Why do Hospitals Offer Lower Rates to Some Payers?

We Answer Questions About Hospital Payer Rates

Recently we were asked by a hospital client to address three common questions they hear from the public regarding price transparency. So, in our next three blog posts we’ll answer the following questions:

For our first question, let’s look at why hospitals offer lower rates to some payers.

Actual payment terms that are negotiated between a health care provider and a health plan are the result of many underlying economic and social objectives. The difference between some payers, which can be dramatic, is sometimes presented as evidence of wrongdoing, but it’s the result of hospitals balancing their budgets, based on previously negotiated terms that are the result of many complex economic and social pressures and limitations.

Governmental payment is less than cost for most procedures.

Hospitals must make up this deficit. It’s a unique challenge for the industry. Most hospitals provide more than 50% of their services to governmental clients (Medicare and Medicaid). Uninsured patients, or those with high deductibles, pay a very small percentage of their treatment. To continue providing care, pay their nurses and doctors, and invest in their facilities and equipment hospitals must make up this cost differential from insured payers.

Medicine doctor and stethoscope working on digital tablet.

Providers and payers enter into unique agreements that reflect the needs of that payer’s patient population.

Commercial health plans have variation in their payment rates. There may be several hundred, or more, specific payment terms in any individual contract. One commercial contract may have lower rates for imaging procedures but higher rates for outpatient surgery than another plan. These differences in payment can be negotiated to reflect the needs of a specific payer’s patient population and the number of patients that utilize those services. Because of the large number of services provided by a hospital, it is very difficult to determine whether overall payment rates are higher or lower in one commercial plan compared to another.

Payment differences result from the different types of services each patient utilizes during their care.

The intensity of service provided may also create payment variation between plans that may not be real. Patients with the same commercial contractual payment terms may experience payment variation due to the intensity of service, e.g. time in the operating room or length of stay at the hospital.

Hospitals continue to work diligently to maintain the balance between serving their community and investing in their continued existence. These three variables may help explain why patients may see dramatic differences in payment.

Hospitals are in a unique position where what they are paid and how they are paid can vary dramatically between each person who walks through their door, even if they have the same insurance. There are a lot of factors in play as hospitals balance these differences.

We’ll look at the relationship between insurance contracts and what members pay next week.

Have questions? You can contact us here.


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