It's a common form of sticker shock: After a hospital stay, an insured patient gets home to find an explanation of benefits form listing charges in the thousands, or tens of thousands, of dollars.

But upon closer inspection, the form reveals that the hospital and the patient's insurer have agreed that the final bill is only a fraction of the original charge.

So where did the initial number even come from?

"A lot of it really is just a made-up number," said David Howard, health economist at Emory University's Rollins School of Public Health.

At one time, private insurers and Medicare commonly paid hospitals based on a percentage of charges, but today the charges figure is all but obsolete, he said.

The exception is for uninsured patients who, in some cases, have been hit with hardline collection tactics from hospitals trying to get payment on the full charges.

"It's not different from any other area of life where the biggest customer pays the lowest prices," Howard said.

Those aggressive collections against uninsured patients have come under scrutiny in recent years, following news coverage of a few horror stories in the early 2000s.

"In some states, hospitals were putting liens on patient's homes or garnishing wages," said Jessica Curtis, project director for the Hospital Accountability Project and staff attorney with Community Catalyst, a Boston-based consumer advocacy group. In some cases, patients could be jailed if they didn't show up to court, she said.

The news sparked a public outcry and a call for citizen protections by some U.S. legislators, she said, including U.S. Sen. Chuck Grassley, R-Iowa.

Some states have initiated their own consumer protections. Tennessee limits hospital charges for uninsured patients to a maximum of 175 percent of actual costs. That could still give the hospital a profit of 75 percent. The law passed the General Assembly in 2007.

Gordon Bonnyman, executive director of the Tennessee Justice Center in Nashville, said the legislation is a relatively modest concession from the hospital industry.

"This is an industry that's primarily tax-exempt. As a charity, you're only going to mark up your services by 75 percent? And I don't have insurance? It doesn't sound very good," he said.

Federal health care reform includes provisions that require 501(c)(3) nonprofit hospitals to limit charges to patients who qualify for financial assistance to the amount billed to insured patients.

Still, the "charges" figures will continue to show up on patients' explanation of benefits for the foreseeable future, hospital officials said.

Last month, Lisa Shivers, 52, of Signal Mountain, underwent a mastectomy and reconstruction surgery at Memorial Hospital, following a breast cancer diagnosis. She hasn't yet received a bill for the surgery, but the numbers on an explanation of benefits for scans she underwent in September show a wide disparity between charges and payments.

The "billed amount" for her insurer, United Healthcare, was $10,671, but United paid only about $3,600, said Shivers.

The array of numbers on the benefits statement is just "the way it works," she said.

"Certainly I'm sure most people would prefer it's like McDonald's and you walk in and everything is on the menu and you know how much everything is going to cost. But that's pretty much the way our health care system right now seems to work," she said.


Locally, reported charges bear little relation to the payments hospitals actually get from insurance companies.

Last year in Chattanooga, private insurers paid Parkridge Medical Center, Erlanger and Memorial only about 40 percent of charges the hospitals reported for patient services, according to their 2009 provisional Joint Annual Reports. Hospitals must submit the reports annually to the state health department.

Charges were more relevant before 1983, when Medicare switched from a cost-based reimbursement system to a "prospective payment system," in which hospitals are paid a pre-determined rate for each Medicare admission regardless of what services are provided.

As part of the Medicare change, the actual payment is based on a code assigned to the patient, indicating his or her diagnosis and severity level.

Each diagnosis code is assigned a payment based on an expectation of what resources should be used to treat patients in that group, according to the U.S. Centers for Medicare and Medicaid Services. The system aimed to encourage hospitals to be more cost-efficient, hospital industry officials said.

"Nowadays, (charges are) like a manufacturer's suggested retail price," said David McClure, with the Tennessee Hospital Association. "There may be no real correlation between [charges and] the cost of providing that service."

In rare cases, some plans still base payments on a percentage of charges, so hospitals need to keep those charges in order and updated to reflect medical inflation, local financial officials said. But most insurers ignore listed charges, said Parkridge Chief Financial Officer Jay St. Pierre.

"Years ago, raising the charges had a much bigger impact," he said. "What happens [now] is you're paid a fixed amount based on the acuity or severity of that diagnosis. We get paid the same amount for an open heart surgery for Medicare whether that patient was here six days or 16 days."

Thirty states have some kind of law aimed at making hospital charges reportable and transparent, according to the National Conference of State Legislatures.

Tennessee requires hospitals to report charges to the Tennessee Department of Health, but the reporting could actually end up misleading patients, said Steve Johnson, vice president for payer relations at Erlanger Health System.

For example, a hospital with higher charges listed online could have actually negotiated a deeper discount with insurance companies than a hospital with lower charges listed, he said. So the patient choosing the lower-charge hospital might end up facing higher out-of-pocket costs, he said.

Insured patients' out-of-pocket costs, such as co-payments, are based on a percentage of what their insurance provider pays, not on a hospital's charges, he said.