How are hospitals paid for inpatients?

After 44 years of reimbursement, the individual coverage of each insurance plan continues to be complicated, especially for patients. With hundreds of different insurance plans including Traditional Medicare, Medicaid, Medicare Advantage, All Commercial Plans, Veterans Insurance, and even Workers Compensation, you need to understand the methodology behind how hospitals are paid. .

Since 1980, traditional Medicare has stopped paying “billed fees” for inpatients and moved to one flat payment per “stay.” Other insurance plans followed, and for years most plans made a single payment based on a patient’s course of treatment and diagnosis code, regardless of the rate charged. This seems strange and begs the question. If a business bills various customers for services, can they all decide what the payment will be based on something other than the price? Welcome to Healthcare!

To better understand this, let’s look at a real life example of an inpatient and how different insurance plans “pay”.

• traditional Medicare. A 68-year-old man was hospitalized with simple pneumonia. He stays for 4 days. The hospital will file a $15,000 claim for him to Medicare. A diagnosis of pneumonia is submitted to Medicare and a pre-determined flat payment (called a “DRG”) of $6000 is allowed. Medicare patients have an inpatient deductible of $1484 deducted from $6000. The total hospital payment is $6000 between the Medicare flat payment and the patient deductible. Under Medicare law, the remaining $9000 is “absorbed/written off” and not billed to anyone. On average, hospitals receive about 40-45% of their traditional Medicare bills through his DRG flat payments.
• Private Insurance A. Age 58. She is an elderly woman hospitalized with a UTI/urinary tract infection. She stays for 3 days. She hospital filed a claim for her $7900. A diagnosis of UTI is filed when she establishes her DRG payment of $5,000 through a contract between the hospital and her UTI’s private insurance. A personal deductible of $2000 will be deducted from the $5000 premium. The total hospital payment is her $5000 and the rest of her $2900 is absorbed/written off and not billed to anyone as per the contract with the insurance plan. On average, hospitals receive about 60-65% of billed fees from commercial plans. However, with hundreds of private plans, there is a huge variability.
• Medicaid, a last resort insurance plan, uses the same DRG methodology. There are many different “Managed Medicaid Plans”, each with their own formula for how much you actually pay. On average, hospitals receive about 30-35% of their bill from Medicaid plans.

There are still some insurance plans that pay a percentage of the charges billed for hospitalization, but not the full billed charges. Those days are gone! PS Regional hospitals are always the best source of information, so be sure to reach out to learn more about inpatient methodology from regional hospitals.