Cost Variation

Consumers seek value from the health care they receive. Being aware of the many factors most traditionally cited as contributors to price variation may help you better understand which of them might affect the cost of care at a given hospital. Click here or on the image below for a visual representation on the variety of factors that influence price variation at health care facilities.

Why do prices vary between hospitals for the same procedure or service?
There are many variables that impact hospital prices. These include:
Patient severity: Patients who are sicker, have multiple medical conditions or chronic illness generally require additional services, resulting in higher hospital charges.
Payer mix: Each hospital has a unique mix of payers. Government programs such as Medicare and Medicaid generally pay hospitals at rates less than the costs of providing care. Hospitals cannot remain financially viable if payments are consistently below costs. Hospitals provide services to all patients that access the emergency department regardless of their ability to pay. Some patients seek treatment at the hospital emergency department when they are unable to locate any other provider who accepts their insurance or if they lack insurance. Hospitals generally have charity care policies that provide assistance to patients in need that meet the requirements established by the hospital. However, hospitals that have a higher percentage of such patients ultimately must attempt to recover a greater percentage of their operational costs by shifting their unreimbursed costs to private insurers.
Insurers: Insurance companies negotiate discounts with hospitals on behalf of the patients they represent. There are 541 insurance plans offered in Colorado from 18 carriers. Each insurance company negotiates different rates with hospitals. Even for identical medical procedures, hospitals get paid different amounts by insurers.
New technology: Hospitals with new technology may have higher charges than those with older equipment. The replacement cost for new equipment is typically higher than the original cost of the old equipment.
Labor costs: Salary and benefit costs vary by community and are generally higher in urban areas. Shortages of nurses and other professional staff may increase hospital costs.
Range and complexity of services provided: Hospitals differ in the range of services provided. Some provide a full range required for diagnosis and treatment, including very specialized services. Other hospitals may stabilize patients and then transfer them to another facility for specialized care. Hospitals provide services to ensure access to health care in their community even when they lose money on those services. Such losses force hospitals to shift costs to private insurers. Services vary by community, but some examples include burn centers, trauma care, obstetrics, high-risk nurseries, poison control centers, medical education, services for the poor, organ transplants and other programs.

Why is there a difference between what hospitals charge and the payments they receive?
Federal regulations require a hospital to charge all its patients the same amount (with limited exceptions) for the same service. The amount collected by the hospital is almost always less than the amount billed for because:

  • Government programs, such as Medicare and Medicaid, typically pay hospitals much less than the billed charge. These payments are determined by government agencies and hospitals do not have any ability to negotiate these rates.
  • Hospitals typically have policies that allow low-income persons to receive reduced-charge or free care.

Why do payments vary between hospitals for the same procedure or service?
While the APCD does not include Medicare data, it is helpful to understand that even government payers often pay different amounts of the same service. Medicare payments to hospitals vary depending on the Medicare payment policy based on the unique characteristics of the hospital.
Wage index: For both inpatient and outpatient, the national payment amount is adjusted by an area wage index to reflect regional variation in hospital salary and benefit rates. Generally hospitals located in urban areas tend to have a higher wage index.
Graduate medical education: Hospitals that have residency programs to train individuals after completion of medical school receive additional payments from Medicare. These payments provide a partial offset to the hospital costs for training these future physicians (salaries and benefits for residents, faculty teaching stipends, administrative cost to operate the residency programs). Hospital residents provide services to all patients, not just Medicare patients. These payments are crucial for ensuring that patients in the future have an adequate supply of physicians to meet their medical needs.
Indirect medical education: Medicare provides payments to teaching hospitals to reimburse the additional indirect costs of patient care associated with operating an approved teaching program. These costs include tests utilized to diagnose and treat patients.
Disproportionate share payments: Hospitals that treat a large number of low-income patients receive additional Medicare and Medicaid payments to offset some of the losses incurred in treating these patients. Low-income patients tend to be sicker and more costly to treat than other patients with the same diagnosis. Higher costs also result from the need for additional staffing and services, such as translators and social workers, to care for low-income patients.
Critical access hospitals (CAHs): Hospitals with fewer than 25 beds may be classified as critical access by Medicare. These hospitals are reimbursed at 101 percent of cost allowable by Medicare, which is lower than the full cost of providing care. This Medicare payment method recognizes the unique challenges CAH facilities face in providing health care services in rural areas. This special designation helps ensure access to health care for all patients in rural areas.

Hospitals have an important to role to play in efforts to reduce inappropriate variation; however, hospitals cannot address it alone. Solutions will require meaningful partnerships with physicians and other providers, policymakers, payers and community stakeholders.

Click here for a visual representation on the variety of factors that influence price variation at health care facilities.