Hospital inpatients are paid on a unique system by most payers. If the hospital is under 25 beds/critical access hospitals, there are some different methods to help them stay solvent, differing by insurance plan.
After 44 years in healthcare reimbursement, the individual coverage for each insurance plan continues to be complex- especially to the patient. With hundreds of different insurance plans, including traditional Medicare, Medicaid, Medicare Advantage, all commercial plans, VA and even worker’s compensation, there is definitely a need to understand the methodology behind how hospitals are paid.
Since 1980, Traditional Medicare has stopped paying “billed charges” for inpatients and moved to a single, per ‘stay’ flat payment. Other insurance plans have followed and for multiple years, most plans have been paying a single payment based on the patient’s course of treatment and diagnosis codes, regardless of billed charges. For any business this seems odd and begs the question, if a business submits a bill for services to different customers – do they all get to decide what the payment would be based on something besides charges? Welcome to healthcare!
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To better understand this, let’s look at some real examples of an inpatient stay and how all the different insurance plans ‘pay.’
- Traditional Medicare. 68 yrs. old admitted for simple pneumonia. He stays 4 days. The hospital submits the charges of $15,000 to Medicare. The diagnosis of pneumonia is submitted to Medicare where a pre-determined flat payment (referred to as a ‘DRG) of $6000 is allowed. The Medicare patient has an inpatient deductible of $1484 deducted from the $6000. The hospital’s total payment is $6000, between Medicare’s flat payment and the patient’s deductible. The remaining $9000 is ‘absorbed/written off’ and billed to no one, per Medicare law. Hospitals on average receive about 40-45% of billed charges from Traditional Medicare thru the DRG flat payment.
- Private Insurance A. 58 yr. old female admitted with UTI/urinary tract infection. She stays 3 days. The hospital submits the charges of $7900. The diagnosis of UTI is submitted where a DRG payment of $5000 had been established thru the contract between the hospital and private insurance for the UTI. The individual deductible of $2000 is withheld from the $5000 insurance payment. The hospital’s total payment is $5000 with the remaining $2900 absorbed/written off and billed to no one, per the contract with the insurance plan. Hospitals on average receive about 60-65% of billed charges from commercial plans; however, there is great variation as there are hundreds of private plans.
- Medicaid, the insurance plan of last resort, uses the same DRG methodology. There are many different ‘managed Medicaid plans’ with each having their own formula for the actual payment amount. Hospitals on average receive about 30-35% of billed charges from Medicaid plans.
There are still a few insurance plans paying a percentage of billed charges for inpatient stays, but never full billed charges. Those days are long gone! PS Be sure to reach out to learn more about the methodology for inpatient from your community hospitals as they are always your best source.