Hospital Retail Pricing For Dummies

At some point in the distant past, someone, let’s call him Bob, figured the cost of an aspirin. In a hospital, this includes the cost of ordering it, documenting it being given, billing it, paying the nurse to make sure it’s delivered and taken, stocking the pharmacy etc. It’s of course not the single cost of a single pill. Much like a restaurant charges you more for a chicken dinner than you can buy a whole chicken for at the store. Hospitals – like all businesses – have costs.

Hospital accountant Bob was asked to figure out the price of one aspirin. It came to, let’s say, $8. Yes you can buy it for less at the store, but you’re not at the store, you’re in hospital. So it’s $8. Then Bob added that number to the chargemaster list of all things in the hospital, which is thousands and thousands of things.

One year later, Bob’s boss says “we need to up the price of some stuff to account for inflation”. Bob looks at the chargemaster list and thinks to himself, “That’s a big list of thousands and thousands of things. I’m not figuring all these out one by one. Let me add inflation of 4% to pretty much everything”. And Bob said “Let there be CPI”. And behold. There was CPI.

Year by year, all the prices on that list go up. The real world costs may go up or down or stay the same, but Bob’s prices go up 4% every year regardless. But the insurance companies don’t pay those prices. They negotiate with the hospital to pay Usual and Customary prices. They don’t shortchange the hospital on the chargemaster. It never came up. It’s just a price in the system in case Bob’s boss wants to know how much an aspirin costs. No-one actually pays the price on the chargemaster.



People without insurance get billed the chargemaster price. People who haven’t met their deductible yet get billed the chargemaster price. If there were some arcane complications, sometimes Medicare gets billed the chargemaster price. In point of fact, your insurance company technically gets billed the same price too, but they’ve already agreed on a different price, so it’s just for show.

Many years later, the price has crept up to $50 but the insurance companies sit down across the table every year and everyone agrees it should really be $8 and you go to hospital and you get an aspirin and you see a bill but it’s not called a bill it’s called an Explanation of Benefits and on it it says

Thing - - Price - - Covered - - Balance - - Customer Owes
Aspirin - $50 - - - $8 - - - - -$42 - - - - $0

So the hospital gets to look like they gave away $42 in charity, the insurance company gets to look like they did you a big $42 favour, and you get to look like a muddled chimpanzee at a maths award ceremony.

Unfortunately, once in awhile, which turns out out be roughly 5% of the time, the person who gets the bill doesn’t actually have insurance. No-one collectively bargained on their behalf. So they get stuck with the $42 balance.

“Sounds good” you say, “probably fat cats from Dubai, they can afford to pay it”.

But no, it’s the poor. The indigent. The undocumented. The tourists who come from countries that have never billed them for healthcare their whole lives.

So they don’t pay. And they get sent to credit reporting agencies. And they get letters. And they feel sad. All because they didn’t pay $42 that no-one was expecting them to pay in the first place.

“Ah well” you say, “it’s only 5% of the population”.

But what about people with high deductibles? They get charged the full amount too. That $42 comes right off the deductible. Or those with low quality insurance plans. They end up paying some portion, maybe 20% of the “balance”. Of the $42 that no-one was expecting anyone to pay in the first place.

Even better, at the end of the year, the hospital probably might go back to the government and say “hey, I lost $42 here, can you spare some change?” And the government hands out a portion of it right back from your taxes or little-known line items on your fully paid hospital bill back into the hospital. To pay the $42 that no-one was expecting in the first place.

All because Bob was asked to make a list of prices that no-one uses.

Thanks, Bob.

So while there are many, many good reasons why an aspirin costs $50, and there are many, many reasons why hospitals are great places full of inspiring people looking to perform a public good, behind it all are many, many reasons why we need to seriously reform reimbursement, pricing, consumption, utilisation, salaries and more.

And this is why I work in healthcare transparency.

*Disclaimer. Yes I have over-simplified in a few places here. but the general story holds true. Charges are fabricated numbers that exist purely for fanciful, fantastical notions on IRS 990s, UCP awards, and safety net provisions.