Allen Dobson, Ph.D.

Joan DaVanzo, Ph.D., M.S.W.

Julia Doherty, M.H.S.A.

Myra Tanamor, M.P.P.

The Lewin Group

3130 Fairview Park Drive

Suite 800

Falls Church, VA 22042

MedPAC

601 New Jersey Avenue, NW

Suite 9000

Washington, DC 20001

(202) 220-3700

Fax: (202) 220-3759

www.medpac.gov

• 

• 

The views expressed in this report 

are those of the authors. 

No endorsement by MedPAC 

is intended or should be inferred. 

A Study of

Hospital Charge

Setting Practices

A study conducted by the Lewin Group for the

Medicare Payment Advisory Commission

December 2005 • No. 05-4
Prepared for: 

Medicare Payment Advisory Commission 

Prepared by: 

Allen Dobson, Ph.D. 

Joan DaVanzo, Ph.D., M.S.W. 

Julia Doherty, M.H.S.A. 

Myra Tanamor, M.P.P. 

A Study of Hospital 

Charge Setting Practices 
367334 v4 

TABLE OF CONTENTS 

I. EXECUTIVE SUMMARY........................................................................................................................... I

A. The Charge Master Structure and Process ...........................................................................................................i

B. Goals of the Charge Master .............................................................................................................................. iii

C. Mark-ups in the Charge Master .........................................................................................................................iv

D. Cardiology Services...........................................................................................................................................iv

E. Pharmacy Charge Masters ..................................................................................................................................v

F. Conclusions.........................................................................................................................................................v

II. BACKGROUND AND PURPOSE ..............................................................................................................1

III. STUDY METHODOLOGY .........................................................................................................................2

A. Recruitment Approaches ....................................................................................................................................2

B. Charge Interview Methodology ..........................................................................................................................3

Charge Interview Protocol..............................................................................................................................3

Conduct of Charge Interviews.........................................................................................................................3

C. Study Challenges and Limitations ......................................................................................................................4

Recruitment .....................................................................................................................................................4

Hospital Systems .............................................................................................................................................4

D. Study Sample ......................................................................................................................................................4

IV. MAJOR FINDINGS FROM CHARGE INTERVIEWS ...........................................................................6

A. Challenges of the Charge Master........................................................................................................................7

B. Charge Master Review Process...........................................................................................................................8

C. Goals in Charge Setting ....................................................................................................................................12

D. Influencing Factors in Charge Setting ..............................................................................................................12

E. Charge Master Update Process .........................................................................................................................17

F. General Inflation Updates.................................................................................................................................18

G. Adjustments to Charges for Existing Services..................................................................................................21

H. Developing Charges for New Procedures and Services....................................................................................22

I. Mark-Ups..........................................................................................................................................................22

General Approaches to Mark-Ups ................................................................................................................22

Central Supply Tables and Formulas............................................................................................................23

J. Cardiology and Cardiac Surgery Services ........................................................................................................24

K. Pharmaceuticals and Pharmacy Tables .............................................................................................................24

APPENDIX A - SCREENER PROTOCOL................................................................................. 26 

APPENDIX B - CHARGE INTERVIEW PROTOCOL ..................................................................29 
364568 

i

I. EXECUTIVE SUMMARY 

The Medicare Payment Advisory Commission (MedPAC) has expressed concerns about the 

accuracy and fairness of the current Medicare hospital in- and out-patient prospective payment 

systems (PPSs). Payment rates for these systems are based, to varying degrees, on hospital 

charges. However, little is known about how hospitals set their charges. In addition, charges 

have become less relevant to hospitals over time, given the advent of PPS and various other flat 

payment arrangements. As a result, the measurement of charges that is currently used by 

Medicare to reflect relative resource consumption across services in determining acute care 

hospital prospective payments may be becoming less accurate over time. For instance, as 

productivity increases in a given service area, if charges are not reduced to reflect 

corresponding lower expenses, the end result could be charges drifting up against relative costs 

over time. Under PPS, this could lead to favorable payments to hospitals for such services. 

In order to better understand hospital charge setting practices and the nature of hospital markups across service lines, MedPAC engaged The Lewin Group to conduct a nationwide study of 

hospital charge practices. 

The protocol for the charge interviews (developed in consultation with MedPAC staff) covered 

four general topics: (1) charge setting goals and processes at each facility; (2) actual changes 

made to the charge master (why, when, how, and based on what information); (3) charge setting 

processes for cardiology and cardiac services; and (4) the development and maintenance of 

pharmaceutical charges. 

This report reviews the charge practices of a purposive sample of hospitals and hospital 

systems around the U.S. Our sample of 57 participating hospitals and/or systems represents 

238 hospitals and included proportionately more hospitals in large urban areas and major 

teaching facilities than there currently are nationwide. Responding hospitals were primarily 

not-for-profit, with for-profits demonstrating a reluctance to participate. We found that 

hospitals in large urban areas, and usually teaching hospitals, are more likely to consider cost 

information in their charge setting than their rural and non-teaching counterparts. Decisions 

about how and when to apply mark-ups to services vary widely, even within individual 

systems, primarily because hospitals use a complex set of rules to set their charges. 

Furthermore, the emphasis placed on different objectives varies from one hospital to the next. 

While our survey responses were highly consistent, our sample is biased toward hospitals in 

large urban areas and teaching facilities. These institutions are more likely to have the resources 

to more carefully examine their costs. 

A. The Charge Master Structure and Process 

The hospital charge description master (CDM), or “charge master”, is extensive, usually 

containing between 12,000 and 45,000 individual charge items and procedures across hospital 

departments providing patient services. Every chargeable item in the hospital must be part of 

the charge master in order for a hospital to bill a patient, payer, or health care provider. 

Hospitals place great importance on the charge setting process and generally coordinate the 

process through their finance departments, with what we have called a “Charge Master Team”. 

This Charge Master Team is typically composed of a senior level finance person, a charge 
364568 

ii

description analyst and/or coder, and others, depending on the size of the hospital or hospital 

system. These individuals review any changes made to the charge master throughout the year, 

and work with the Chief Financial Officer (CFO) to determine how aggregate annual charge 

updates will be made. In addition, the Charge Master Team works with individuals from all 

relevant departments depending on the nature of the charge item in question. While coding 

corrections and changes are made regularly for compliance purposes, there are also a number of 

other reasons charges may be changed throughout the year. 

Hospital charges have been set over several decades, long before facilities had a good sense of 

the costs of providing services. A complete overhaul of the charge master is rare. The charge 

survey instrument protocol was divided into two sections for examining charge master changes: 

1) those increases in charges which are global, (across all services and charge items) and often 

made to adjust for inflation, and 2) those that are specific to individual services or procedures. 

With inflationary increases over time being applied to thousands of revenue codes and with 

varied methods applied to charge setting over time, it has become difficult for many hospitals to 

explain or rationalize the basis of their charges. 

While almost all respondents indicated making an annual increase in charges, less than a third 

of the respondents indicated this increase was applied uniformly across their charge master, 

suggesting that it varies by department. The most recent average annual increase among 

hospitals reporting this information was about seven percent. Variations in charge increases 

were made for reasons unique to each individual hospital or system, but took into consideration 

a hospital’s current financial and competitive position within its market. 

Respondents reported varied approaches to updating their charge master for existing services. 

Most respondents mentioned the importance of coding and compliance checks and other 

strategic objectives, but in terms of assessing the validity and accuracy of existing charges, 

respondent attitudes differed. For example, less than fifteen percent of the hospitals set a 

strategic objective to review all charges in their charge master over a particular period of time 

(usually several years) to ensure that they were updated to reflect recent costs and changes in 

market conditions. However, many other hospitals focus on compliance, and only scrutinize 

charges being developed for new procedures and services or those where problems in pricing 

are brought to their attention. 

The vast majority of respondents indicated that their process for developing charges for new 

procedures and/or charge items is similar to that for existing services, with one notable 

exception. Respondents reported examining costs (e.g., labor, time, or equipment) much more 

closely for new services. This was particularly true for large urban and teaching facilities. The 

development of charges for new services is thus is more resource-intensive than the global 

updates or updates for existing services. 

In cooperation with the Charge Master Team, the individual clinical department closely 

examines the time, labor, equipment and room costs associated with a particular service. These 

costs may then be compared to other similar services provided by the hospital. In addition, the 

team and the individual clinical department may analyze anticipated payments (from existing 

fee schedules and contracts) and use available market or competitor information to develop a 

reasonable charge. Hospitals without cost accounting systems often reported simply looking at 
364568 

iii

payer fee schedules for new procedures and sometimes considering the fees that competing 

hospitals charged. 

B. Goals of the Charge Master 

Each respondent was also asked to identify charge master process goals. Most respondents 

either mentioned or reported thinking we would presume compliance was their primary goal in 

managing the charge master. For almost all respondents, charge practices were being driven at 

least partly by financial and competitive pressures. For those more attentive to charge master 

details, ensuring that all possible chargeable items and all potential revenue sources were 

captured was a key part of the process. Hospitals were usually cognizant of aligning their 

charges with those of their competitors, positioning their charges between the 50th and 75th

percentile of their local market. 

Key influencing factors reviewed during interviews included: overall cost inflation, changes in 

specific costs of services or procedures, hospital missions, competitive forces, influence of 

specific payers, community perception, managed care contract terms, and indirect cost 

allocation. It became clear through these discussions that the goals and factors under 

consideration were sometimes conflicted. For instance, a hospital might want to remain 

competitive but recognize that its costs for a particular service were more than the market could 

bear. Then the question of cross-subsidization would arise. Different hospitals, depending on 

their mission and resources, often made entirely different decisions based on the same 

information. 

The sensitivity of charges to utilization, the market and payer mix, while being different for 

each facility, affected each hospital’s approach to charge master updates. Of all the influencing 

factors discussed, those having to do with reimbursement, the influence of specific payers, and 

managed care contracts were most frequently identified as factors that have recently changed in 

importance. Respondents mentioning this change reported that these payer influences have 

become more important in the charge master process in recent years. The process for setting 

charges is often challenging given the competing goals of maintaining a strong bottom line and 

remaining competitive. 

Use of Cost and Other Information in Charge Master Process 

In an open-ended question about the information that is used in setting charges for existing 

services, hospitals in large urban areas mentioned using cost information half of the time, while 

rural hospitals mentioned it only a quarter of the time. Similarly, two-thirds of the major 

teaching hospitals reported using cost data in the charge setting process compared to one-half 

of the non-teaching hospitals. A number of respondents indicated that hospital charges do not 

systematically reflect costs, with some exceptions. Generally charges for new items and 

procedures are those that are most likely to correlate in some way with hospitals’ actual costs. 

