Hospital Contracts Made Simple – 120% Method

monkey Sam Crafting, M.D.

Sam Crafting 120 Hospital Contract For

By Bill Rusteberg

Hospital contracts, if you can get your hands on one, may prove too complicated for most. Page after page of legalese followed by five or six pages of reimbursement schedules makes for dull reading. On occasion one will be delighted to discover that some payers utilize a simplified, shortened version that even monkeys can understand.

Below is a sample:

Reimbursement Schedule

A. 120% of Medicare reimbursement methodology effective on the date of service


B. 120% of billed charges times the Medicare most current cost-to-charge ratio as filed to CMS

whichever is greater

Here is an example of how payment could be derived on a $100,000 billed charge:

Medicare Allowable                $20,000

A. Reimbursement                  $24,000

B. Reimbursement                 $30,000

Note:  Cost-To-Charge Ratio of .25 used in this example. Cost-to-charge ratio is derived by dividing cost by charges. (Average cost-to-charge ratio in Texas is 398.31% or .25 – Source: Institute for Health & Socio-Economic Policy 2011-2012).

A typical PPO discount of 50-60%  would produce a reimbursement as high as $50,000, or as much as 66% more than the reimbursement schedule shown above. Yet a provider under this 120 Hospital Contract would earn a profit margin of 20%.

Net profit for other industries are much lower: Retail clothing – 7.98%; Equipment Manufactures – 6.81%; Telecomunication – 10.99% (Source: Butler Consultants – Free Industry Statistics).

“Why would a hospital bill $100,000 when they know they will always get a much lower reimbursement? The answer is obvious – the “spread” is a significant revenue stream for third party intermediaries who dominate our health care delivery system” – Dr. Sam Crafting, M.D.

See  Hospitals Dismiss Significance Of Chargemaster Prices?

The Cost-to-Charge Ratio:

Every hospital has a “chargemaster,” a master file of all costs and charges for every hospital service, drug or procedure, which is used to generate both a hospital invoice and the standard required federal UB-92 form that accounts for all inpatient or outpatient hospital procedures.

The Centers for Medicare and Medicaid Services (CMS) compiles this information annually in its Medicare Cost Reports These reports detail every hospital’s costs and charges by department and cost centers. Thus, Medicare knows each hospital’s average daily costs, or operating expenses, to provide care for a patient. Moreover, Medicare knows what every hospital collects from Medicare, managed care and the “self-pay” (i.e., the uninsured).

The ratio between what a day in the hospital costs and what the hospital charges is called the “cost-to-charge ratio” (i.e., the cost divided by what the hospital charges); the closer a cost-to-charge ratio is to 1, the less difference there is between the actual costs and the hospital’s gross charges.

A good source of information on cost-to-charge ratios on specific hospitals  can be found at