Where Do Hospitals Get Money?

Although hospitals may receive donations, grants and cash payments for services, generally most hospitals receive the majority of their money through what is called "fee-for-service" billing of government and private insurance companies.

Fee-based billing operates according to contractual guidelines between a hospital and an insurance company. Typically, an insurance carrier has a set of diagnosis and procedure codes for nearly every conceivable condition and treatment a hospital's patients would receive. "Fee schedules" determine how much the insurance carrier is willing to pay, and when a hospital contracts with that carrier, the hospital agrees to see that insurance carrier's patients for a predetermined price per procedure. Billing and coding specialists employed by the hospital submit claims for reimbursement for procedures performed in the hospital, and the insurance companies in turn typically pay the hospital for those services within a few months from the date of the procedure.

A relatively new phenomenon in health care is the payment reform known as "value-based billing." Whereas with fee-based billing a doctor or hospital receives a fixed amount of money for a particular procedure, in value-based billing a doctor or hospital's reimbursement is dictated by the outcomes of the treatment the patient receives. Previously, hospitals seeking higher profits might default simply to seeing more patients. With the advent of the Affordable Care Act and value-based billing, though, hospitals are being called on to provide qualitative care as opposed to mere quantitative care, and reimbursements might be withheld or recouped if the hospital's treatment plans fail to produce positive outcomes.