Variation in Southwestern Hospital Charges for Pulmonary and Critical Care DRGs

Richard A. Robbins, M.D.

Phoenix Pulmonary and Critical Care Research and Education Foundation

Gilbert, AZ

Abstract

Recently, the Centers for Medicare and Medicaid Services (CMS) released nationwide data on hospital charges and CMS payments for the top 100 disease-related groups (DRG). Data obtained from the CMS website was examined for 23 common pulmonary and critical care DRG charges and payments to hospitals in the Southwest United States (Arizona, New Mexico and Colorado). Similar to nationwide trends, charges vastly exceeded payments and varied widely. Normalizing the data to the state average for each DRG, the percent over/under the state average revealed a negative correlation between charges and payments. Urban hospitals billed more but did not receive significantly higher payments. Hospitals that were primary hospitals for residencies did not bill significantly more but did receive higher payments. These data demonstrate that charges and payments for respiratory and critical care DRGs in the Southwest mirror nationwide trends in large overcharges.

Introduction

It has commonly been accepted that hospital charges greatly exceed payments (1). Insurance companies, CMS and other groups negotiate a discounted price from the “charge master” price (1). However, in the absence of a negotiated discount, the “charge master” price applies which may result in the poor and most vulnerable paying the highest prices. In addition, it may result in overbilling for insurance companies who in some instances pay more than patients who pay cash for certain procedures (1).

Some attempt has been made to introduce transparency. For example, a bill was introduced into the Arizona legislature to require posting of hospital and physician prices (1). However, this bill died in committee. The Arizona Department of Health Services requires hospitals to report their charges which are posted on the Arizona Department of Health Services website (2). However, this information does not appear to have been disseminated widely and would appear to be seldom used by consumers when making health care decisions. Similarly, this data does not appear to be well known by healthcare providers. Recently CMS released data on hospital charges. This database was searched for common pulmonary and critical care DRG charges and payments for hospitals in the Southwest.

Methods

CMS data

Data was obtained from the CMS website (3). Hospital-specific charges for the more than 3,000 U.S. hospitals that receive Medicare Inpatient Prospective Payment System (IPPS) payments for the top 100 most frequently billed discharges were examined. Also examined was the amount paid by Medicare based on a rate per discharge using the Medicare Severity Diagnosis Related Group (MS-DRG) for Fiscal Year (FY) 2011. These DRGs represent almost 7 million discharges or about 60 percent of total Medicare IPPS discharges.

Hospitals determine what they will charge for items and services provided to patients and these charges are the amount the hospital bills for an item or service. The Total Payment amount includes the MS-DRG amount, bill total per diem, beneficiary primary payer claim payment amount, beneficiary Part A coinsurance amount, beneficiary deductible amount, beneficiary blood deducible amount and DRG outlier amount.

For these DRGs, average charges and average Medicare payments are calculated at the individual hospital level. The payments are adjusted based on the wage index applicable to the area where the hospital is located, the percentage of low-income patients, if the hospital is an approved teaching hospital and for outlier cases (4).

For the purposes of comparison, urban hospitals were defined as within an urban center (Phoenix, Tucson, Denver, or Albuquerque) or within 50 miles of the city center.

Statistical Analysis

Data was reported as mean + standard error of mean (SEM). The percentage over/under for charges and payments was calculated by taking the state average for each DRG and calculating the percentage above or below for each hospital. Comparison between groups was done using the Student’s t-test. The relationship between continuous variables was obtained using the Pearson correlation coefficient. Significance was defined as p<0.05. All p values reported are nominal, with no correction for multiple comparisons.

Results

Southwest Hospital Charges by State

Covered charges are shown in Table1. Arizona and Colorado charges averaged 24% and 23% above the National average respectively while New Mexico closely approximated the National average.

Table 1. Average Southwest hospital charges for 23 common pulmonary and critical care DRGs. [Editor's Note: It may be necessary to enlarge your browser window to view this and the other tables.]