Hospitals also reported basing charges for supplies and pharmaceuticals on their costs. 

Methods for identifying costs varied widely for respondents due to different cost accounting 

systems and different assumptions for allocating costs across multiple departments. 

Slightly more than half of respondents reported that they used publicly available charge data, 

such as information hospitals are required to report to state agencies, to compare their charges 
364568 

iv

with their competitors. Some states publish hospital charges and require that hospitals submit 

pricing changes in advance for approval. Almost two-thirds of respondents reported using 

market information in the decision making process. Many respondents referenced Medicare’s 

fee schedules and the schedules of other payers being used as a floor and point of reference for 

setting charges. Market information often included any information hospitals could collect 

about competitor prices and services. Over 40 percent of all respondents indicated that they 

conduct sensitivity analyses to determine the impact of contemplated increases on their 

reimbursement given current utilization, payer arrangements, and market trends. 

C. Mark-ups in the Charge Master 

The charge master generally reflects some amount above costs, otherwise known as a “markup”. Mark-ups, like the charge master, are changed over time and may vary by department, 

type of service or other unique issues facing an individual facility. Most hospitals reported that 

higher cost procedures and items generally are assigned a lower mark-up. Few respondents 

reported using standard mark-up schedules outside of those for pharmacy and supplies. 

Central supply (materials management) and pharmacy departments generally have separate 

pricing policies that are based on distinct formulas or tables. Many respondents remarked that 

these two areas are those where charges are most commonly related to costs. 

Hospitals reported charges for supplies being based on a flat percentage or a sliding scale table 

based on ranges of the costs for each item. For instance, any supply costing less than $100 might 

be marked up by a certain percentage, while supplies costing over $5,000 would be marked up 

at a lower percentage as provided in the supply cost table. All but one hospital indicated it 

marked up lower cost supplies at a higher rate than more expensive supplies. Pharmacy 

charges are generally handled separate and apart from all other charges and are discussed 

separately below. 

Almost a third of the hospitals reported that they often have had a higher mark-up for 

outpatient services than for other services. Other facilities reported that they no longer 

increased outpatient charges more than inpatient since the ratios of charges were likely to 

become skewed. There were no clear trends in the examples given by respondents of areas in 

which they reported higher or lower mark-ups being given to specific services. 

D. Cardiology Services 

The study protocol included a special focus on cardiology at MedPAC’s request.1 The vast 

majority of respondents indicated treating cardiology services the same way as other service 

areas providing care of similar intensity in setting charges. However, they also indicated that 

more attention is generally paid to specific items and procedures in departments such as 

cardiology and orthopedics where more expensive and new technologies are added at a greater 

frequency. They added that this approach of building new charges by looking at costs and 

market conditions to the extent possible is no different than for any other department. 

 

1 Anecdotally, cardiology services are thought to be more profitable than other service lines. One reason for that, if true, could be 

differences in mark-ups across service lines. 
364568 

v

Of those hospitals offering catheter suites, most reported a key difference in charges for services 

in these areas. While charges are set for hospital operating rooms based on the time required for 

a surgical procedure, charges in the catheter labs are typically based upon the procedure itself, 

which is a fixed price regardless of the time taken to perform the procedure. Other differences 

in charges across suites would be due to any unique catheters and other devices that might be 

used in one suite and not the other. 

A few respondents reported having designated cardiac surgery rooms with higher time charges 

than for other surgery rooms. These facilities explained that charges are higher for these suites 

to reflect the increased labor and equipment costs associated with complex heart surgeries, such 

as open heart and transplant. Several respondents indicated that cardiac surgery was 

considered to be a “major surgery” at their facility, as are other complicated implant procedures 

and services, such as neurosurgery, and are charged at a higher rate per time increment. 

E. Pharmacy Charge Masters 

In addition to pharmacy charges being set differently and generally being under the purview of 

the Director of Pharmacy rather than finance staff, the charge masters for these items tend to be 

updated with greater frequency and to be tied more closely to actual costs. Some hospitals 

reported basing charges on the average wholesale price (AWP) plus a standard mark-up, but 

many indicated they now work from more sophisticated, internally developed pharmacy markup tables. These tables generally were developed by prescription drug category, and were often 

complex enough to vary costs by drug type, means of administration, involvement of 

pharmacist, etc. Overhead costs were generally incorporated into the formula or table used by 

each facility. Many respondents reported using separate software specially developed for 

pharmacy cost management. 

F. Conclusions 

Hospital charge setting practices are complex and varied. Hospitals are generally faced with 

competing objectives of balancing budgets, remaining competitive, complying with health care 

and regulatory standards, and continuing to offer needed services to the community. They tend 

to base charges for new procedures, devices, and drugs more on actual costs than they do 

charges for existing services. Mark-ups tend to vary by service line, with high cost items 

receiving a lower mark-up than low cost items. 

Disparities between charges and costs has been growing over time as many existing charges 

were set before hospitals had a good idea of their costs and/or were set in response to 

budgetary and competitive considerations rather than resource consumption. Hospital charges 

are set within the context of hospitals’ broader communities, including their competitors, 

payers, regulators, and customers. These factors vary significantly depending on an individual 

hospital’s market position, mission, ability to estimate costs, and overall financial 

circumstances. These competing influences and hospitals’ efforts to address them often produce 

charges which may not relate systematically to costs. For instance, outside of supplies and 

pharmacy, hospitals did not seem to have a system for tracking or adjusting for falling costs of 

equipment and technology as they became more widely used. Thus, when charges are initially 

set high for a new technology, they may not be lowered later when the equipment or procedure 

is no longer as expensive, unless there are market pressures to do so. 
364568 

vi

The fact that charges are often not closely tied to costs implies that the current Medicare 

payment systems may not be closely tied to resource utilization. The findings from this study 

suggest that in certain instances, relative charges may not accurately proxy relative costs. 

Therefore, the impact of using charges to set payment rates in Medicare should be investigated 

more closely. 
364568 

1

II. BACKGROUND AND PURPOSE 

The purpose of this report is to present the findings from the qualitative interviews with 

hospital administration staff regarding their charge setting practices. We first provide the 

background and purpose for the study. Then, we present the study methodology. Finally, we 

present the major findings from the charge interviews. 

Medicare’s relative payment weights for diagnosis-related groups (DRGs) are calculated to 

reflect the intensity of resources, on average, that are required to treat each type of case.2 The 

Centers for Medicare & Medicaid Services (CMS) recalibrate the DRG relative payment weights 

annually in an attempt to ensure that these weights reflect the current value of input resources. 

The current system uses charge-based weights. Medicare also sets payments for outpatient 

services prospectively by grouping procedure codes (CPTs) into ambulatory payment 

classification groups, or APCs. 

Over the last several years, policymakers have become concerned that hospital charge 

structures may not be reflective of costs (or resource consumption) and that the Medicare Cost 

Reports may not be measuring Medicare-specific costs accurately. These problems may be 

leading to biases in both the relative weights and the calculation of overall and inpatient and 

outpatient hospital margins. For example, the Medicare Payment Advisory Commission, or 

MedPAC, cited “systematic differences in mark-ups across services that are built into the 

hospitals’ charge structures” in its June 2003 report to Congress.3 Those problems are also 

reflected in attempts to calculate service area margins (e.g., outpatient vs. inpatient). 

Historically, hospitals have focused on gross charge levels because patients with indemnity 

insurance generated reimbursement based on those charges. With the advent of managed care 

in the early 1980s, payers began scrutinizing a greater number of individual hospital charges or 

items. Hospitals often found the basis for some of their charges difficult to justify. Concurrently, 

medical inflation was on the rise, resulting in hospitals sometimes increasing their charges 

across the board to maintain their margins. For years, these gross annual increases were applied 

to charge masters, which had not necessarily been developed in a systematic or standardized 

way, but instead formed over decades with varying degrees of attention and resource 

commitment. 

Rather than focusing on altering their charge systems to be more rational, a number of hospitals 

focused on responding to increased market pressures by agreeing to flat per diem payment 

arrangements with only two or three service categories (e.g., medical/surgical, ICU, birthing), 

or other fixed payment arrangements. This, in combination with the advent of DRGs, resulted 

in most hospital services being paid under fixed payment arrangements so that hospital charge 

structures became less and less relevant to hospital operations and actual payments. 

 

2 Centers for Medicare & Medicaid Services, “Federal Register” pp. 49985, August 1, 2002; Medicare Payment Advisory 

Commission. (2003). Accounting for variation in hospital financial performance under prospective payment. Report to the Congress: 

Variation and Innovation in Medicare. June 2003: 41-57. 

3 Medicare Payment Advisory Commission. (2003). Accounting for variation in hospital financial performance under prospective 

payment. Report to the Congress: Variation and Innovation in Medicare. June 2003: 56. 
364568 

2

Today, reimbursement for the majority of patients is no longer tied directly to hospital gross 

charges.4 To the extent that hospital mark-ups for certain types of products or services are 

consistently out of line with mark-ups for other products and services, the Medicare payment 

levels based on relative charges will not accurately represent the relative costliness of the 

resources required across services. 

The purpose of this study is to help policymakers better understand the processes hospitals use 

to set charges and the effect that allocations based on charges may be having on the 

measurement of costs. Specifically, the study will provide information that will enable MedPAC 

to: (1) understand hospital charge setting practices as they relate to high and low cost items, 

and/or different departments or service lines; and (2) assess the extent to which hospital charge 

setting practices exert bias both on the measurement of relative resources and on the calculation 

of hospital Medicare inpatient and outpatient margins. 

III. STUDY METHODOLOGY 

Given the concerns referenced above, MedPAC engaged The Lewin Group to conduct a series 

of structured telephone interviews to better understand hospitals’ charge setting practices. This 

report summarizes our findings. 

A. Recruitment Approaches 

The Lewin Group conducted a nationwide recruitment process. The process was developed in 

conjunction with MedPAC staff. To encourage participation, a letter introducing the study, 

signed by the Executive Director of MedPAC, was developed. In addition, The Lewin Group 

offered to sign non-disclosure agreements with those hospitals reticent to participate as an 

additional measure of confidentiality. Hospitals were assured that if they chose to participate, 

MedPAC would obtain only aggregate information, with limited anecdotal individual hospital 

and system information being blinded. 

