How Do Hospitals Determine Medical Treatment Pricing?

Understanding Hospital Pricing Structures

The cost of medical treatment in hospitals is not fixed and varies due to several factors. Prices differ from hospital to hospital within the same city and also vary from state to state for the same procedure. Understanding how hospitals set their rates can help patients make informed decisions about their treatment options.

Hospitals consider several elements when determining pricing. Factors such as the hospital’s location, infrastructure, the expertise of doctors, and the availability of advanced medical technology all play a role. A well-established hospital with state-of-the-art facilities and highly experienced specialists is likely to charge more than a smaller or newer hospital with limited resources. Similarly, hospitals in metropolitan cities often have higher treatment costs compared to those in smaller towns or rural areas, primarily due to differences in operational expenses, staffing, and equipment costs.

Another important aspect influencing hospital pricing is the type of services offered. Routine procedures may have relatively stable pricing, while complex or emergency treatments can significantly vary. The category of hospital rooms—general wards, private rooms, or luxury suites—also affects the total cost of treatment. Furthermore, the pricing mechanism differs for cash-paying patients, insurance-backed patients, and those covered under government healthcare schemes, each following its own set of pre-determined pricing agreements.

In addition, hospitals must account for accreditation costs, compliance with medical regulations, and the overheads involved in maintaining hygiene and patient safety standards. These factors contribute to the overall cost structure, making it challenging to establish a uniform pricing system across hospitals.

How Do Hospitals Set Prices?

Hospitals determine pricing mainly for "cash-paying" patients—those who pay out of pocket without any government or private insurance coverage. The rates for such patients are set independently by each hospital.

However, for patients covered under government-backed medical insurance schemes, such as the Central Government Health Scheme (CGHS), Ex-Servicemen Contributory Health Scheme (ECHS), or Ayushman Bharat, the pricing is set by the respective government authorities.

For those with private medical insurance, pricing is determined in two ways:

1. General Insurance Practices Service Agreement (GIPSA): This applies to policyholders of four government insurance companies. GIPSA has a fixed price list for over 100 routine procedures, but these rates vary from hospital to hospital as they are based on the existing hospital pricing rather than a uniform rate.

2. Negotiated Rates: Private insurance companies or Third-Party Administrators (TPAs) negotiate discounted rates with hospitals. These are usually 10% to 20% lower than the rates for cash-paying patients.

Why Do Hospital Prices Differ? 

Several factors influence hospital pricing, including:

• Age of the Hospital: New hospitals typically set prices 10% to 20% lower than market rates to attract patients, while established corporate hospitals follow their existing pricing models.

• Infrastructure & Facilities: The quality of infrastructure, availability of specialized doctors, accreditation, and medical capabilities influence pricing.

• Location & Brand Value: Hospitals in metropolitan areas or with strong brand recognition often charge higher prices due to their reputation and quality of care.

Is Uniform Pricing Feasible?

There is growing demand for uniform pricing of medical treatments, and even the Supreme Court has commented on this issue. For patients, standard pricing would bring transparency and certainty about medical expenses.

However, hospital pricing is complex because of multiple factors such as room rent, procedure costs, doctor’s fees, and operational costs. Standardizing prices across hospitals would require accounting for differences in:

• Infrastructure & Equipment Quality

• Medical Expertise & Accreditation

• Availability of Specialized Treatments

• Location & Overhead Costs

The Real Problem: Patients paying out-of-pocket bearing the burden of others who are being treated on lower pricing.

The root cause of pricing discrepancies is not just the hospitals but also government-set pricing and delayed payments under public insurance schemes. Hospitals struggle with reimbursement delays, which affects their ability to provide quality care at lower prices.

One of the biggest challenges with government healthcare schemes is that the pricing set by authorities has remained unchanged for a long time. With rising inflation and increasing operational costs, many hospitals find these rates unviable. As a result, large hospitals often avoid admitting patients covered under these schemes, as they cannot sustain high-quality services at such low reimbursement rates.

Moreover, hospitals face significant delays in receiving payments from government agencies due to lengthy formalities, liquidity issues, and bureaucratic hurdles. On top of that, unnecessary deductions further reduce the already low payments, making it even more challenging for hospitals to operate under these schemes. These factors discourage many private hospitals from accepting government-insured patients, forcing them to either limit admissions or exit the program entirely.

Major Hospitals not empanelled for Ayushman Bharat Scheme

The Ayushman Bharat scheme has been adopted by many healthcare providers, but mostly smaller hospitals participate because large hospitals find it difficult to operate at the low reimbursement rates. Since smaller hospitals often lack the necessary infrastructure and resources for complex surgeries, Ayushman Bharat beneficiaries may struggle to get specialised treatments.

This raises a critical question: How will Ayushman Bharat cardholders receive necessary major surgeries if large hospitals do not participate?

The pricing of medical treatment in hospitals is influenced by a range of factors, from infrastructure and location to government policies and insurance agreements. While the idea of uniform pricing is good, its implementation is complex and requires addressing deeper issues related to sustainability of healthcare services.

For meaningful reform, the focus should be on enhancing transparency in hospital billing, ensuring timely payments from government schemes, and establishing fair pricing mechanisms that strike a balance between affordability and quality healthcare.

Additionally, addressing the challenges faced by larger hospitals in participating in government schemes like Ayushman Bharat is crucial to ensuring accessible and equitable healthcare for all patients. Without these fundamental changes, pricing discrepancies in hospital treatments will continue to persist, affecting both healthcare providers and patients alike.