Medicare Hospital Pricing — Cost plus

Our health care non-system is remarkable for it’s high cost and the resultant inability of individuals to afford insurance and care (50,000,000 uninsured).  Ewe Reinhardt’s discussion on hospital pricing helps understand the exceptional costs we pay for hospitalization and the inefficiency of the system.

He notes the origin of the Medicare hospital reimbursement mechanism:

this was a home-grown American idea that Presidents Ronald Reagan and George H.W. Bush embraced and introduced to Medicare.

He explains the differences between the amount paid by private insurers and Medicare:

Private insurers pay hospitals mainly on the basis of negotiated per-diem rates,

A natural byproduct of one-on-one negotiations is price discrimination, which means that a hospital charges different insurers different prices for the same service, and that a given health insurer pays different hospitals substantially different prices for the same service Medicynical Note:  Some remarkable price differences   without evidence of difference in outcomes.

Medicare pays on a different basis:

Medicare uses what is known as the “case base” system for paying hospitals for inpatient care, which means that hospitals receive one single payment for an entire inpatient episode of a given type.

The medicare payment is corrected for a number of factors including case severity, type of hospital, the amount of non-reimbursed care offered by the hospital and so on –read the article for more.

Medicynical Note:  Medicare’s system seems reasonable, though there have been noted to be wide geographical variations in payments reflecting differences in local economies, local inefficiencies and gaming of the system.

As we work to make Medicare more efficient and economical perhaps with a budget based system, reimbursements  will need to be rebalanced with fewer rewards for procedures and high tech interventions and more for those involved in face to face care.