The initial contact list was developed by MedPAC and Lewin staff by merging the 2001 “Impact 

File” of 4,059 hospitals with a list supplied by MedPAC of the approximately 700 hospitals that 

used either HBOC-McKesson Information Solutions, Eclipsys Corporation, or Transition 

System, Inc. (TSI) cost accounting software. Following a discussion with MedPAC, The Lewin 

Group expanded the initial list of hospitals to obtain representation from a few hospitals with 

cost accounting systems in place that would not have been contacted based only on the list. 

The approaches described below were used to recruit participants: 

• telephoning current and former Lewin clients/colleagues; 

• obtaining referrals from state hospital associations where Lewin had contacts; 

• contacting systems for support and/or referrals to individual hospital Chief 

Financial Officers (CFOs); 

 

4 Some indemnity patients continue to generate reimbursement in relation to charges (i.e. percentage discount off charges) 

throughout the country. The payment liability for uninsured consumers and out of contract payers frequently is based on gross 

charges, unless hospitals have charity care programs that provide discounts. Hospitals in Maryland are reimbursed by all payers

based on their gross charges, and charges are established by regulation. 
364568 

3

• calling teaching hospitals with American Association of Medical College’s “informed 

consent”; 

• ‘cold calling’ hospitals listed as having purchased cost accounting systems; and, 

• ‘blast faxing’ target hospitals and then making follow-up calls. 

We contacted over 500 hospitals and systems in the recruitment effort. Those contacted 

included hospitals from all regions, of various sizes, teaching status and affiliations. Appendix 

A contains the screener protocol. 

Basic information collected on hospitals included: geographic location, teaching status, 

ownership status, bed and system size, as well as hospital payer mix. 

B. Charge Interview Methodology 

Individuals who agreed to participate in a charge interview were asked to commit 

approximately 45 minutes to discuss their charge master update process. Less than a quarter 

asked to review the charge interview protocol in advance of the interview. More often than not, 

these respondents invited more than one individual from their hospital or system to participate 

in the charge interview. 

Charge Interview Protocol

A protocol for the charge interview was developed in conjunction with MedPAC staff (see 

Appendix B). During the charge interviews, four general topics were covered: 

• General charge setting goals and processes at each facility, such as (1) which staff 

members are involved, (2) to what extent, and (3) with what purposes. 

• Actual changes made to the charge master, such as (1) how decisions are made for 

existing and new service charges, (2) how mark-ups are determined, and (3) to what 

extent indirect costs figure into the charge setting process. 

• Charge setting processes for cardiology and cardiac surgery services (to determine if 

charges for these areas were set any differently and, if so, how). 

• Pharmaceutical charges (and how their development relates to costs of such 

services). 

Conduct of Charge Interviews

The Lewin Group initially contacted the administrative office of the hospital’s CFO to help 

identify the relevant individual(s) to interview by telephone. Many hospital CFOs also 

expressed interest in participating in the interview. All respondents were or had been 

personally involved in developing updates to their charge master. 

While conducting the interviews, each researcher employed a worksheet to record hand-written 

notes. To further assist the project team in analyzing the findings, The Lewin Group created a 

customized relational database to capture the interview results. At the end of each charge 
364568 

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practices interview, researchers entered their interview notes into the database, which included 

fields for specific subsections of the interview protocol. Once the data were entered, the project 

team culled the database to create a report that included all of the respondents’ answers on each 

particular topic. This allowed the project team to organize the extensive amounts of information 

collected during the interviews, to identify relevant quotes, to support observations, and to 

conduct highly structured content analyses. 

C. Study Challenges and Limitations 

This section of the report discusses the main challenges and limitations we encountered while 

conducting this study. 

Recruitment

Recruitment was extremely difficult, in that most hospitals and systems contacted were not 

willing to participate in the study despite numerous assurances of confidentiality and the 

availability of a non-disclosure agreement. The first barrier was a reticence about participating 

in any study involving proprietary information, especially information that would be provided 

to Federal officials in any form. Others expressed a fear of potential retribution (a ‘witch hunt’) 

should the information provided not reflect favorably on their facilities. As one CFO expressed, 

“Whenever I participate in studies like this, bad things happen”. Many hospitals and systems 

required discussion, review by senior management, and a completed non-disclosure agreement 

before they would participate. 

Hospital Systems

Establishing system status for specific hospitals was sometimes difficult. We found many 

different affiliations and organizational structures associated with systems making it difficult to 

categorize system responses. Some hospitals were so loosely affiliated with a system that they 

represented themselves as an ‘individual’ hospital rather than as a ‘system’ hospital. Further 

complications arose with hospital systems that were organized into smaller group entities for 

pricing purposes. For example, three charge interviews conducted were with subsets of larger 

systems, representing only two or three within-system hospitals having common charge setting 

practices. 

In other organizational structures, a system might have an integrated cost accounting system 

across all its facilities, but little integration or influence in terms of charge master policies. Other 

systems had a system-wide pricing policy, but no system-wide standards for cost accounting. 

We tracked interviews differently for system-affiliated hospitals that were not tied to a standard 

system charge policy. These interviews were considered ‘individual’ for purposes of reporting 

in this study. 

D. Study Sample 

Our approach to recruitment produced a study sample reflecting a broad spectrum of 

organizational characteristics (See Table 1 below). The sample includes 57 charge interviews 

representing 238 hospitals. 
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Table 1. Characteristics of Hospitals Participating 

 Compared to National Distribution 

Charge 

Interview 

(n=57) 

Charge 

Interview 

Sample 

Nationalb/

LOCATION 

 Large Urban 18 41% 40% 

 Other Urban 21 48% 30% 

 Rural 5 11% 30% 

 Not Applicable a/ 13 

TEACHING STATUS 

 Major Teaching 13 30% 6% 

 Other Teaching 11 26% 17% 

 Non-Teaching 19 44% 77% 

 Not Applicable a/ 14 

REGION 

 Northeast 15 27% 30% 

 Midwest 14 26% 28% 

 South 15 27% 23% 

 West 11 20% 19% 

 Not Applicable a/ 2 

OWNERSHIP STATUS 

For-Profit 3 5% 15% 

Non-Profit 50 86% 58% 

Government 4 9% 27% 

a/ Counts include both hospitals and systems. We were unable to categorize 

some charge interviews since they were conducted at the hospital system level. 

Those systems with varying sized hospitals or with multiple characteristics 

were labeled as “not applicable”. 

b/ Medicare Payment Advisory Commission (2002). Report to the Congress: 

Medicare Payment Policy. 

At least one-quarter of the time more than one person participated in the charge interview, 

usually a supervisor in the finance department such as the director of finance and/or the 

controller, and the individual identified as the charge master analyst or auditor. The majority of 

respondents had been involved in developing charge policies for over three years, with only 

three having been at their jobs for less than a year. 
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6

The 19 systems participating in charge interviews represented charge setting practices for over 

200 hospitals. Hospitals indicating that they were part of systems primarily represented smaller 

systems, with over half having between one and ten affiliated hospitals. The study sample also 

contains four large hospital systems with more than 25 facilities each. A number of the systems 

interviewed could not be categorized by location, region or teaching status since the hospitals 

they represented came with varying affiliations and from different regions and communities. 

An additional 14 hospitals (beyond those in the 19 systems listed above) mentioned a system 

affiliation, but their systems did not have centralized charge practices. In sum, 38 of the 57 total 

interviews conducted represented individual hospitals’ charge practices rather than those of 

any system. 

With respect to the location of hospitals participating in the charge interviews, almost half of the 

hospitals were located in “other urban” areas. Two-fifths were located in large urban areas 

compared to just over one-tenth in rural surroundings.5 Rural facilities were underrepresented. 

Fewer than average for-profit and government hospitals chose to participate in the program. 

Many for-profit hospitals that were part of systems indicated it was against corporate policy to 

share proprietary information and/or participate in such studies. It is unclear why government 

facilities participation was lower than that of other groups. 

The study sample (for those which we could categorize) includes a roughly even distribution of 

hospitals across the country. A little more than one-quarter of the hospitals, respectively, were 

located in the Northeast, Midwest, and South and one-fifth were in the West. 

Payer mix varied within the sample. Most of the hospitals in the sample reported between 26 

percent and 75 percent of their business with Medicare, averaging 45 percent. Hospitals 

reported less than 25 percent of their business with Medicaid, averaging 14 percent. Several of 

the hospitals interviewed, however, were sole community providers of primarily Medicare and 

Medicaid services. 

Non-system participating hospitals varied in terms of teaching affiliation. Forty-four percent of 

the individual hospitals were non-teaching facilities. The remaining sample was divided among 

major teaching (30 percent) and other teaching (24 percent) facilities. 

While our survey responses were highly consistent, our sample is biased toward major teaching 

facilities. These institutions are more likely to have the resources to more carefully examine 

their costs. 

IV. MAJOR FINDINGS FROM CHARGE INTERVIEWS 

The following section highlights the major findings from the charge interviews. When there are 

apparent differences among respondents, these are highlighted within the specific subsections 

of the report. 

 

5 “Large urban” is defined as a metropolitan area with population more than one million. 
364568 

7

While half of the facilities in large urban areas volunteered that they use cost information in 

developing their charges when asked about the information they used, only one-quarter of the 

rural hospitals mentioned looking at costs. This pattern was similar but less striking for major 

teaching hospitals, two-thirds of which mentioned using cost data compared to one-half of nonteaching hospitals. 

Several other apparent differences among reporting facilities are worth noting. Fewer hospitals 

in urban areas were part of hospital systems than those in rural areas. In addition, non-teaching 

facilities were also more likely to be in systems when compared to major teaching facilities. 

A. Challenges of the Charge Master 

Hospitals manage extensive charge description masters (CDM), or charge masters, listing as 

many as 45,000 or more separate line items. These masters are designed to include the total 

chargeable items in any given hospital and have at least one charge and charge code associated 

with each item (see Table 2). Each charge code is then associated with a revenue code which 

links to revenue categories used in a hospital’s accounting and billing systems.6 Charge and 

revenue codes are not directly linked to a specific APC or DRG code, and the particular charges 

incurred within an APC or DRG may vary by patient. 

Respondents expressed a general concern about the difficult nature of the charge description 

‘animal’. In addition, it was noted that the relationship between charges and costs is tenuous at 

best. Respondent comments are summarized below: 

“With over 45,000 items in the charge master, the vast majority of items have no relation 

to anything, and certainly not to cost.” 

“There is no rationality to the charge master and costs still do not have much relevance.” 

