Charge

Steven Brill's Time article, "Bitter Pill" sent a shock wave through the healthcare industry and prompted a response from the American Hospital Association to correct a series of mis-statements and financial assumptions.
According to Brill, he spent seven months analyzing hundreds of bills from hospitals, doctors, drug companies and medical equipment manufacturers to find out "who is setting such high prices and pocketing the biggest profits."
Some of his conclusions are as follows: Hospitals arbitrarily set prices based on a mysterious internal list known as the "chargemaster;" markups and inflated charges are rampant; chargemaster rates were set a long time ago and go up automatically; and patients are powerless against confusing, overpriced bills.
Another report, from non-profits Catalyst for Payment Reform and the Health Care Incentives Improvement Institute, shows that 29 states get a grade of "F" for their lack of laws to provide for healthcare cost transparency.
At the center of this storm is the CFO who must answer for a hospital's chargemaster. How does a CFO defend the chargemaster against such claims?
As a 22 year veteran of coding and chargemaster technologies, I believe that the growing distrust of hospital billing and the chargemaster is based on some misunderstandings by the consumer, but the full explanation of the chargemaster falls squarely on the shoulders of hospital CFOs.
Brill is correct in that hospitals do use their chargemasters to determine the charges that are assigned to a patient's bill. However, his suggestion that hospital chargemasters are mysterious is inaccurate. Hospitals spend significant time and resources reviewing their chargemaster on an annual basis, adjusting for thousands of device price changes, drug price changes, and payer fee schedule modifications. Hospitals also typically seek external reviews through large CPA firms or hospital price consulting firms.
What Brill should have focused on is hospital reimbursement. The reimbursement system in a hospital is a lot more complicated than walking into a local Walmart, picking up something off the shelf and paying the sticker price. As much as 80 percent of a typical hospital's reimbursement comes from fixed based payers, such as government programs, HMOs and Workman's Compensation. For the most part, these reimbursements don't even cover the costs incurred. Unfortunately, this leaves private pay and commercial payers to foot the bill on these cost differentials and deficits.
Taking this into consideration, it forces hospitals to increase their charges a minimum of 8 to 10 percent annually to realize a 2 percent increase in payments.
Hospitals have less control over the cost of patient care due to many factors. If you look at the average hospital charge, a range of 20-30 percent of the cost is for supplies, and Physician Preference Items represent about 60 percent of that 20 to 30 percent. In many cases, the use of new technology may be good for the patient; however, it often leads to even lower margins for the hospital.
How do we bridge this gap between consumer perception and reality? There are some steps that CFOs can take to avoid potential media and consumer backlash on the chargemaster:
• CFOs should benchmark their chargemaster against current payer contracts and peer hospital data. Find the outliers and bring their chargemaster into alignment. There are several Charge Description Master (CDM) maintenance technologies on the market today that allow organizations to benchmark their CDMs to payer fee schedules other than CMS, as well as compare their charges to equivalent peer hospital charges.
• CFOs should use effective technologies to link the chargemaster and item master, and as a result, create a better link between supply chain software and the accounts receivable/ invoicing system.
• CFOs should break down the silos between the VP of Supply chain and the VP of Revenue Cycle, and jointly come up with a strategy to ensure charges are in line with costs. Better yet, include all departments involved in the cost data capture including pharmacy, purchasing, finance and any other appropriate ancillary departments.
• CFOs should consider using a strategic pricing strategy. Develop defensible and optimum chargemaster pricing with strategic pricing. This pricing strategy establishes prices based on unit costs, market data or a hybrid of both.
• Finally, CFOs should have enough confidence in their chargemaster that they would be willing to put it online.
By taking these five steps, not only can a CFO defend the chargemaster, but the chargemaster may very well become an important competitive advantage and strategy for containing costs.