The prices or charges payable by patients in health care organizations make up the greater
part of most hospitals revenues. The healthcare charges are usually compiled and entered on a
chargemaster. The major weaknesses of the chargemaster is that it does not reflect the real costs
that hospitals are reimbursed and which do not cover the entire costs incurred by the hospitals.
As a result of these inadequacies most healthcare organizations have their own systems of
charges that cover their entire health care costs.
The importance and benefits of pricing is that if it covers all the health care costs incurred
by the hospital and the revenues collected are enough to maintain the regular hospital operations
and enables the replacement of worn our equipments and application of modern technology to
medical treatment and diagnostic services. Good pricing enables direct funding to modern
medicine research and development and also the provision of affordable healthcare to all
patients. (American College of Healthcare Executives, 2013)
The traditional systems of paying health care organizations involve charges, negotiated
amounts, negotiated charge discounts and retrospective costs and payments.
Charges pricing method requires the use of a developed list of charges against which all the
charges are drawn from. Health care organizations like Medicare and Medicaid negotiate the
amounts payable to the hospitals. For the physicians, their charges are based on fee screens for
fixed price services that are developed based on Usual, Customary or Reasonable charges
(UCR). The application of the normal charge screen limits seeks to cap the healthcare cost
increments. (Smith-Healthcare, 2014) For example, to determine the UCR for a particular
patient, the insurance companies will compute the distribution of all the charges in a patients bill
and then select a median. This includes the highest and the lowest sections of the bill and the 75 th
or the 90 th percentile is obtained. For instance if the median charge for a patient is $100, the 75 th
and 90 th percentile would be $125 and $150 respectively. The UCR would be $100, $125 or even
$150 depending on the insurance system calculations methods.
The Medicare Cost Report is utilized to calculate departmental costs and it’s mostly utilized by
Medicare and other insurance companies like Medicaid and Medicare. The information on the
medi care cost report include the conversion factors which are found on the resource-based
relative value unit systems (RBRVS) and the relative value units (RVU). These calculations are
utilized when calculating the amounts payable to doctors. RVU is based on version 4 code
known as the CPT- 4) and they are guided by the geographical practice cost indicator (GPCI).
Pricing Services .
The RBRVS = (RVU work time * GPCI work time) + (RVU practice cost * GPCI practice costs)
- (RVU malpractice * GPCI malpractice) * conversion factor. (Smith-Healthcare, 2014)
For example in Alabama, a physician who has worked for an hour and the conversion rate in
Alabama is $34.0376 will be paid $49.32. The calculations are given in the table below.
RVU 11000 1 0.878 0.474
GPCI – Alabama 0.6 0.94 0.05
Product 0.6 0.825 0.024 1.449
Source: (Smith-Healthcare, 2014)
The figures in the first row are multiplied by the figures in the second row to obtain the figures in
the third row and the totals 1.449 which is multiplied by the conversion factor 34.04 to obtain
$49.23 which is payable to the Doctor who is practicing in Alabama. These reports are calculated
by the hospitals accountant and reviewed by the chief accountant before being forwarded to the
respective insurance companies for payment.
To conclude, retrospective costs are the basis of reimbursement where the hospitals are
actually reimbursed for the expenses incurred in the respective financial year. Examples of
retrogressive costs are the amounts which have already being incurred by the hospitals like
surgical fees and physician consultations and the hospitals have to be reimbursed by the
American College of Healthcare Executives (2013) Top Issues confronting Hospitals – 2013,
Smith-Healthcare, (2014) Prices and Payment Systems in Healthcare Industry, Ingram
publishing, 118 – 120