“Charges have less and less meaning each year. Policymakers need to realize the charge 

master does not mean as much as it used to – we are getting only 10 to 15 cents for each 

dollar we increase our charges. Focusing on managed care contracts is far more 

important to us than charge master adjustments.” 

Given the difficulties with managing charge masters, hospitals sometimes resort to ensuring 

that their charges are at least higher than (or a certain multiple of) the prices paid by Medicare. 

In addition, many provide the majority of their services under fixed price contracts that have 

little, if any, relationship to the charge master. Hospital administrators seemed to be of different 

minds in terms of dealing with this challenge. Because the charge master is not often as relevant 

to hospitals in markets with extensive fixed payment arrangements, several administrators 

argued that time and resources should not be devoted to it. More often than not, however, 

administrators viewed improving the logic and accuracy of the charge master as a long-term 

administrative goal, especially when new charges are added and other problems are identified. 

Most facilities carefully examine new procedure(s) to ensure that whenever possible these new 

 

6 Some respondents have different charges for the same code depending on the department in which the charge is incurred. Most 

indicated they are trying to eliminate this type of discrepancy as they work to make the charge master more systematic. 
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8

charges are both reasonable and consistent with costs and market prices as well as the amount 

insurers are paying for other similar services. 

Table 2. Illustration of Hospital Charge Master7

Code Description Price

00002-0351-02 Darvocet-50 Tablet Ta 50-325 $0.59

00002-0363-02 Darvocet-100 Tablet Ta 100-650 $1.11

00002-0604-40 Seromycin (Cycloserine) Capsule Ca 250mg $3.54

00002-0803-33 Darvon Capsule Ca 65mg $0.71

00002-1052-02 Diethylstilbestrol Tablet Ta 1mg $0.10

00002-1054-02 Diethylstilbestrol Tablet Ta 5mg $0.26

00002-1094-02 Tapazole 5mg (Methimazole) $0.25

00002-1444-01 Vancocin Hcl (Vancomycin) Vial 500mg $7.80

00002-1450-01 Glucagon Vial 1mg $48.00

00002-1452-01 Velban 10mg Vial (Vinblastine Sulfate) $40.54

B. Charge Master Review Process 

In general, hospital charge practices originate in the hospital’s finance department. Depending 

on the size and organizational structure of each facility, the CFO may or may not be involved in 

changes to the charge master outside of annual global increases. (The overall amount of the 

annual increase is generally reviewed at the highest levels within a hospital or system, to 

include the CFO, and sometimes the hospital CEO, COO and Board of Directors). 

A “Charge Master Team” handles day-to-day changes to the charge master. This coordinated 

team is usually managed by a director of finance, a controller, or a charge master director, and 

supporting roles are performed by charge master analysts, nurse auditors, or other finance staff. 

In hospital systems, the duties of the Charge Master Team may either be housed at the 

corporate level where charge master changes occur, or be delegated to individual facilities (or 

groups of facilities) with only broad guidelines from the system on how to establish charges. 

 

7 This illustration of a hospital’s charge master is taken from a hospital in California. Beginning July 1, 2004, each hospital in 

California is required to make one written or electronic copy of its charge description master (charge master) available at the

hospital’s location or on its Internet Web site. 
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9

As outlined in the flowchart in Figure 1, requests for price changes are submitted to the Charge 

Master Team, either electronically or in print form. The submitting department (normally a 

clinical department director or manager) must indicate whether the change requested is an 

addition, deletion or revision, and indicate the reason for the change. 

Change requests from departments come to the Charge Master Team for many different 

reasons. A department may want to decrease certain charges because they realize they are no 

longer in line with their competitors. Other changes may be requested because of incorrect 

coding or for some other reason payment is consistently denied for a particular charge. Certain 

changes are requested when supply cost increases have occurred. Others are made to address 

problems where multiple codes have been used which are too similar in nature. Many changes 

are made to address changes in regulations and to remain in compliance. 

Typically, each request is reviewed by the finance department (and/or a committee), including 

those in the Charge Master Team, to ensure that it is reasonable and compliant with charge 

master policies. An open dialogue generally occurs between the requesting department and the 

Charge Master Team, where questions or concerns are identified and discussed. 

We found that hospitals in large urban areas tended to involve more groups, such as the 

hospital’s Board of Directors or charge master committees, in the charge setting process. With 

regard to the oversight provided by hospital systems, our interviews found that rural hospitals 

and non-teaching hospitals participating in a hospital system tended to have more autonomy in 

their charge practices than their counterparts in large urban areas and major teaching hospitals. 

A sampling of hospital descriptions of their charge master review processes is provided below. 

While fewer than one in five hospitals interviewed had a charge master committee in place, a 

number mentioned that committees reviewed major changes: 

“A form can be completed by department mangers or business office. This form goes to the charge 

master coordinator. The coordinator reviews the CPT codes and checks the accuracy of the cost (in 

terms of labor, nursing time, supplies and equipment). Then, it is reviewed by the director, the 

Compliance Office, and the CFO. If approved, the charge is added to the charge master. We do not 

have a charge master committee, because [this function] is part of other committees.”

 “We have a process and forms for each type of charge master change. The Director of Finance 

oversees the process. All major changes and non-compliance issues are reviewed by the Revenue 

Cycle Committee, which includes the CFO and COO. Less significant changes are made 

following discussions with individual department managers. We conduct two educational 

sessions a year for department managers to keep them abreast of charge master changes and 

trends in compliance, etc. Departments are expected to review their charges against the 

compliance reports at least twice a year. Patient Accounting produces a soft denial report every 

two weeks, which flags problem codes for different payers. We often have problems with major 

payers that will not bill according to Medicare codes, and must determine each time how we can 

ensure we are paid correctly with code discrepancies.” 

Most hospitals mentioned working with some type of form which must be completed to initiate 

any change requests for charges. This form, along with appropriate explanations and, if 

required, cost data, would be reviewed by key players. 
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10

“Our process for modifying and adding the charge master is driven by a form, starting at the 

department level. Each department is expected to have ownership of its charge master and drive 

the process. We make the form available on internet, the department completes it -- chooses to 

add, change, or inactivate a code, then sends it on to health records department -- [medical] 

records checks for charge description matches and correct HCPCS code, then the form goes to 

managed care, to check the contracts. If the change is not impacted by contracts, then it is 

reviewed by patient accounting, to apply revenue code and to check that all payer conventions are 

met. Then the form goes to accounting, and we calculate correct price based on a mark-up 

formula. Finally, the change is input [into the system]. We are working on streamlining this 

process to make it more efficient and take less time.” 

Oftentimes the annual aggregate changes in the charge master require a higher level of review 

than individual, mid-year changes. One in five respondents indicated these changes were 

reviewed by the board of directors. 

“The Finance Department solicits information from all departments to gain their input on 

detailed charge codes. Formal approval is provided by the Director of Finance and COO. For the 

annual updates data is presented to the CEO and COO at the macro level on the impact that 

pricing has for individual departments. If the Hospital Board approves the overall [undisclosed] 

percent rate increase, the CEO and COO will decide which departments will be above or below 

the average increase.”

There are two key exceptions to the process described above and they are for supplies and 

pharmacy. Pharmacy charges are usually handled by an entirely different system, most often 

managed by the Pharmacy Director with little if any day-to day involvement from the Finance 

Department. Supply charges are most often determined based on a formula approved by 

Finance, either a standard mark-up across the board for all supplies or based on a sliding scale, 

where typically higher cost items get a lower mark-up. 
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11

Figure 1: Charge Master Review Process

 YES 

` NO 

Department submits 

procedure or supply 

request in charge 

master form 

Request forwarded to 

Charge Master Team 

for revenue codes and 

CPT codes 

Charge 

Master 

Committee? 

Charge Master 

Committee reviews 

and approves addition 

to charge master 

Charge approved by 

Charge Master Team 

and incorporated into 

charge master 

Charge incorporated 

into information 

system & sometimes 

decision support 

Revised and updated 

charge master 

New 

service? 

Annual 

update? 

CEO/Board 

of Director 

Approval 

Existing 

services? 
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12

C. Goals in Charge Setting 

Each respondent was first asked to describe the goals of their charge master update process. A 

majority of respondents mentioned compliance with federal regulators as a primary goal. A 

number of other hospitals did not explicitly list compliance as a goal, but indicated that ‘it was 

simply a given’ when probed. In order to receive appropriate payment, hospitals must comply 

with CMS laws and regulations by following the appropriate coding and charging procedure(s). 

Inaccuracies in the charge master can lead to fines, penalties, and imprisonment. Representative 

comments include: 

“Another goal is to ‘stay out of prison’– the charge master is used as a basis for our 

ability to comply with billing and regulations.” 

“Our number one goal is to stay in compliance. We have a multi-disciplinary group that 

monitors coding or charge changes.” 

“The main goal is that we are compliant from a coding perspective.” 

For almost all respondents, charge practices are at least partly driven by financial pressures. 

Examples of respondent comments are presented below: 

“Our price updates focus on the areas that give us the ‘biggest bang for the buck’.” 

“Our key goal with the charge master is to help the hospital meet its profitability and 

cash flow needs. We try to take advantage of those payers on a percent of charge 

arrangement, so we capture all the revenue codes.” 

“Our first priority is making sure we can meet the bottom line.” 

“We want a competitive charge structure – we are a small hospital and have a very small 

margin.” 

Hospitals in large urban areas and major teaching hospitals tended to place greater importance 

on the relationship between costs and charges and were concerned about their hospital’s ability 

to cover operating costs. This variation is likely due to the greater resources of these larger 

facilities, which often have cost accounting systems and specified procedures to track costs. 

About a third of all hospitals volunteered that covering hospital costs was a goal of their charge 

master system and process. 

D. Influencing Factors in Charge Setting 

Respondents were then asked to score the importance of the following influencing factors on a 

scale of one to five, with five being “highly important,” and one being “not important”: 

1. Overall cost inflation; 

2. Changes in costs of specific services/procedures/devices; 

3. Hospital mission; 

4. Competitive forces; 
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13

5. Influence of specific payers; 

6. Community perception; 

7. Managed care contract terms; 

8. Indirect cost allocation; and 

9. Other factors 

Table 3 presents the average rating of the importance of each factor in the charge setting 

process. Most respondents maintained that all of the listed factors were important, and rated 

each factor as a “3” or above, outside of indirect cost allocation. Respondents ranked overall 

cost inflation as the most important influencing factor, with hospital mission, competitive 

forces, and the influence of specific payers ranked almost as highly. Responses concerning 

influencing factors are discussed below. 

