rates hospitals use are nearly meaningless.
What is a chargemaster?
A hospital chargemaster is the collection of standard list prices for hospital services. Chargemaster rates are essentially the health care market equivalent of Manufacturer’s Suggested Retail Price (MSRP) in the car buying market.
Hospital chargemaster rates are the equivalent of Manufacturers Suggested Retail Price or MSRP in car buying markets. They are little more than the price a seller would ideally like to charge a consumer. Hospitals set their own chargemaster rates – there is no legal requirement or set formula a hospital must follow when establishing the basis between chargemaster rates and costs. As a result, chargemaster rates are unlikely to be accurate reflections of actual hospital expenses.
Recently, The Montana Office of the Commissioner of Securities and Insurance examined the ratio between 10 acute hospitals’ expenses and chargemaster rates.
The state concluded that what the hospitals listed as chargemaster rates for all payers would cover between 192 to 384 percent of the hospitals’ actual costs.
A hospital may also change chargemaster rates at any time – prior notification is not always required – and mark-ups on hospital-purchased services and supplies like durable medical equipment are not disclosed. All of these features make it difficult for public and private payers to use chargemaster rates as a way to establish relevant prices to pay to hospitals. Hospitals instead negotiate discounts off their chargemaster rates with individual and group plans.
In fact, almost no one actually pays the publicized chargemaster rates. The vast majority of health care consumers are represented by a payer of some kind, such as a commercial health insurance company, Medicaid, or Medicare. Commercial insurers negotiate the actual prices they pay during the process of contracting with providers. Medicare and Medicaid establish their own payment levels independent of hospitals’ chargemaster lists – Medicare through the federal government and Medicaid through state governments. (The cruel irony of the chargemaster is that the uninsured are the most likely to be billed chargemaster rates because they are not represented by a payer. NASHP will be exploring this issue in in future work.)
These problematic chargemaster features also impede the ability of payers to have a comprehensive and accurate understanding of hospitals’ financial positions. Nonprofit hospitals are required to report charity care, bad debt expenses, community benefit initiatives, and uncompensated care. When these expenses are reported at the chargemaster level, expenses can be overstated, potentially making a hospital’s financial position look worse than it actually is.
Focusing state policy efforts on demanding more transparency in chargemasters lists misses the boat. This transparency reveals little about the trends in health cost that deserve attention: High costs deserve attention. High prices deserve attention. Variation in prices deserves attention. Chargemaster rates not so much.
Policymakers interested in transparency would do well to focus policy efforts on the following rather than looking at chargemaster rates:
What insurers and consumers actually pay for health care;
How those payments compare to what is paid for the same service and
Perhaps most importantly, how that amount varies across providers and payers
Until policymakers move away from focusing primarily on chargemasters, payers will be no better off than car buyers who struggle to figure out what the MSRP sticker price really means.
Written with support from NASHP’s Health Systems Cost Project funded by Arnold Ventures.