Reimbursement Pricing 101: How Treatment Costs are Determined for Clinical Procedures in the US


In the US, reimbursement to a facility for the treatments it performs can occur via Medicare, commercial insurers, or cash payment by the patient (if the procedure is not reimbursed).

Ultimately, the pricing for all of these methods is indirectly set by Medicare, the US federal health insurance program for Americans who are 65 years old and older. For example, commercial insurance companies tend to set their rates as a 1.2 – 1.7x multiplier of the Medicare rate; similarly, many treatment centers set their “cash pay rate” for patients based on a factor of the Medicare rate. The processes that Medicare uses to determine their reimbursement rates, which influence the entire pricing system, are discussed below.

Determining Cost
Pricing for any given procedure, also known as the reimbursement rate or payment level, is determined by Medicare every year based on cost data from the previous calendar year.

To determine the payment rate for a procedure, Medicare calculates the geometric mean (a programmable version of the median) of the individual cost values from every Medicare cost report (explained below) from all treatment sites in the country that have performed a specific procedure.

Costs are based on the amount charged for a procedure at each facility. The process of how Medicare determines costs is neither simple nor intuitive. As discussed here, each facility sets the amount it will charge for each procedure in their chargemaster, which is a catalog of all procedures performed at that site. The method that hospitals use to calculate these charge values varies between institutions, although it generally follows one of two models. The first model uses a calculation of the true costs that the facility incurs while performing the procedure, with allowances for overhead expenses and projected margin. As expected, this is a complex calculation that accounts for every aspect of a procedure, literally down to the number of bandages used. Because the first method is so complex, the second most-common model is to take the current Medicare reimbursement rate and simply multiply it by a factor to arrive at a charge value (usually a factor of two or three).

How Charges are Converted to Medicare ‘Costs’
After a facility performs a procedure, it completes a Medicare claims report (form number UB-04), where it enters the CPT or HCPCS (Healthcare Common Procedure Coding System) code, the charge for that code, and the revenue center from where the procedure is billed. On the Medicare cost report, the revenue center is then matched to a cost center. Each hospital’s cost center is associated with a unique cost-to-charge ratio (CCR) that is determined annually by Medicare. For example: “Internal Charge Code 6100398000” has an associated charge of $30,630, billed to “Revenue Center 0761” (Treatment room). Revenue Center 0761 crosswalks to “Cost Center 9000” (Clinic), which has a cost-to-charge ratio of 0.39. This leads to the “cost” that Medicare assesses for this procedure of $11,946.

The above example illustrates the fact that the sample hospital determined that its true costs of performing the procedure were $30,630, but the cost that Medicare uses to calculate future reimbursement rates is only $11,946. The shortcoming of this system is apparent: even though the facility determined, down to the bandage, its true cost for performing the procedure, Medicare sets a much lower (39%, in this case) cost value when it determines future reimbursement rates. This makes it exceedingly difficult for hospitals and individual medical practices to recover their actual cost for performing the procedure.

In addition, as new technologies are usually adopted by a few institutions, initial underbilling for the new procedure (skewing the perceived cost) can negatively impact the amount of reimbursement at all sites. This occurred with the use of focused ultrasound for the treatment of Essential Tremor (CPT code 0398T). The geometric mean of Medicare costs for this procedure is approximately $12,800; however, four sites in the US significantly underbill for this code (between one-half to one-third that of the national reimbursement rate). Had these centers billed at a level commensurate with their peers, the geometric mean from Medicare would jump to approximately $15,400.

Another factor is that Medicare creates reimbursement tiers called Ambulatory Payment Classifications (APCs), which have a minimum and maximum, yet reimburse at the geometric mean of all procedures in that APC. A geometric mean for CPT code 0398T of more than $15,000 would have bumped 0398T up to the next APC level, which reimburses at $17,500. But instead, the few underbilling sites have reduced (by $5,000) the reimbursement that all other sites in the US receive for focused ultrasound treatment of ET. The Foundation has worked with a team to help hospitals improve their billing, and we remain ready to assist sites that are underbilling.

Thus, it is incumbent on all sites to ensure correct charges for a specific procedure to then lead to Medicare costs that are close to the national reimbursement rate. If the charges are not properly documented and submitted, there will be lower reimbursement rates for Medicare and commercial insurers which generally reimburse at a multiple of the Medicare rate.