Table 3. Average Rating for Factors Influencing Charge Master 

Charge Master Influencing Factor Mean 

(n=57) 

Overall Cost Inflation 3.89 

Changes in Costs of Specific 

Services/Procedures/Devices 

3.75 

Hospital Mission 3.74 

Competitive Forces 3.67 

Influence of Specific Payers 3.65 

Community Perception 3.44 

Managed Care Contract Terms 3.31 

Indirect Cost Allocation 2.43 

1) Overall Cost Inflation

Overall cost inflation is a constant concern among respondents, as this factor is ranked the 

highest of all influencing factors. Sixty-three percent considered overall cost inflation as very 

important, assigning it either a “4” or “5”. Many mentioned concerns about malpractice issues, 

nursing shortages, and the costs of labor and new technologies as adding pressure to an already 

“low margin” business: 

“Cost increases have become more of a challenge with the nursing shortage and 

malpractice issues.” 
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14

“Increasing costs are a bigger and bigger concern.”

“This drives my charges more than anything else.” 

2) Changes in Costs of Specific Services/Procedures/Devices

The influencing factor of costs for specific devices or items was often ranked as “highly 

important”, however respondents attributed the highest rating only to specific high cost items 

or procedures. Generally, these items or procedures represent a small portion of the overall 

charge master. Furthermore, many respondents asserted that, for the rest of the charge master, 

this influencing factor was not important at all. Price increases in pharmacy and advanced 

technology were also often mentioned as a concern, as reported in the following comments: 

“New technology influences pricing more now. A new piece of equipment that costs a lot 

of money requires the hospital to adjust prices to recover its costs.” 

“Drugs and devices are so costly now.” 

“The hospital is more sensitive to new technology, such as high cost implants, than we 

were before.” 

Facilities in large urban areas reported greater concerns about the changes in costs of specific 

items and procedures, and ensuring that those costs were covered in the charge master than 

their rural counterparts. 

3) Hospital Mission

The hospital’s mission as an influencing factor in charge updates was, for the most part, 

considered a given. Many respondents emphasized that, in order to continue meeting their 

mission of providing high quality care, they needed to stay fiscally sound. Respondents 

mentioned the following: 

“Our ability to meet our mission and provide services is dependent on having some 

margin.” 

“We want to make sure our charges are reasonable and we are making enough money to 

be able to continue providing quality care – that is our goal.” 

Others suggested that while mission does not play much of a role in pricing, the ability to crosssubsidize unprofitable but vital community services is key to one’s mission. This crosssubsidization is often only possible by choosing to price certain well-reimbursed services at a 

higher mark-up over costs (market permitting) than other services. 

4) Competitive Forces

Competitive forces were continually mentioned in the context of charge setting, especially by 

non-teaching hospitals, which were more likely to report competitive forces as an influencing 

factor when establishing charges. These forces include pressures to set charges so that they are 

not too much more than other hospitals in the same market area, except for the charges for 
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15

which there is little or no competition. Some respondents defined competitive forces more 

broadly than did the interview protocol to include competing free-standing outpatient facilities 

providing a wide variety of services, from rehabilitation therapies to laboratory, interventional 

radiology, and ambulatory surgery. The influence of competition seems to be “especially 

important on the outpatient side where patients are price shopping” and different types of 

competitors are emerging. 

5) Influence of Specific Payers

Many hospitals mentioned Medicare specifically as having a significant effect on establishing 

and reviewing charges. Large urban hospitals tended to be more sensitive to the influence of 

specific payers than rural and other urban hospitals. Some respondents noted the significant 

impact of the recent changes in Medicare’s outpatient reimbursement (the advent of APCs) on 

their outpatient services and pricing. One respondent went so far as to say, “With recent 

changes, Medicare outpatient reimbursement has become very important to us.” 

6) Community Perception

Hospitals reported becoming increasingly sensitive to community perceptions in recent years as 

they contend with negative press reports about hospital charges not being in line with costs and 

the resulting public pressure. In addition to facing these pressures, many hospitals have 

negotiated contract rates. This further lessens the importance of charges. The charge master is 

primarily relevant then for (1) individuals who are insured but pay a portion of the hospital bill 

directly; (2) those payers without a contract; (3) uninsured and/or self-paying patients; and, (4) 

those contracts based on discounted charges. A sampling of comments regarding the 

importance of community perception is provided below: 

“Community perception has become far more important over time. We work hard to stay 

at least comparable to other facilities.” 

“We try real hard to show the community that we are not gouging them. The hard part of 

that argument is explaining that full costs include overhead, and covering all costs is 

necessary to provide hospital services.” 

“We are very careful about the public’s perception related to hospital charges being so 

high.” 

The above notwithstanding, hospitals reported that community perception varies greatly 

depending on the amount of competition in the local health care community, the degree of 

information available to patients, and the type of service. Some facilities experiencing no 

competition for particular services reported pricing them at higher rates than those services 

patients could easily obtain elsewhere. Competitors are not only other hospitals, but also 

ambulatory surgery centers, radiology, and rehabilitation centers. Because patients are tending 

to pay greater portions of their hospital bill over time, there appears to be a growing focus on 

“shopping” for elective procedures based on price. For most Medicare beneficiaries, this 

concern about out-of-pocket expenses is generally limited to the outpatient services where they 

must pay a portion of the hospital’s charge. For example, a hospital in Florida reported that “the 
364568 

16

aging population has lots of time to shop hospital prices, and do research. This comes as their 

co-pays and out-of-pocket expenses are increasing and makes for more price competition.” 

7) Managed Care Contract Terms

Nearly half of the sample ranked managed care contract terms as very important to their 

pricing policy. Typically, these respondents were in markets where managed care payers had 

the market power to demand complex contract terms. These terms often affect reimbursement 

differently across the charge master depending on both utilization and pricing terms. While 

some respondents still had a portion of their contract, most often outpatient services, paid at a 

percentage of charges, many had far more complex terms including specific outlier provisions 

and multiple flat payment arrangements. This increases the likelihood of varied approaches to 

charge increases across a given charge master depending on the amount and nature of contract 

reimbursement anticipated for each charge code. 

“Changes in managed care contract payment terms make adjustments to the charge 

master more difficult.” 

“We may need to limit our charge master increases [in response to] a specific payer since 

that payer contract restricts increases in charges.” 

“Managed care contracts are highly important, but we need to couple those with 

Medicare information. We don't want to cause outlier problems, and want to keep 

charges at the market median. We do not want to be the price leader or the lowest.” 

Respondents in some markets could afford to pay less attention to specific contract terms since 

their contract reimbursement was generally based on a percentage of charges. They could 

simply increase charges across the board (the entire charge master) by a set percentage to 

maintain or improve their margins, rather than conduct complex sensitivity analyses to 

determine the impact of specific charge master changes. Hospitals with far more complex 

contract terms recognized that aggregate increases to a charge master will not result in a 

corresponding increase in contract payments and had to be more attentive to contract terms in 

order to remain financially sound.8 

8) Indirect Cost Allocation

Indirect cost allocation was ranked the lowest of all the factors listed. Many respondents 

explained that when examining their charge master, hospitals do not generally focus on indirect 

costs. They typically are looking at their budget, and trying to guarantee that the anticipated 

revenue will cover overall anticipated costs. This is evidenced by the following comments: 

 

8 These hospitals are generally in more competitive markets and often pay outside consultants to analyze the impact of any potential 

aggregate changes to the charge master on actual reimbursement. These sensitivity analyses involve plugging in the contract terms 

for every payer, anticipated volume by payer, and extrapolating expected reimbursement before and after proposed charge 

increases. Increasing certain charges, such as room charges or basic nursing services, will not increase reimbursement for hospitals 

with many flat rate or per diem contracts. For some hospitals responding where inpatient contract rates were often fixed but 

outpatient rates were based on percentages of charges, they avoided inpatient charge increases and only increased outpatient 

charges which were not subject to fixed payment arrangements. 
364568 

17

“[Indirect cost allocation] bears very little on how to approach rate increases.” 

“It is not important from a charge master perspective but in the cost accounting system, 

it is important.” 

9) Other Factors

Respondents were asked if there were additional factors that were important in the charge 

setting process. Factors that were reported included: charity care, bad debt, uncompensated 

care, the impact of new technology, the new Medicare outpatient APC reimbursement, and 

financial “margin implications.” 

In summary, many hospitals and systems reported using both market and reimbursement 

information in setting their charges. Competitive forces and specific payers have a major 

influence on most hospitals’ charge setting process. Respondents reported that the influencing 

factors that have most changed in recent years were: (1) the influence of specific payers; (2) 

managed care contracts; and, (3) general competitive forces. The most frequently mentioned 

changes in terms of increasing importance were those influencing factors related to 

reimbursement and payer contracting. 

E. Charge Master Update Process 

Many different departments are involved in the charge master update process depending on the 

nature of the update. Global updates are often tied to the budgeting process to ensure that the 

facility can maintain its bottom line. The amount of a targeted aggregate increase is often set by 

the CFO/CEO in conjunction with the hospital’s Board of Directors. 

Individual hospitals may determine that some department charge codes need to be excluded or 

treated differently in the annual update process. Examples given by respondents included 

departments where the charges were already on the high end in their market and they wanted 

to remain competitive, or where they anticipated potential problems in terms of community 

perception (for example by increasing room rates or for items which can commonly be 

purchased at a drug store for significantly lower prices). Departments usually have appeal 

rights if they believe the proposed charges are inappropriate. 

Respondents mentioned verifying that appropriate charges and codes are in place to stay in 

compliance with regulations. These updates occur on a regular basis and require less 

interdepartmental collaboration. Updates may also originate from the patient billing office after 

repeated denials or problems occur with certain codes (e.g., denials). Some Charge Master 

Teams provide their staff with regular in-service training surrounding compliance and coding, 

as updates are implemented. 

The changes in existing charges are normally initiated by individual clinical departments, the 

finance department, or the patient billing office, which identifies problem codes through the 

billing and denial process. Clinical departments have varying knowledge and responsibility as 

related to charges. Although some hospitals reported using cost information if available and 

considered to be reliable, less than half of the hospitals mentioned using cost information in 

their charge setting process. 
364568 

18

New charges are often initiated at the department level in conjunction with new programs and 

services or advances in technology. Prior to setting these charges, most respondents reported 

that the Charge Master Team works closely with the individual departments to identify costs as 

best they can, often comparing cost accounting data to information submitted by individual 

departments. Respondents consistently reiterated the importance of working in close 

collaboration with individual departments for both review and feedback, especially related to 

the development of charges for new services. 

