How Hospitals Determine the Price of an MRI—and Why Clinics Can Charge Less
How Hospitals Determine the Price of an MRI—and Why Clinics Can Charge Less
When your doctor orders an MRI, should you stay within the hospital system or find an independant imaging center?
If you want to pay less, you're better off with the latter.
You'd expect a similar procedure to have a similar cost, no matter who your provider is. In fact, the price of an MRI might vary wildly, even within the same small region — and even when funded by the same insurance plan. For instance, a 2014 report from medical-claim analysts at Change Healthcare found that the insurer's in-network price for an MRI ranged between $511 and $2,815.
Not much has changed since 2014. The latest figures from financial-planning site Bankrate report a general range of MRI costs between $400 and $3,500. That's a $3,100 spread for the exact same procedure.
"Imaging bills typically run two to three times higher at hospitals than at freestanding radiology centers," reports Money. But what's the rationale for this tremendous difference in price, especially since clinics often use the exact same equipment and radiologists as hospitals?
To find out, we'll have to go a little deeper into the complex world of health care pricing for hospitals.
Calculating Prices for MRI Scans at Full-Service Hospitals: DRG Basics
While hospitals follow different pricing schedules, every operation works to ensure profitability of these things called diagnosis-related groups, or DRGs.
DRGs are specific codes covering treatment for common conditions. That is, they gather all the discrete medical interventions for a particular diagnosis into a single, calculable "product." They're important for hospital balance sheets because Medicare decides what it will pay for care according to each of these codes — and hospitals can mark up their prices from there.
For instance, if you were to have an appendectomy, the hospital might add the costs for your imaging, surgery, aftercare, and drug/equipment usage into a single cost under the assigned DRG code. If you were on Medicare, there would already be a pre-set price for the entire set of procedures. If an insurance company pays for the services, though — or an individual — hospitals determine their own rates for those DRGs. That's where things get even more complicated.
Estimating Radiology Department Costs in Order to Set Charges
The typical model that hospitals have used to figure out how much to charge for a given DRG service is called the ratio of cost-to-charge (RCC). The RCC figure divides the hospital's total costs by the amount they charge the payer. The resulting ratio describes the hospital's ability to turn a profit. The lower the RCC, the more profit for the hospital.
So, the RCC approach became the standard method used to figure out how much to charge patients. The problem is, while RCC calculations are very accurate and reliable for grouped charges, such as DRGs, they're notoriously off-base when it comes to individual services, such as those offered by radiology departments.
Forward-thinking hospitals slowly began to change their methods of determining charges, a process that inevitably begins with figuring out total costs per procedure. Here's an example of another approach, provided by David W. Young in the journal Healthcare Financial Management:
Young divides costs hospitals must pay for an MRI scan into three categories:
Once administrators figure out these costs for an MRI scan, they add them together, then divide by the number of MRI scans in a given period; this gives them a total estimated cost for the procedure on its own.
Of course, if that cost should prove higher than Medicare, they will still only be paid the official price set by the Centers for Medicare and Medicaid Services (CMM). That's one of the reasons some hospitals mark up their Medicare prices by up to 1,000 percent for insurance companies or cash payers; they argue they're making up for expenses left uncovered by government programs.
MRI Scans: Determining Individual Charges from Cost Estimates
Once administrators calculate the cost of an MRI, all that's left is to apply the markup and start issuing bills. So what determines a hospital's markup over cost on an MRI, or any service for that matter?
Just about anything. Possibly nothing. It's the mystery at the heart of the U.S. health care system. Only two states, Maryland and West Virginia, set top rates for hospitals. Everywhere else, health care providers can charge whatever they want—and they do.
A 2015 study in the journal Health Affairs studied markups at U.S. hospitals. The average markup among most hospitals in the nation was 340 percent. Among the 50 hospitals with the highest markups, that number was over 1,000 percent. The hospital at the top of the list marked up procedures 1,260 times the CMM charge.
Radiology departments are particularly vulnerable to enormous markups. Brian Keigley, who founded the consumer group New Choice Health, told Money that "radiology is often subsidizing other service lines."
For instance, if an emergency department at a major metropolitan hospital loses money, administrators might raise the price on MRIs to make up the difference. This brings us to why freestanding imaging facilities can charge so much less per procedure.
Keeping Costs Low at Medical Imaging Clinics
Hospitals can mark up their costs for an MRI as much as they want. There are no regulations to control medical pricing in most states, and being part of a hospital system keeps patients flowing regularly through the radiology department.
Ultimately, hospitals are sheltered from price-controlling market forces by obscure charges, patient vulnerability, intra-institutional referrals, and, often, non-profit status.
