Cost vs Price vs Charge, Explained

I’ve written a lot of long blog posts lately, and partly that’s because I don’t want to split certain things up. But I, as much as anyone, love when I see an article is really short. It feels like less of a commitment. So, I am committing to deliver short posts more often. That means covering less ground with each post, but I think discussing a specific single principle in a blog post can be very effective. So, now that I’ve gone on so long about short blog posts, here’s this week’s dose of health policy . . .

Let’s talk about terminology.

When I started medical school, I didn’t understand why there were so many doctor words. It seemed to interfere with physicians communicating clearly with patients because they so often slip into using those jargon-y words.

I have since learned that to be clear with your communication, you need words with precise meanings. This avoids so many problem-causing ambiguities. For example, I could tell another doctor a patient has an owie on his back and it hurts, and it would communicate almost nothing. But if I said the patient has a unilateral eruption of erythematous papules and vesicles along the T6 dermatome with associated burning pain and paresthesias, the other doctor would be able to visualize exactly what I’m describing (Herpes zoster, AKA shingles).

Here are two terms that are used ambiguously in health policy discussions all the time: cost and price.

Cost is the amount of money that goes into producing a product or delivering a service. Calculating cost is often challenging. For example, if you admit a patient for a heart failure exacerbation, you can fairly easily allocate physician and nursing time to the cost of their stay, and it’s not too difficult to calculate many other things like the cost of the medicine you administered and the cost of cleaning their room after they’re discharged, but what about the cost of actually staying in that room for 4 days? You start getting into the depreciation of capital expenditures. And how do you allocate a percentage of administrative employees’ salaries to the cost of that patient’s hospital stay? Maybe this is why so many hospitals don’t even bother calculating costs for specific services delivered!

Price is the total amount of money that is paid to the hospital for delivering a service. Sometimes the patient pays part of the price (known, confusingly, as the patient’s “out-of-pocket cost”), and the insurer pays the rest.

The difference between the price and the cost is the profit the hospital made on delivering that service. Think about how impossible it would be to safely set prices when nobody is accurately calculating costs in a hospital. This is going to become a huge issue when patients start shopping for prices and hospitals are required to start pricing competitively. They’ll have no idea if the price they’re setting will make them a profit or not.

And let’s add a bonus term, one that is special to healthcare. The “charge.” This is completely separate from price. I think it’d be clearer if it were known as the “fictitious price.” It’s basically a made-up number that hospitals use as an anchor for the starting point of price negotiations with insurers. Nobody actually is meant to pay these fictitious prices, although it’s the default thing that will be printed on a bill sent to someone who doesn’t have insurance. And some hospitals jerkily expect people to pay that amount, but usually what happens is they put the patient in contact with their finance people and work out a cash-pay price for them instead. Although, how can they set a reasonable cash-pay price if they have no idea what the cost was of delivering that service to the patient?

Let’s use these terms properly so our discussions can be focused around substance rather than arguing over the definitions of terms!