A little more than one in five of the respondents indicated that a committee oversees the charge 

master update process. Committee work varies with different facilities, some focusing on broad 

pricing policies and aggregate increases, and others meeting as frequently as once a week to 

review changes in the charge master. Typical committee members include staff from the 

following departments: 

• Comptroller; 

• Revenue cycle9; 

• Reimbursement; 

• Medical records; 

• Audit and compliance; 

• Managed care; 

• Decision support and information systems; 

• Patient accounts and billing; and 

• Other departments such as laboratory, radiology and pharmacy, on an ad hoc basis. 

F. General Inflation Updates 

This section of the report reviews the (1) frequency of general inflation updates, (2) uniformity 

of the updates, (3) considerations when making updates, and (4) areas that experience the 

largest and smallest percentage increases. In addition, we summarize the types of information 

hospitals use in making inflation updates to their charges. 

Frequency of Updates

The vast majority of respondents reported that their hospital and/or system updates charges on 

an annual basis. A few hospitals mentioned updating their charges twice during the course of a 

year, for example, due to financial pressures. When respondents were asked about their 

hospital’s average annual increase for the previous year, the percentage given by respondents 

ranged from zero percent to 18 percent, with an average of seven percent.10

 

9 Some hospitals have begun to put the key departments having to do with revenue cycle under one director or manager, who might 

oversee registration, admissions, billing and collections, medical records and coding. These areas are traditionally associated with 

hospital business office functions. 

10 Forty-eight of the respondents provided data on their average annual increase. Some were unwilling to share this information, 

and several systems indicated the average increase varied significantly depending on the system hospital in question. 
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19

Uniformity of Updates

Less than one-third of respondents reported making annual changes that were uniform across 

their entire charge master. Hospitals in large urban areas and major teaching hospitals more 

often reported making uniform increases in their charge masters than rural and non-teaching 

hospitals. While generally employing uniform increases, some hospitals cited that it was 

necessary to make slight variations in percentage increases due to competitive pressures or to 

sudden increases in costs for certain services. Hospitals, including those that generally apply 

uniform percentages, often give special consideration to areas sensitive to public scrutiny, such 

as room and board rates and charges for medicines which could otherwise be purchased overthe-counter. 

Considerations When Making Updates

Charge masters have evolved over the decades with the input of different people under 

different circumstances. The hospital’s charge master may need adjustments in unique areas 

when specific issues come to the Charge Master Team’s attention. While actual variations in 

across-the-board rate increases differed among respondents, the reasons for differential markups were consistent: cost increases, market conditions, or the hospital’s financial circumstances. 

Charges for supplies are the best example of areas where increases are predictable for hospitals 

that are careful to monitor cost increases. Advances in technology have resulted and will 

continue to result in new supplies being added to the charge master, which have significantly 

higher acquisition costs (e.g., specialized catheters and orthopedic devices). 

Changes in market conditions also result in focus being placed on specific charge items. For 

example, hospitals deciding to compete with reference labs keep their lab prices low, while 

several other hospitals mentioned this area as one that typically sees higher charge increases. A 

hospital facing the opening of a competing ambulatory surgery center may look more closely at 

its outpatient surgery charge structure and consider changes to remain competitive. Or, a 

specific department may bring information to the Charge Master Team about what its 

competitors are charging and indicate that if it does not do better in terms of pricing the 

department will lose patients. This type of market influence will often result in a hospital 

choosing to limit the rate of increase for certain charges, or in very limited instances, reducing 

charges for certain services. 

Respondents also emphasized the impact of community perception on price increases. A 

number of respondents indicated their hospitals or systems no longer have any charges below a 

set dollar amount (e.g., $2 or $10), or simply do not charge for typical over-the-counter drugs 

(e.g., Tylenol). One hospital does not charge for blood, arguing that it is donated and the 

community should not have to pay for it. 

Ultimately, each individual hospital and system makes decisions about charge increases and 

pricing to address the unique circumstances they face in a given market for the population they 

serve and the services they are able to offer to that community. When specific items or areas are 

brought to the Charge Master Team’s attention, charge increases may be made separate and 

apart from any aggregate hospital charge increases. This variety of approaches to charge master 
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20

adjustments and the basic and historically different flaws inherent in each charge master make 

it unlikely that charges provide an accurate surrogate for relative resource utilization.

Examples of Highest and Lowest Percentage Increases

Respondents were also asked to provide examples of areas that experience the largest and 

smallest increases in charges. No consistent trends emerged, with the exception that the 

examples provided were driven by the hospital’s circumstance and local market forces. 

Over a third of respondents offering examples of areas where higher charge increases occurred 

listed outpatient services as falling into this category. This was generally explained to be 

because it was the main area where hospital contracts were not on a fixed payment 

arrangement, and charge increases would result in corresponding increases in revenue. 

Hospitals in large urban areas were twice as likely to report outpatient services as an example of 

an area that received the highest percentage increase in charges. 

Room and board charges, on the other hand, were often mentioned as receiving limited or no 

increases. More rural and non-teaching hospitals reported making no or limited increases in 

room charges than did large urban and teaching hospitals. With pharmacy and supply charges, 

some respondents gave them as examples of areas where charges were increased proportionally 

more, while others specifically mentioned pharmacy and supplies as examples of where charges 

were increased proportionally less. 

Assistance or Information Used to Update Charges

Over 40 percent of hospitals or systems reported receiving outside assistance from consulting 

firms and/or special software companies. Half of rural hospitals reported using consultants 

while only a third of large urban facilities reported doing so. The pattern was similar for 

sensitivity analyses, with two-thirds of rural hospitals indicating they conducted these analyses, 

compared to one-third of hospitals in large urban areas. These consulting firms help hospitals 

identify where increases are likely to bring the most revenue without increasing 

uncompensated care or bad debt, while taking into account both utilization and payer contract 

arrangements.11 They also offer software packages and online services to help facilities stay in 

compliance with coding changes and be alerted to charges that have become out of line with the 

hospital or system’s own established parameters.12 Some hospitals choose to perform a similar 

analysis internally. 

When asked an open-ended question about the information they used in making decisions in 

setting charges, about half of respondents indicated that they use cost information. Slightly 

more than half reported that they used publicly available data, with hospitals in large urban 

areas being three times more likely to use these type of data compared to rural facilities. 

 

11 The consulting firms that were mentioned by respondents varied in size. The firm and software most frequently used and 

referenced was OSI Systems. This software and company was recently renamed by the parent company MedAssets and is now 

known as MedAssets Net Revenue Systems. Other hospitals mentioned working with one of the large accounting firms’ consulting 

practices for sensitivity analyses. 

12 The coding compliance software, service and on-line capacity most frequently mentioned and regularly used by respondents was 

Craneware. Craneware offers many different services in the area of charge master management. 
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21

Publicly available data might include data hospitals are required to file in certain states about 

pricing, MedPAR data, and information a hospital might collect with the help of its own 

employees about other area hospitals’ bills and charges and other materials produced by 

competitors. One state, for instance, identifies and publicizes the top 25 charges for each 

hospital doing business in that state. Another requires that all hospitals file any proposed price 

changes with the state at least 60 days before they are implemented. 

Sixty percent of respondents said they used market information in the decision making process. 

This might include any information they could get on competitor pricing, the complexity of 

cases going to other facilities, reviewing bills for similar services, or any other intelligence that 

could be gathered as a Charge Master Team considers changes to charges for certain services. 

Close to 40 percent of all respondents indicated that they conduct sensitivity analyses to 

determine the potential effect contemplated increases might have on their reimbursement given 

current utilization. Our study results suggest that hospitals place more emphasis on using 

market information and responding to competitive forces than they do on using cost 

information. 

G. Adjustments to Charges for Existing Services 

Respondents reported varied approaches to updating their charge master for specific existing 

services. Most respondents mentioned coding and compliance checks, but in terms of assessing 

the accuracy of existing charges, respondent attitudes differed. Four facilities and one system 

specifically reported conducting a detailed review of each department’s charge master codes at 

least once annually, often on a revolving basis. Several others mentioned doing this every two 

or three years, usually with the help of outside consultants and while performing a sensitivity 

analysis. (These facilities represented in total less than fifteen percent of the sample.) Most 

facilities instead reported using the time of the annual review to give departments the 

opportunity to raise any concerns, suggest increases or decreases in charges, or additions and 

deletions to the charge master. The great majority of facilities did not review each and every 

charge in their master on a regular basis. 

As with inflation increases, departmental concerns are typically brought to the Charge Master 

Team and/or the designated committee in order to be reviewed, discussed and addressed. The 

amount of time and resources dedicated to making improvements to existing charges by taking 

a comprehensive look at their charge masters varied greatly. The majority of respondents 

agreed that charges having the greatest impact on net revenue or public perception tend to 

receive the most attention.13 The impact charges have on revenue varies by hospital and is 

dependent not only on their utilization of certain services and items, but also the contract 

reimbursement rates, such as which items are paid for on a percentage of charge basis. 

 

13 The public perception of charges seems to be limited to those which a consumer can easily compare - either to a similar item they 

could purchase at a drug store, or to what they perceive the cost to be of receiving the service elsewhere. More attention to total bills 

is paid as patients need to pay higher portions of hospitals bills out-of-pocket. One respondent in Florida indicated that elderly 

“shop around” to determine how much certain surgeries, like hip replacements, might cost at different hospitals. 
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H. Developing Charges for New Procedures and Services 

A vast majority of respondents indicated that their process for developing charges for new 

procedures and/or charge items is similar to that for existing services, with one notable 

exception. Most respondents reported examining costs much more closely for new services. 

Representative comments from cost-conscious hospitals are provided below: 

“With new procedures, cost is key.” 

“We actively use our decision support [cost accounting] system whenever we can for cost 

information. New charge codes are always based on cost information.”

”Generally, costing out a new procedure requires examining equipment and labor time, 

and reviewing the Medicare and managed care rates to make sure that ‘we are in the 

ballpark’.”

Generally, costs are determined with close cooperation between the Charge Master Team, 

individual clinical departments, and when available, decision support and cost accounting staff. 

