Hospital Charges Explained

The dollar amount a hospital sets for services before negotiating any discounts is known as the charge. This can be different than actual cost or amount paid for the care.

The amount collected by a hospital for each service is almost always less than the amount charged. Hospitals do not receive billed charges because:

  • Government programs such as Medicare and Medicaid typically pay health care providers much less than the billed charge. These payments are determined solely by the government. Hospitals have no ability to negotiate the reimbursement rates for government-paid services.
  • Commercial insurers or other purchasers of health care services usually negotiate discounts with hospitals on behalf of the patients they represent.
  • Hospitals have policies that allow low-income persons to receive reduced-charge or charity care.

Negotiations between hospitals and health care purchasers generally begin with the charge amount. While each hospital’s charge structure may vary in important ways, charges represent a consistent, though imperfect, way to compare health care costs.

Why Charges May Differ Among Hospitals

There are many reasons that charges may differ among hospitals. Among them are the following:

  • New technology: The equipment hospitals use to provide services differs in age, sophistication and frequency of use and may impact the charges of the hospital.
  • Staffing costs: Salary scales may differ by region and are typically higher in urban areas. Shortages of nurses and other medical personnel may affect regions differently. Where shortages are more severe, staffing costs, and, therefore charges, may be higher.
  • Intensity of care: Some hospitals are equipped to care for more severely ill patients than others. Patients within the same diagnosis or procedure category may need very different levels of service and staff attention, causing a variation in charges.
  • Range of services provided: Hospitals differ in the range of services they provide to patients. Some may provide the full range of services required for diagnosis and treatment during the stay. Others may stabilize patients and then transfer them to another hospital for more specialized or rehabilitative care.
  • Service frequency: The per-patient cost of services is generally higher if the type of hospitalization occurs infrequently at the hospital. Furthermore, a single case with unusually high or low charges can greatly affect a hospital’s average charge if the hospital reported only a few cases in a given time period.
  • Documentation/Coding: Hospitals are required to follow correct coding guidelines and to code all the conditions documented in the patient’s medical record. The hospital bill will reflect charges to the greatest level of specificity as documented in the medical record by clinicians. Hospitals vary in their coding systems and personnel and in the number of billing codes they routinely include on a billing form.
  • Capital expenses: Hospitals differ in the amount of debt and depreciation they must cover in their charge structure. A hospital with a lot of debt may have higher charges than a hospital not facing such expenses. Furthermore, hospitals may choose to lease or purchase equipment. The choices made about financing of capital projects may affect charges in different ways.