Meanwhile, freestanding imaging clinics must compete with the facility down the street. There's a distinct incentive for Company A to offer low-price MRIs without sacrificing quality. Remember: They're also competing with hospitals, which usually get the first shot at any patient's business.
Plus, imaging clinics don't have to cover for underperforming departments. They provide MRIs and X-rays; their radiologists write reports; they do what they do and that's it. With a more focused business model, these companies are much more free to reduce margins in order to thrive through sheer patient volume.
The result is good for patients and their care. Clinics offer simpler, more flexible scheduling. They can focus on patient care rather than cope with the complexities of an enormous organization. They charge much, much less than hospitals for an MRI.
In short, it pays to do a little shopping around when your doctor orders an MRI. Whatever you do, don't march down the hall to the hospital radiology department without having a conversation about pricing.
References:
Ashford, Kate. "What I Learned When I Asked How Much My MRI Would Cost." Forbes. Forbes Media LLC, 31 Oct. 2014. Web. 1 July 2017.
Deleon, Maya. "Need an MRI? Here's what it will cost." Bankrate. Bankrate, LLC, 23 June 2017. Web. 1 July 2017.
Gengler, Amanda. "How to Get the Same Health Care at a Quarter of the Cost." Money. Time, Inc., 16 July 2014. Web. 1 July 2017.
Glover, Lacie. "Why Does an MRI Cost So Darn Much?" Money. Time, Inc., 16 July 2014. Web. 1 July 2017.
Potter, Wendell. "Why Hospitals Mark Up Prices by 1,000 Percent." Newsweek. Newsweek, LLC, 15 June 2015. Web. 1 July 2017.
Reinhardt, Uwe. "How Do Hospitals Get Paid? A Primer." NYTimes. The New York Times Company, 23 Jan 2009. Web. 1 July 2017.
Schwartz, M, DW Young and R Siegrist. "The ratio of costs to charges: how good a basis for estimating costs?" NCBI. U.S. National Library of Medicine, 1996. Web. 1 July 2017.
Young, David W. "What Does an MRI Scan Cost?" Healthcare Financial Management, no. 11, 2015, p. 46. EBSCOhost, 1 July 2017.
When your doctor orders an MRI, should you stay within the hospital system or find an independant imaging center?
If you want to pay less, you're better off with the latter.
You'd expect a similar procedure to have a similar cost, no matter who your provider is. In fact, the price of an MRI might vary wildly, even within the same small region — and even when funded by the same insurance plan. For instance, a 2014 report from medical-claim analysts at Change Healthcare found that the insurer's in-network price for an MRI ranged between $511 and $2,815.
Not much has changed since 2014. The latest figures from financial-planning site Bankrate report a general range of MRI costs between $400 and $3,500. That's a $3,100 spread for the exact same procedure.
"Imaging bills typically run two to three times higher at hospitals than at freestanding radiology centers," reports Money. But what's the rationale for this tremendous difference in price, especially since clinics often use the exact same equipment and radiologists as hospitals?
To find out, we'll have to go a little deeper into the complex world of health care pricing for hospitals.
Calculating Prices for MRI Scans at Full-Service Hospitals: DRG Basics
While hospitals follow different pricing schedules, every operation works to ensure profitability of these things called diagnosis-related groups, or DRGs.
DRGs are specific codes covering treatment for common conditions. That is, they gather all the discrete medical interventions for a particular diagnosis into a single, calculable "product." They're important for hospital balance sheets because Medicare decides what it will pay for care according to each of these codes — and hospitals can mark up their prices from there.
For instance, if you were to have an appendectomy, the hospital might add the costs for your imaging, surgery, aftercare, and drug/equipment usage into a single cost under the assigned DRG code. If you were on Medicare, there would already be a pre-set price for the entire set of procedures. If an insurance company pays for the services, though — or an individual — hospitals determine their own rates for those DRGs. That's where things get even more complicated.
Estimating Radiology Department Costs in Order to Set Charges
The typical model that hospitals have used to figure out how much to charge for a given DRG service is called the ratio of cost-to-charge (RCC). The RCC figure divides the hospital's total costs by the amount they charge the payer. The resulting ratio describes the hospital's ability to turn a profit. The lower the RCC, the more profit for the hospital.
So, the RCC approach became the standard method used to figure out how much to charge patients. The problem is, while RCC calculations are very accurate and reliable for grouped charges, such as DRGs, they're notoriously off-base when it comes to individual services, such as those offered by radiology departments.
