Column: Accountability – Hospital and Health System Pricing

This series titled “Column: Healthcare Accountability” is sponsored content from our partners at Axene Health Partners.  AHP offers highly specialized health care actuarial and consulting services across a number of states.  We have curated this content because we think it adds value to the work our readers are engaged in.  As always, we welcome your feedback on this series.


In a traditional economic business model, the tension and interaction between supply and demand in a competitive environment usually leads to rational pricing and reasonable pricing/profit margins. Today’s US health care system varies from the traditional economic business model and faces some unique challenges.

For most beneficiaries, the US health care system has four major stakeholders: individual patient, plan sponsor (i.e., employer or government), the insurance company, and the health care provider. The chart below visually shows this and the various relationships.

The individual patient is what might be called the customer, however, their customer relationship is filtered through multiple stakeholders:

• In the case of work-based insurance and government sponsored programs (i.e., Medicare and Medicaid), much of the health care cost is subsidized by their employer or plan sponsor
• There is limited transparency of the actual provider cost to the individual or patient
• The impact of the provider’s financial and pricing decisions are filtered and diluted through their relationship with the insurance company and the insurance company’s relationship with the plan sponsor, and the plan sponsor’s relationship with the individual.
• To the extent that individual decisions regarding healthcare choices are required, the individual makes these on very limited, diluted and incomplete information.

This article will discuss one aspect of this complex set of relationships, the pricing of hospital and health system services. This article will discuss hospital/health systems accountability as it relates to the pricing of their services. As with other articles, the accountability will be evaluated in terms of Triple AIM, the AHP Accountability Index, and the Accountability Ladder.

Charge-Master Basics

Hospitals and health systems utilize charge-masters to bill their patients for services provided by them. The charge for each service is identified by charge-master code. Services provided to the patient are recorded in the patient’s chart with the total bill for that patient based upon each of these services. In today’s world of electronic medical records, technology is used to capture this inventory of services and related charges, including the submission of this to the insurance company for payment (i.e., using the UB-04 and Form 1500).

The charge-master provides “gross charges” for each service. Payers negotiate discounts with individual providers which results in “net charges” (or what becomes net revenues). The difference between gross charges and net charges (i.e., the discount) is often called the “contractual” or “contractual adjustment”.

Continue reading the column here