healthcare provider - doctor

How Providers of Healthcare charge for their services[1]

Again, the constant theme in American healthcare is variability. That is why the prices in the United States are expressed as a range.  All of this means there are about as many price tags for that hypertension checkup as there are insurers and providers.

There’s one party — the provider who provides the service. They each have their own master list of charges for different services, and these charge lists are different from provider to provider.

There’s a second party — the patient or patients — who receive the service.

And there’s a third party —the insurance company —who pays for the service, but they don’t pay those listed charges. They negotiate for lower prices with each hospital and doctor on every plan. And these negotiated prices can even vary within an insurance company depending on which plan a patient has.

There are multiple ways that a provider of services can code for the healthcare they provide, which determines how they get paid. The claims process starts when a healthcare provider treats a patient and sends a bill for the services provided to a designated payor after their internal process. The ‘payor’ or ‘insurance provider’ is usually a health insurance company (unless you do not have employer or government sponsored health care, in which case it is you). The payor then evaluates the claim based on a number of factors, determining which, if any, services it will reimburse.

how healthcare insurance flows graph

I will now take a minute to talk about how providers code. Why? Because you need to understand the coding process in order to understand this tectonic plate.

Coding an Outpatient Procedure or Physician Service

CPT 4-Procedure codes and HCPCS (Healthcare Common Procedure Coding System, Level II). are used to tell insurance companies what kind of procedure or service was performed. They also sometimes denote pharmacy and supply items, as well as capture physician visit times. Procedure codes must match up with diagnosis codes in order to get claims paid. Keeping up on procedure codes attached to charges is one of the most important areas for hospitals and physicians, yet it’s probably the one that’s overlooked the most.

Coding a Hospital stay

The coding and payment process is referred to as the inpatient prospective payment system (IPPS).  The code set used to report medical diagnoses on claims for services used by all providers is the ICD-10-CM diagnosis coding system. The Centers for Disease Control and Prevention (CDC)[3]  developed and maintains the code set.  Providers select codes based on documentation in the patient’s medical record. These codes are primarily used to determine coverage.

Inpatient providers report ICD-10-CM diagnosis and ICD-10-PCS procedure codes on claims, which are then used to assign discharges to the appropriate MS-DRG. Diagnosis-related group (DRG) is a system to classify hospital cases into one of originally 467 groups, now nearly 500.  The DRG system was intended to identify the “products” that a hospital provides.

Each case is categorized into a diagnosis-related group (DRG).  Each DRG has a payment weight assigned to it, based on the average resources used to treat Medicare patients in that DRG. Medicare is the only payer who has obligated providers to use the DRG system. That said, a wide variety of other third-party payers for hospital care have adapted elements of this system for their own use. The extent of DRG use varies considerably both by type of payer and by geographical area. Users include: 21 State Medicaid programs, 3 workers’ compensation systems, the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS), more than one-half of the Blue Cross and Blue Shield Association (BCBSA) member plans, several self-insured employers, and a few employer coalitions.[4]

And How Do Providers of Health Care Get Paid?

  • Fee-for-service (FFS) is a payment model where services are unbundled and paid for separately. In health care, it gives an incentive for physicians to provide more treatments because payment is dependent on the quantity of care, rather than quality of care. How they code determines how they get paid.
  • Pay-for-Coordination-coordinating care between the primary care provider and specialists.
  • Pay-for-Performance-healthcare providers are only compensated if they meet certain metrics for quality and efficiency.
  • Bundled Payment or Episode-of-Care Payment-specific episodes of care such as an inpatient hospital stay. The hospital DRG system is a bundled payment system.
  • Shared Savings Programs-providers share potential cost savings in the upside model. They are also at risk for any cost over runs in the downside risk as they are liable for the excess costs of healthcare delivery between provider and payer.
  • Partial or Full Capitation-assignes a per member per month (PMPM) payment based on the providers’ patient panel age, race, sex, lifestyle, medical history, and benefit design.
  • Global Budget-fixed total dollar amount paid annually for all care delivered.

The point of all this? Doctors are among the highest paid professionals in the U.S., beating out lawyers, software developers, and finance managers amongst other groups of professionals. “Doctors bank about $35,000 more each year then the next top earners — lawyers.”[5]  Their compensation varies based on the location and their specialty as well as how well they (or their practice consultants) have learned to use the systems I just described.

How much do physicians make overall?[6] Orthopedists top the list with annual average compensation of $443,000, taking in to account salary, bonus, and profit-sharing contributions, according to Medscape’s 2016 physician compensation report. Cardiologists and dermatologists come in second and third for earnings, logging annual compensation totaling $410,000 and $381,000, respectively. The lowest earning doctors were pediatricians, which brought in about $204,000 annually. [7]

wide range of physician fees - graph

The net results? The wide variability of physician office fees or charges for a hospital day. Both categories lead the rest of the world by a large margin.

The variability comes from multiple factors as we have discussed.  But primarily the variability is built into the three-party process I have described.




[3] the US agency charged with tracking and investigating public health trends. A part of the US Public Health Services (PHS) under the Department of Health and Human Services (HHS),





By | 2018-09-18T14:52:39+00:00 September 12th, 2018|Categories: Healthcare|Tags: , |0 Comments

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