The development of new charges is generally more resource-intensive than the global updates 

or updates for existing services. Most hospitals reported similar processes for determining the 

charge for a new service. In cooperation with the Charge Master Team, the individual clinical 

department closely examines the time, labor, equipment and room costs associated with a 

particular service. These costs may then be compared to other similar services provided by the 

hospital. In addition, the Charge Master Team and the individual clinical department may 

analyze anticipated payments (from existing fee schedules and contracts) and may use available 

market or competitor information to develop a reasonable charge. One respondent summarized 

the process succinctly: 

“In developing the charge for angioplasty, our finance/decision support team sits down 

with the Cardiology Department and develops the cost of the procedure (e.g., length of 

stay, tests performed, drugs, implants, all ancillary services) to get a mock–up of the 

charge. We also estimate payer mix, look at the physician care involved in the procedure 

(e.g., examine old procedures) to develop the cost and then determine what charges are 

associated with it. Then, we add an appropriate mark-up and perform a return on 

investment analysis. Once approved, we sit down with the department and determine the 

CPT codes.” 

Furthermore, some hospitals, especially in instances where an entirely new service is being 

established, expect the clinical department to develop a feasibility study before new charges are 

developed for that service. 

I. Mark-Ups 

General Approaches to Mark-Ups

Mark-ups, like the charge master, are changed over time and may vary by department, type of 

service or other unique issues facing an individual facility. Very few respondents reported 

using standard mark-up schedules outside of those for pharmacy and supplies. Central supply 
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23

(materials management) and pharmacy departments generally have separate pricing policies 

that are based on distinct formulas or tables. Many respondents remarked that these two areas 

are those where charges are most commonly related to costs. Over half of the respondents 

assign higher mark-ups to lower cost items, through the use of supply mark-up tables. Even 

facilities that set a floor on mark-ups still vary them for both subjective and practical reasons. 

One hospital explained their mark-up strategy for various services: 

“Currently, we set our charges at a floor of two times Medicare unless there is a reason 

not to, for example, certain blood product charges for hemophiliacs. Implants are 

generally marked up at two times cost. In pharmacy, we generally charge three times the 

average wholesale price (AWP).” 

Different factors affect mark-ups including payer mix, utilization, and market forces. In 

addition, some respondents stated that sensitivity analyses are used to help determine the level 

of mark-up of specific services. While some hospitals reported charging different rates for 

laboratory for inpatient and outpatient services, other hospitals work toward standardization of 

charges across departments and across inpatient and outpatient services. Respondents indicated 

that when charge masters were not carefully reviewed, several departments charged a different 

amount for the same revenue code, which caused integrity problems they later had to correct. 

The following comment reflects the complexity involved for many facilities when making 

decisions regarding mark-ups: 

“We do have different mark-ups for routine versus ancillary services. Normally, routine 

services are more sensitive to the market because it is easier for patients to understand 

these hospital bills. Thus, the hospital tries to be in line with the market and our 

competitors. What drives net revenues is key. Generally, outpatient and diagnostics have 

larger [increases in charges] -12 percent - than room rates - 3 percent. But this also 

depends on budget. We assess how much net revenues need to go up. In addition, it is 

important to examine the type of contract (e.g., per case basis, fixed amount or percent of 

charges).” 

Only two of the respondents thought differential mark-ups flow through to individual DRGs. 

The majority of respondents indicated they did not look at DRGs at all when making mark-up 

decisions. Several others speculated which services were most impacted: 

“Our supply algorithm on an expensive implant, for example, has a mark-up of 150 

percent, but on a less expensive supply, the mark-up is 300 percent. Thus, DRGs with 

high cost supplies may be under-costed.” 

“We don't really look at DRGs and mark-up. However, surgical DRGs probably come 

out higher given higher mark-ups on supplies.” 

Central Supply Tables and Formulas

Over half the respondents reported using a supply mark-up table, and all but one indicated that 

the formula marks up higher cost items less than lower cost items. The tables function on a 

graduated scale, with between four and nine categories or dollar levels for costs. Those with 

more dollar categories work with more detailed cost ranges. For instance, the first category 
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24

might be for items costing less than two dollars and an eighth or ninth category might be for 

items costing $5000 or more. A single mark-up percent is assigned to each dollar category. The 

cost of the item in question is simply multiplied by the mark-up percentage to determine the 

actual charge. 

Many respondents remarked that these formulas generally result in charges for supplies being 

more closely related to costs than other types of charges. Only a few items are occasionally 

excluded from such tables by some facilities due to contractual and other arrangements. These 

items are often implants, which can be exceptionally expensive, or other items that have 

frequently changing costs. 

J. Cardiology and Cardiac Surgery Services 

The vast majority of respondents indicated they treat cardiology services the same way they do 

any others in setting charges. Higher cost procedures get a lower mark-up, but often more 

attention is paid to specific items in cardiology (and orthopedics) since they involve higher 

dollar values. Several respondents indicated that cardiac surgery is considered as “major 

surgery” at their facility, as are other complicated implant procedures and services, such as 

neurosurgery. These “major surgeries” are then charged at a higher rate per unit of time. This 

charge structure is not unique to cardiac services. 

Most respondents reported having an interventional cardiac suite and /or catheter lab. They 

noted that charges are determined in the operating room based on the time required for the 

surgery, whereas charges in the catheter lab are based upon the procedure. Other differences in 

charges would be due to any unique catheters and other devices used in one suite, but not the 

other. 

A few respondents specified some special considerations given to cardiology and cardiac 

services in terms of pricing. These facilities had designated cardiac surgery rooms with higher 

charges. They explained that charges are higher for these suites to reflect the increased labor 

and equipment costs associated with complex heart surgeries, such as open heart and 

transplant. 

K. Pharmaceuticals and Pharmacy Tables 

Most respondents reported that pharmacy charges were handled in a different and separate 

way than any other charges. In fact, the Charge Master Team often has little involvement in 

pharmacy pricing. Pharmacy directors often have full responsibility for setting pharmacy 

charges and operate their own charge master with an entirely separate system tailored 

specifically to meet pharmacy department needs. Most respondents could only speak in very 

general terms about their hospitals’ pharmacy charge policies. Pharmacy tables and formulas 

are common, used by nearly three-quarters of the responding hospitals and systems. 

In general, overhead and acquisition costs are worked into the formulas in the form of a 

standard mark-up over acquisition costs, without any other uniform charges being added. The 

more sophisticated pharmacy formulas not only take into account the cost of individual drugs, 

but also will vary the mark-up by the type of drug or biologic, and the route of administration 
364568 

25

and preparation time. Only one respondent reported excluding any biologic or drug from its 

established formula. 

Hospitals not using formulas typically set prices based on the average wholesale price (AWP) 

with a standard mark-up. Several of the hospitals using this method expressed their 

dissatisfaction with the AWP reference guide and felt that it did not reflect their costs. Most 

respondents noted that they intended to shift away from AWP and move to an internal formula 

in determining pharmacy charges. 
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26

APPENDIX A - SCREENER PROTOCOL 

MedPAC Analysis of Medicare Hospital Costs 

and Charging Practices 

Good _________ (morning/afternoon/evening), my name is ________ and I am calling on 

behalf of the Medicare Payment Advisory Commission, or MedPAC, which advises Congress 

on Medicare payment policy and other issues. As our letter dated January 30, 2004 indicates, 

MedPAC has engaged The Lewin Group to study the relative costs of different services, and 

how hospitals set their charges. Your participation is very important to policymakers’ 

understanding the accuracy of Medicare’s payments. 

The Lewin Group is compiling data collected from hospitals’ cost accounting systems and 

conducting a series of telephone interviews. To protect the confidentiality of sensitive, hospitalspecific data, we will not provide MedPAC with individual hospital data; participating 

hospitals will not even be identified. The Lewin Group will only provide MedPAC with 

measures of relative costs by DRG, CPT, and type of service, as well as interview responses, 

aggregated across hospitals. 

Q1. May I ask you several preliminary questions? 

[IF YES:] GO TO QUESTION 2. 

[IF NO:] “THANK YOU FOR YOUR TIME. GOOD-BYE.”

Q2. How does your hospital develop its cost estimates for specific services? 

− By building up specific direct cost estimates and applying indirect cost ratios? 

− As a percentage of charges? 

− Some combination of these approaches? If combination, which process predominates? 

[IF BUILD-UP OR BOTTOM-UP:] GO TO QUESTION 3. 

[IF CHARGE-BASED:] “THANK YOU FOR YOUR TIME. GOOD-BYE.”

[RECORD VERBATIM]

 

_____________________________________________________________________________________ 

Q3. Which cost accounting system does your hospital use? 

[DATABASE SHOWS________________] 
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{PROBE:} McKesson (includes HBOC)? Eclipsys (includes TSI)? Other? 

[IF MCKESSON OR ECLIPSYS:] GO TO QUESTION 4. 

[IF OTHER:] “THANK YOU FOR YOUR TIME. GOOD-BYE.”

[RECORD VERBATIM] 

_____________________________________________________________________________________ 

Q4. How does your hospital use cost accounting data? 

[PROBE} For management decisions? Payer contracting? Anything else? 

[IF USED] GO TO QUESTION 5. 

[IF “NOT USED”] “THANK YOU FOR YOUR TIME. GOOD-BYE.”

[RECORD VERBATIM]

 

_____________________________________________________________________________________ 

Q5. Do you use flexible budgeting? 

[RECORD VERBATIM]

 

_____________________________________________________________________________________ 

Q6. Do you create data by product line? 

[RECORD VERBATIM]

 

_____________________________________________________________________________________ 

Q7. We’re hoping you’ll consider participating in the survey. I’d like to send you additional 

information about the study today, as well as the survey instrument. I have your address as 

_______________ and your email address as __________________. Are these correct? 

[IF YES:] GO TO CLOSE 

[IF NO:] CORRECT INFORMATION AND THEN GO TO CLOSE.
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CLOSE. Thank you for taking the time with me today. I’ll send you a more detailed 

project description and the survey. Included will be my contact information so please 

call or email me if you have any questions. 
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Appendix B - Charge Interview Protocol 

MedPAC Analysis of Hospital Charging Practices 

Q.1 [FOR NEW HOSPITALS] Good _________ (morning/afternoon/evening), my name is 

________ and I am calling on behalf of the Medicare Payment Advisory Commission, 

or MedPAC, which advises Congress on Medicare payment policy and other issues. 

MedPAC has engaged The Lewin Group to study how hospitals set and update 

charges. The goal of this telephone survey is to better understand how hospitals 

accomplish this. First I would like to thank you for participating in this study of 

hospital charges. Your participation in the telephone survey is very important to 

policymakers’ understanding the accuracy of Medicare’s payments. Your answers will 

be treated as confidential and your hospital will not be identified to MedPAC or 

anyone else. Are you available now, or would you prefer that I call at another time?

