A Bitter Pill: Hospital Charges vs. Actual Costs

Issues & Policies

It’s a problem so big that Time magazine devoted an entire issue to it (“Bitter Pill: Why Medical Bills Are Killing Us,” March 4, 2013): Hospitals routinely charge more—often 10 times more—than their actual costs for medical services.

It’s also a key issue for Connecticut businesses because of a ruling last fall by the state Workers' Compensation Commission that insurers and employers have to pay the full rates charged by hospitals in settling claims.

Most hospital reimbursement rates for the last two decades have been the result of negotiations—which for the most part has worked well for both employers and hospitals alike. But hospitals would be pleased not to negotiate under the commission’s decision (which is being challenged) because it guarantees higher payouts from the already lucrative workers’ compensation business than they would get if they did negotiate.

That’s why the term “actual costs” is used in state workers’ comp law. It was deemed a necessary tool for negotiating hospital fees, for without it, employers had no leverage and would face unreasonably high costs. (Worker’s comp claims comprise less than 2% of all medical claims, thus the low volume means little leverage.)

Having the tools to negotiate is key, because as Time revealed, hospitals and health care providers offer services at prices that very often bear little relationship to actual costs.

Hospitals arbitrarily set prices based on “the chargemaster, the mysterious internal price list for products and services that every hospital in the U.S. keeps,” says Time.

“The hospitals all know the bills are fiction, or at least only a place to start the discussion, so you bargain with them,”  Katalin Goencz, a former appeals coordinator in a hospital billing department who now works as an advocate in Stamford, told Time.

Here are some extraordinarily high hospital charges for medical services in two Connecticut workers’ comp cases–and how they were negotiated back to reality:

  • Shoulder surgery: the hospital charged $44,000; after negotiations, the health insurer paid $4,000, and the workers’ comp insurer paid $14,000.
  • Lumbar fusion surgery: the hospital charged $135,000, the group health insurer paid $28,000, and the workers’ comp insurer paid $61,000.

The commission’s ruling, however, takes away that negotiation process for many and will cause costs to skyrocket. In Connecticut, employers are already facing an average workers’ comp increase of 7% this year, and the upward trend has been driven in large part by rising medical costs.

Fifty percent of workers’ comp payouts are for medical treatment–and of that, a third are payments to hospitals. Without a way to check this trend, employers will face even higher increases going forward.    

Legislative Remedy?

Employers and insurers are now challenging the commission’s ruling. State lawmakers also are considering a remedy through SB 1074, which is still a work in progress. That measure is meant to give employers or their insurers the necessary tools to continue negotiating hospital reimbursement rates, starting with actual costs, that are fair to both employers and hospitals.

CBIA urges lawmakers to approve such a measure and restore and clarify the mechanism that has helped prevent hospitals from overcharging when it comes to workers’ comp medical costs in Connecticut for nearly two decades.

For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or bonnie.stewart@cbia.com.


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