Southwest Hospital Payments by State

Payments were much lower than charges (Table 2). Payments averaged 25%, 24% and 31% of charges in Arizona, Colorado and New Mexico for the pulmonary and critical care DRGs. These closely approximated the National average of 28% for all charges.  In contrast to billings, payments averaged below the National average in the Southwest. For the pulmonary and critical care DRGs the payments were below the National average for Arizona (-3.76%), Colorado   (-7.46%), and New Mexico (-0.98%).

Table 2. Average Southwest hospital payments for 23 common pulmonary and critical care DRGs.

Individual Hospital Charges

CMS listed hospital charges from 56 hospitals in Arizona, 40 hospitals in Colorado and 31 in New Mexico. The number of DRGs from each hospital was highly variable ranging from a low of 1 to a high of 23. Hospital charges varied widely with large differences between the high and low charges (Table 3).

Table 3. Average differences between high and low charges for each pulmonary and critical care DRG. The percent is the difference between the high and low compared to the state average.

Charges by individual hospitals as a percentage of the average for each state are listed in Appendix 1.

Urban hospital billings were higher than rural hospital billings (3.0 + 3.0% vs. -14.5 + 4.4% of the state average, p= 0.001).

Hospitals charges for the 9 hospitals that are primary hospitals for residencies in the Southwest (6 in Arizona, 2 in Colorado and 1 in New Mexico) averaged 4.0% over the average for their respective state (p=0.21 compared to the other hospitals). In contrast, these hospitals received payments that were 28.9% over their state average (p= 0.015 compared to the other hospitals).

Individual Hospital Payments

CMS listed hospital payments from 56 hospitals in Arizona, 40 hospitals in Colorado and 31 in New Mexico. Like the hospital charges, the number of DRGs from each hospital was highly variable ranging from a low of 1 to a high of 23. Hospital payments varied but less between high and low payments than charges (Table 4).

Table 4. Average differences between high and low payments for each pulmonary and critical care DRG. The percent is the difference between the high and low compared to the state average.

Payments to individual hospitals as a percentage of the average for each state are listed in Appendix 2.

For the Southwestern states there was an inverse relationship between percent of the state average of charges and percent payments (r = -0.2243, p = 0.0112). In other words, the higher the percent charges compared to the state average, the lower the percent payments compared to the state average.

Urban hospital payments did not significantly differ from rural hospital payments (0.8 + 2.7% vs. 7.8 + 3.3% of the state average, p= 0.103).

Hospitals payments to the 9 hospitals that are primary hospitals for residencies in the Southwest averaged 28.9% over their state average (p= 0.015 compared to the other hospitals).

Discussion

The data in this manuscript demonstrates that hospital charges to CMS in the Southwest US for common pulmonary and critical care DRGs greatly exceed CMS payments. These charges reflect national trends for other DRGs (1-5). The data also suggest that there is wide variability in charges between hospitals, again reflecting national trends. Payments also vary, but the degree of variability is much less. Interestingly, higher charges to CMS were associated with lower CMS reimbursement.

The data showing the range of hospital bills does not explain why one hospital charges significantly more for the same DRG than another hospital. Some hospitals have said that higher bills they sent to CMS reflected the fact that they were either teaching hospitals or they had treated sicker patients (5). CMS does make higher payments to certain hospitals based on the wage index applicable to the area where the hospital is located, the percentage of low-income patients, if the hospital is an approved teaching hospital and for outlier cases. However, the inverse relationship we found between the charges and payments in the Southwest US for pulmonary and critical care DRGs suggest that the higher billings are not based on the CMS adjustments.

Teaching would not appear to explain the differences in hospital billing. There are 9 hospitals that are known primary hospitals for residencies in the Southwest (6 in Arizona, 2 in Colorado and 1 in New Mexico). These hospitals had billings that averaged only 4.0% over the average for their respective state. In contrast, these hospitals received payments that were 28.9% over their state averages.

Similarly, high labor costs likely do not explain the differences in billing. The urban centers where wages tend to be higher did bill higher but their payments did not differ. This would seem to indicate that higher billings are not based on higher labor costs. There was considerable variability in billing. For example, the medical centers with the highest billing in each state were in Bullhead City, Arizona (Western Arizona Regional Medical Center); Littleton, Colorado, a suburb of Denver (Centura Health-Littleton Adventist Hospital) and Roswell, New Mexico (Eastern New Mexico Medical Center).