[SCHEDULE TIME FOR CALLBACK] 

OR 

Q.1 [FOR SURVEYED HOSPITALS] Good _________ (morning/afternoon/evening), my 

name is ________ and I am calling on behalf of the Medicare Payment Advisory 

Commission, or MedPAC, which advises Congress on Medicare payment policy and 

other issues. First I would like to thank you for participating in this study of hospital 

charges. Your participation in the telephone survey is very important to policymakers 

understanding the accuracy of Medicare’s payments. Your answers will be treated as 

confidential and your hospital will not be identified to MedPAC or anyone else. Are 

you available now, or would you prefer that I call at another time? [SCHEDULE TIME 

FOR CALLBACK] 

Are you personally involved in the hospital’s charge setting activities? 

[IF YES:] SKIP TO QUESTION 2. 

[IF NO:] Who should we talk with? [OBTAIN NAME OF INDIVIDUAL AND PHONE 

NUMBER IF POSSIBLE AND END INTERVIEW] 

 q1 Yes [SKIP TO QUESTION 2] 

 q2 No 
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Q.2 Is the hospital part of a larger health care system? 

[IF YES:] GO TO QUESTION 3 

[IF NO:] GO TO QUESTION 5 

q1 Yes [GO TO QUESTION 3] 

q2 No [GO TO QUESTION 5] 

Q.3 Does your hospital have discretion in setting or updating its charge structure or are 

these activities conducted at the system level? 

[IF YES:] GO TO QUESTION 5 

[IF NO, AT SYSTEM LEVEL:] GO TO QUESTION 4 

q1 Yes [GO TO QUESTION 5] 

q2 No [GO TO QUESTION 4] 

Q.4 Are you familiar with the details of the system’s policies concerning charge setting or 

updating? 

[IF YES:] GO TO QUESTION 5 

[IF NO:] END INTERVIEW 

q1 Yes [GO TO QUESTION 5] 

q2 No (“Thank you for your time. This is all the information I need today.”) 

Q.5 How long have you been involved with the hospital’s charge setting activities? 

[RECORD VERBATIM]

 _______________________________________________________________________ 
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Q.6 Are you working with charge setting approaches that were developed by your 

predecessors or are they ones you developed (or modified)? 

[RECORD VERBATIM]

 ________________________________________________________________________ 

We would like to understand the processes and information used to make three different 

kinds of changes to the charge master: (1) inflation updates, (2) reviews and changes to 

charges for existing codes, and (3) establishing charges for new services. We will ask a series 

of questions about each type of change. First, however, we would like to ask a couple of 

general questions about the chargemaster. 

Q.7 Would you mind telling us, briefly, about the goals of your charge master update 

processes? 

[RECORD VERBATIM] 

 ________________________________________________________________________ 

Q.8 Please score the influence that each of the following factors (benchmarks) has on 

setting or updating charges, where 1 is “not important” and 5 is “highly important.” 

[READ LIST AND RECORD SCORE] 

 1 2 3 4 5 

Q.8a Community perception 

Q.8b Hospital mission 

Q.8c Overall cost inflation 

Q.8d Changes in costs of specific 

services/procedures/devices

 

Q.8e Indirect cost allocation 

Q.8f Competitive forces (e.g., benchmarked to other 

facilities in your area)

 

Q.8g Influence of specific payers 

Q.8h Managed care contract terms 

Q.8i Other (Please describe) 
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Q. 9 Has the importance of any of these factors changed in recent years? 

[RECORD VERBATIM] 

 ________________________________________________________________________ 

Q.10 What is the formal review and approval process for charge master changes? 

[RECORD VERBATIM] 

________________________________________________________________________ 

Q.11 Which departments are involved in the process? 

[RECORD VERBATIM] 

________________________________________________________________________ 

INFLATION 

Q.12 The next series of questions is about general inflation updates. How often do you 

update the charge master? Have updates been more frequent in recent years? 

[RECORD VERBATIM] 

 ________________________________________________________________________ 

Q.13 Are these updates typically uniform across the charge master or do the updates vary 

by department, type of service, or specific item? 

[IF UNIFORM:] GO TO QUESTION 14, THEN SKIP TO QUESTION 18 

[IF BY PROGRAM OR PROCEDURE:] GO TO QUESTION 14 

 ________________________________________________________________________ 

Q.14 Do you mind telling us the overall average rate of increase in your charges for your 

last update?

[RECORD VERBATIM] 

 ________________________________________________________________________ 
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Q.15 Please give us examples of the department, type of service, or specific items that 

received the highest percentage increases. 

[RECORD VERBATIM]

________________________________________________________________________ 

Q.16 Please give us examples of the department, type of service, or specific item that 

received the lowest percentage increases. 

[RECORD VERBATIM]

________________________________________________________________________ 

Q.17 What accounts for the variation in charge increases by service/procedure type? 

[PROBE:] Can you tell us how “different” charge increases are determined?

[RECORD VERBATIM]

________________________________________________________________________ 

EXISTING SERVICES 

Q.18 Now, I would like to ask you to walk me through how you review charges for existing 

services. How often do you review charges for specific, existing services? For what 

kinds of reasons? 

[RECORD VERBATIM] 

________________________________________________________________________ 

Q.19 Who is involved in the process? 

[RECORD VERBATIM] 

________________________________________________________________________ 
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Q.20 What information is used to revise charges? 

[RECORD VERBATIM] 

________________________________________________________________________ 

NEW SERVICES 

Q.21 Is the same process used to establish charges for new departments, types of service, or 

specific items, such as a drug eluting stents or new outpatient surgery procedures? If 

not, please elaborate? 

 q1 Yes 

 q2 No 

[RECORD VERBATIM] 

________________________________________________________________________ 

MARK-UPS 

Q.22 If we looked at the mark-up of charges over cost for new and existing departments, 

types of service, or specific items, would we find significant differences by: 

 o routine vs. ancillary 

 o high vs. low cost 

 o department 

 o operating room 

[RECORD VERBATIM] 

[IF SIGNIFICANT DIFFERENCES:] GO TO QUESTION 23 

[IF NOT SIGNIFICANT DIFFERENCES:] GO TO QUESTION 27 
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Q.23 What is the basis for differential mark-ups? 

 o routine vs. ancillary 

 o high vs. low cost 

 o department 

 o operating room 

[RECORD VERBATIM] 

________________________________________________________________________ 

Q.24 Which particular departments, types of service, or specific items have larger markups? Why? 

[RECORD VERBATIM] 

________________________________________________________________________ 

Q.25 Which particular departments, types of service, or specific items have smaller markups? Why? 

[RECORD VERBATIM] 

_______________________________________________________________________ 

Q.26 (OPTIONAL QUESTION) Do you think these differentials flow through to particular 

types of DRGs? If so, which types? 

[PROBE:] Please give examples. 

[RECORD VERBATIM] 

________________________________________________________________________ 

Q.27 One reason for differentials in mark-up might be that some departments, types of 

service, or specific items are allocated more indirect costs than others. Do you think 

that happens in your hospital? If so, do you think differences in indirect cost 

allocations contribute to differential mark-ups? If so, please give examples. 
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[PROBE:] To what extent does this affect mark-up differentials across departments, types of 

service, or specific items or, ultimately, types of DRGs? Please give examples. 

[RECORD VERBATIM] 

________________________________________________________________________ 

CARDIOLOGY SERVICES 

Q.28 Now I would like to explore the charge setting process for cardiology services. Are 

charges for all cardiology services determined using a standard mark-up? 

[RECORD VERBATIM] 

_______________________________________________________________________ 

During a hospital stay or outpatient visit, a cardiac patient can receive and generate charges 

for multiple services, including procedures, ancillaries, drugs, devices, and supplies. Some of 

these services are unique to cardiac patients (e.g., cardiac catheterization and perfusionist 

services) while others draw from other departments (e.g., imaging services, drugs, medical 

devices). 

Q.29 To what extent do services unique to cardiac patients have a differential mark-up than 

services from other departments? 

[RECORD VERBATIM] 

_______________________________________________________________________ 

Q.30a If you have a cardiology operating room, is its time charge differentially marked-up 

compared to other operating rooms? 

[RECORD VERBATIM] 

_______________________________________________________________________ 

Q.30b Do you have a cath/procedure suite for interventional cardiology? (Y/N)

If so, how do you develop charges for services provided in that suite? Do charges differ from 

those for cardiology procedures performed in the OR? How? 
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[RECORD VERBATIM] __________________________________________________ 

Q.31 Are the charges for services in other departments that are used primarily for cardiac 

patients set differently than the charges for other items in those departments? 

[RECORD VERBATIM] 

_______________________________________________________________________ 

Q.32 What is the role of the manager of cardiac services in establishing charges for services 

and items coming from other departments (e.g., drugs or cardiac devices)? 

[RECORD VERBATIM] 

_______________________________________________________________________ 

Q.33 Do charges for high cost cardiology procedures/items reflect a lower mark-up than for 

lower cost procedures/items? 

q1 Yes 

q2 No 

Q.34 Are there any other special issues related to setting charges for cardiology services? 

[RECORD VERBATIM] 

________________________________________________________________________ 

PHARMACEUTICALS 

Q.35 Now, I would like to ask about charges for pharmaceuticals, including both drugs and 

biological products. Do you use a table or formula to determine pharmacy charges? 

q1 Yes 

 q2 No 

[IF YES, ASK THE FOLLOWING] 
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What factors do you consider in building each charge in your table/formula? 

[RECORD VERBATIM]_____________________________________________________ 

What portion of drugs/biologics, if any, are excluded from your pharmacy 

table/formula?Why? 

_____ % 

_____ other _______________________________________________________________ 

[RECORD ANSWER TO WHY VERBATIM] _____________________________ 

 ___________________________________________________________________

Do mark-ups vary with drug acquisition costs? By class of drug? With overhead costs? 

[RECORD VERBATIM] 

_______________________________________________________________________ 

Q.36 How do you factor pharmacy department overhead into charges for specific drugs? Is 

there a separate charge? Do you add a uniform charge to each drug? 

[RECORD VERBATIM] 

_______________________________________________________________________ 

Q.37 Do overhead allocations vary with drug acquisition costs? 

[RECORD VERBATIM] 

_______________________________________________________________________ 
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Q.38 Do overhead allocations vary by class of drug? 

[RECORD VERBATIM] 

_______________________________________________________________________ 

Q.39 Are there special issues related to setting charges for pharmaceuticals? 

[RECORD VERBATIM] 

________________________________________________________________________ 

Q.40 Thank you for taking the time to speak with us. Do you have any questions for us 

about the study? 

[RECORD VERBATIM] 

________________________________________________________________________