Why Employers are Overcharged by Hospitals

Many hospitals in America claim to be underpaid by Medicare. That is, hospital executives say that the reimbursement from Medicare does not cover the cost to care for a Medicare patient. 

For example, the reimbursement for a 5-day hospital stay for pneumonia by Medicare is not enough to pay for the nurses, the technicians, the administrative overhead, and the electricity for that patient.

Instead of cutting costs, hospitals then over-charge employer-sponsored plans via their health insurance carriers to ‘Cross-Subsidize’ the Medicare underpayments.

This process of ‘Cross-Subsidization’ involves the health insurance carrier ‘tacking on’ an additional 15% in administrative fees, commissions to insurance brokers and consultants, and profit margin.

Therefore, insurance carriers are incentivized by Medicare to underpay hospitals even more to maximize the carriers’ 15% additional fees/commission/profit.

Hospitals could create their own health insurance companies (and indeed some have) and work to decrease their costs and lower administration fees… However, most hospitals lack the will and the skill to execute such a strategy.

As a result, hospitals ‘Cry Poor’ to the government via lobbying efforts to increase Medicare reimbursement and ‘Cry Poor’ to insurance carriers to negotiate higher payments.

Stuck in the middle of all this back-and-forth are employer-sponsored health plans and the plan members (i.e. employees and their families).  These two groups end up ‘footing the bill.’  They are the losers in this game.

What can employers do?

Step 1:  Understand WHY their healthcare costs are high and rising.  Oftentimes people need to understand the WHY beyond just the WHAT of ‘Our healthcare costs are high and rising.’

Step 2:  Build a case with your organization’s executive team. The CEO and CFO are busy and healthcare costs are not their area of expertise, yet their buy-in is obviously required. The ‘drip method’ or the ‘boiling frog’ method have been successful at other organizations for achieving this buy-in.

Step 3:  Create an action plan to address the hospital over-charging with the two groups that are largely charged with this responsibility: 1) your broker/benefit consultant and 2) your insurance carrier/TPA.

Step 4:  You may need to find new partners.  Part of your ‘case’ with your organization’s executive team needs to involve this possibility and the ensuing search process/RFP that it involves.

Step 5:  Manage ‘Time’ expectations.  Healthcare is notoriously slow to change.  Every successful organization that has tackled its ‘hospital-over-charging’ problem has done so over 2 – 4 years. There are excellent case studies in the book ‘The Company That Solved Healthcare’ and the employee health plans for Quest Diagnostics (see video here: https://youtu.be/4m6-UrSX7I8) and Purdue University (see video here: https://youtu.be/k-UGkDVVhXI).

Step 6: Get started.  Literally the most difficult part of this entire process is ‘getting started.’  Just start with one, small incremental step today… do an internet search, ask ChatGPT a question, read a blog post.  Then, take another small step tomorrow.  The key is momentum. Overtime, those steps with add up and grow into results.

To take one small action today, just look at a couple of pages on our website.  I promise you, you will learn something useful.