Forward-thinking hospitals slowly began to change their methods of determining charges, a process that inevitably begins with figuring out total costs per procedure. Here's an example of another approach, provided by David W. Young in the journal Healthcare Financial Management:
Young divides costs hospitals must pay for an MRI scan into three categories:
- Direct costs include the obvious hospital expenses; salaries for staff, medical supplies, and depreciation of machinery.
- Departmental costs cover the salaries of administrators.
- Allocated costs flow down from the hospital administration; they're comprised of the estimated value of maintenance and janitorial services for the radiology department.
Once administrators figure out these costs for an MRI scan, they add them together, then divide by the number of MRI scans in a given period; this gives them a total estimated cost for the procedure on its own.
Of course, if that cost should prove higher than Medicare, they will still only be paid the official price set by the Centers for Medicare and Medicaid Services (CMM). That's one of the reasons some hospitals mark up their Medicare prices by up to 1,000 percent for insurance companies or cash payers; they argue they're making up for expenses left uncovered by government programs.
MRI Scans: Determining Individual Charges from Cost Estimates
Once administrators calculate the cost of an MRI, all that's left is to apply the markup and start issuing bills. So what determines a hospital's markup over cost on an MRI, or any service for that matter?
Just about anything. Possibly nothing. It's the mystery at the heart of the U.S. health care system. Only two states, Maryland and West Virginia, set top rates for hospitals. Everywhere else, health care providers can charge whatever they want—and they do.
A 2015 study in the journal Health Affairs studied markups at U.S. hospitals. The average markup among most hospitals in the nation was 340 percent. Among the 50 hospitals with the highest markups, that number was over 1,000 percent. The hospital at the top of the list marked up procedures 1,260 times the CMM charge.
Radiology departments are particularly vulnerable to enormous markups. Brian Keigley, who founded the consumer group New Choice Health, told Money that "radiology is often subsidizing other service lines."
For instance, if an emergency department at a major metropolitan hospital loses money, administrators might raise the price on MRIs to make up the difference. This brings us to why freestanding imaging facilities can charge so much less per procedure.
Keeping Costs Low at Medical Imaging Clinics
Hospitals can mark up their costs for an MRI as much as they want. There are no regulations to control medical pricing in most states, and being part of a hospital system keeps patients flowing regularly through the radiology department.
Ultimately, hospitals are sheltered from price-controlling market forces by obscure charges, patient vulnerability, intra-institutional referrals, and, often, non-profit status.
Meanwhile, freestanding imaging clinics must compete with the facility down the street. There's a distinct incentive for Company A to offer low-price MRIs without sacrificing quality. Remember: They're also competing with hospitals, which usually get the first shot at any patient's business.
Plus, imaging clinics don't have to cover for underperforming departments. They provide MRIs and X-rays; their radiologists write reports; they do what they do and that's it. With a more focused business model, these companies are much more free to reduce margins in order to thrive through sheer patient volume.
The result is good for patients and their care. Clinics offer simpler, more flexible scheduling. They can focus on patient care rather than cope with the complexities of an enormous organization. They charge much, much less than hospitals for an MRI.
In short, it pays to do a little shopping around when your doctor orders an MRI. Whatever you do, don't march down the hall to the hospital radiology department without having a conversation about pricing.
References:
Ashford, Kate. "What I Learned When I Asked How Much My MRI Would Cost." Forbes. Forbes Media LLC, 31 Oct. 2014. Web. 1 July 2017.
Deleon, Maya. "Need an MRI? Here's what it will cost." Bankrate. Bankrate, LLC, 23 June 2017. Web. 1 July 2017.
Gengler, Amanda. "How to Get the Same Health Care at a Quarter of the Cost." Money. Time, Inc., 16 July 2014. Web. 1 July 2017.
Glover, Lacie. "Why Does an MRI Cost So Darn Much?" Money. Time, Inc., 16 July 2014. Web. 1 July 2017.
Potter, Wendell. "Why Hospitals Mark Up Prices by 1,000 Percent." Newsweek. Newsweek, LLC, 15 June 2015. Web. 1 July 2017.
Reinhardt, Uwe. "How Do Hospitals Get Paid? A Primer." NYTimes. The New York Times Company, 23 Jan 2009. Web. 1 July 2017.
Schwartz, M, DW Young and R Siegrist. "The ratio of costs to charges: how good a basis for estimating costs?" NCBI. U.S. National Library of Medicine, 1996. Web. 1 July 2017.
Young, David W. "What Does an MRI Scan Cost?" Healthcare Financial Management, no. 11, 2015, p. 46. EBSCOhost, 1 July 2017.