There are several limitations to our study. Hospital billings and payments are based on CMS data. In several instances the average data is based on only one or two DRGs. Billing and payments vary considerably from state to state and it is unclear if this data from the Southwest reflects national trends.

The hospital industry is quick to point out that the charges are irrelevant because private insurers, Medicare or even the uninsured do not pay these amounts (5). Medicare sets standard rates for treatments and insurers negotiate with hospitals. However, experts add that the charges reflect decades of maneuvering by hospitals to gain an edge over insurers and provide themselves with tax advantages. A hospital could use the higher prices when calculating the amount of charity care it was providing. Charity care is important to hospitals which need to demonstrate provision of a high level of “community benefit” in order to maintain its status as a nonprofit hospital. However, the IRS has recently issued new rules that require a hospital to charge uninsured patients a rate that is not more than the “amounts generally billed” to patients with insurance coverage (6).

A small number of hospitals have adopted a strategy to increase their profits by “going out of network” (5). The hospitals sever ties and hence contractual agreements that limit reimbursement rates, with large private insurers. An out-of-network hospital can bill a patient’s insurer at essentially whatever rate it cares to set which likely reflect the “charge master” price. While the insurers can negotiate with the hospital, they generally end up paying more than they would have under a contractual agreement. Data regarding the network affiliations of the hospitals in the Southwest is unavailable.

Transparency in healthcare pricing is needed but few hospitals or physicians have adopted this as a standard policy. One that does post prices is the physician-owned Surgery Center of Oklahoma (7). Their prices appear to be about 50 to 75 percent lower than most major hospitals. Whether this business model will grow as an approach to attract patients is unclear.

Physicians need to act as patient advocates including advocating for affordable healthcare. Transparency is one part in achieving this goal. The release by CMS of hospital charges and payments is a step towards transparency. Release of similar data by healthcare providers and insurers will enhance the transparency and will likely lead to more affordable healthcare for the majority of patients.

References

1. Roy A. Why do hospitals charge $4,423 for $250 ct scans? Blame Arizona Republicans. Forbes. Available at: http://www.forbes.com/sites/aroy/2012/05/27/why-do-hospitals-charge-4423-for-250-ct-scans-blame-arizona-republicans/ Accessed 5/13/13.
2. http://www.azdhs.gov/plan/crr/cr/hospitals.htm Accessed 5/13/13.
3. http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Medicare-Provider-Charge-Data/index.html
4. http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/index.html?redirect=/acuteinpatientpps/
5. Meier B, McGinty JC, Creswell J. Hospital billing varies wildly, government data shows. NY Times. 5/8/13. Available at: http://www.nytimes.com/2013/05/08/business/hospital-billing-varies-wildly-us-data-shows.html (accessed 5/13/13).
6. Federal Register. 2013;78(66):20523-44. Available  at: http://www.gpo.gov/fdsys/pkg/FR-2013-04-05/pdf/2013-07959.pdf (accessed 5/27/13).
7. http://www.surgerycenterok.com/index.php (accessed 5/27/13).

Reference as: Robbins RA. Variation in southwestern hospital charges for pulmonary and critical care DRGs. Southwestern J Pulm Crit Care. 2013;7 (1):31-7. doi. http://dx.doi.org/10.13175/swjpcc074-13 PDF

Comments

[RicK Robbins]

According to a report from the Health and Human Services Office of Inspector General (OIG) (http://oig.hhs.gov/oei/reports/oei-06-10-00520.pdf) Medicare “outlier” payments are directly influenced by hospital charges. Generally, high-outlier hospitals were larger, more likely to be in urban areas, and had a higher percentage of teaching hospitals, compared to all other hospitals the report said. The OIG did not immediately fulfill a Freedom of Information Act request to list those hospitals. Although these urban academic medical centers are often said to treat sicker populations of patients, the OIG study found that patients' average length of stay in the hospital—an indicator of severity of illness—was virtually the same in the lower-priced hospitals for the same services. This suggests that high charges are not necessarily associated with more or better care. The findings “raise concerns about why charges and estimated costs for similar patient-care cases vary substantially across hospitals.”

Richard A. Robbins, MD
Editor

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