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The field of hospital medicine was built on the premise that hospitalists would promote and deliver more efficient, safer, and higher-quality inpatient care. Indeed, over the past decade hospitalist care has led to shorter lengths of stay and relatively lower hospital costs. However, as national health care costs have continued to rise unabated, on track to consume approximately 20% of the United States gross domestic product by 2020, the government, payers, and the public have all focused renewed efforts on improving health care value—commonly defined as


Hospital costs represent the single largest segment of the nearly $3 trillion annual US health care expenditure. Thus, hospitalists are vital to any effort to rein in health care costs. This chapter reviews concepts and strategies critical for hospitalists to understand in the emerging world of value-based health care.


In February 2013, Time magazine published an expose on health care costs, “Bitter Pill: Why Medical Bills Are Killing Us,” which was trumpeted across popular media and helped the hospital “chargemaster” become nearly a household term. The chargemaster (also known as the charge description master or “CDM”) is the list of prices for the tens of thousands of billable items at a given hospital. Shortly following the Time article, the Centers for Medicare and Medicaid Services (CMS) publicly released a database of how hospitals billed Medicare for the 100 most common inpatient procedures, revealing in stark relief the baffling amount of variation in charges and reimbursements for the same procedures between similar hospitals. Later that same year, the New York Times published a front-page article with the headline, “As Hospital Prices Soar, a Stitch Tops $500,” continuing to shine a bright national spotlight on the issue of hospital costs. As the “Bitter Pill” and the “$500 stitch” highlighted, charges found on hospital bills usually appear arbitrary and grossly inflated.

Despite the pressures to increase transparency, health care costs have largely remained hidden from the public and medical professionals. As a result, hospitalists are generally not aware of the costs associated with their care. In addition, most clinicians find the concepts of “charge,” “price,” “cost,” and “reimbursement” confusing (Table 2-1). In most medical centers, the majority of health care transactions occur between the organization and large payer organizations, such as insurance companies or Medicare. The price or charge refers to the amount reported on the bill to each of these payers. The cost depends on perspective; providers, payers, and patients each evaluate costs differently:

  • To providers, costs are the expense incurred to deliver health care services to patients.

  • To payers, costs are the amount payable to the provider for services rendered.

  • To patients, costs are the amount payable out-of-pocket for health care services.

TABLE 2-1Costs, Charges, Reimbursements, and Prices in Health Care...

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