The chargemaster: the list price
Every hospital maintains a chargemaster, a master file of every billable item with an associated price. This is the hospital's list price. Chargemaster prices are set by hospital administrators and revenue cycle staff, often based on what competitors charge and what the market will bear for uninsured patients.
Chargemaster prices are consistently higher than what any payer actually pays. A RAND Corporation study of hospital prices found that commercial insurers paid an average of 224% of Medicare rates in 2020. Chargemaster prices are often 300% to 1,000% of Medicare rates. The chargemaster is a ceiling, not a market price.
How insurers negotiate different rates
Every insurer that contracts with a hospital negotiates its own rates. Larger insurers with more covered patients have more leverage and typically negotiate lower rates. The same hospital may have dozens of different contracted rates for the same procedure, one for each insurer it works with.
Rates are negotiated as percentages of the chargemaster, as fixed payments per case (DRGs for inpatient care), or as percentages of Medicare rates. The final negotiated rate is confidential under most contracts, which is why price transparency regulation was necessary to surface this information.
Government-set rates: Medicare and Medicaid
Medicare rates for inpatient hospital stays are set through the Inpatient Prospective Payment System (IPPS), which assigns each diagnosis a Diagnosis Related Group (DRG) with a fixed payment. For outpatient services, rates are set through the Outpatient Prospective Payment System (OPPS) and the Medicare Physician Fee Schedule.
Medicaid rates are set by each state and are generally lower than Medicare rates, often below the actual cost of providing care. Hospitals serving large Medicaid populations receive supplemental Disproportionate Share Hospital (DSH) payments to offset these losses.
Price transparency requirements
The Hospital Price Transparency Rule (effective January 1, 2021) requires all Medicare-participating hospitals to publish two types of pricing information: a comprehensive machine-readable file listing prices for all items and services, and a consumer-friendly display of prices for at least 300 shoppable services.
The machine-readable file must include the chargemaster rate, negotiated rates with each insurer identified by plan name, and de-identified minimum and maximum rates. This data makes it possible for the first time to compare prices across hospitals and across payers.
What self-pay patients are charged
Self-pay patients without insurance are typically billed the chargemaster rate unless they negotiate or qualify for financial assistance. Some hospitals have a separate "uninsured" or "self-pay" discount rate that is lower than the chargemaster but still higher than negotiated insurance rates.
Under IRS Section 501(r), nonprofit hospitals cannot charge patients who qualify for financial assistance more than the "amounts generally billed" to insured patients. This is typically the average of what all private insurers and Medicare pay for the service, which provides an implicit ceiling for qualifying uninsured patients.
Frequently asked questions
Why do hospitals charge so much more than what they actually receive?
The chargemaster system evolved because hospitals negotiated different rates with different payers. To have room to discount, they started from a high list price. The system is self-reinforcing: as list prices rose, negotiated discounts grew, and hospitals raised list prices further to maintain revenue. The result is list prices with no relationship to actual costs.
Can I find out what my insurer pays before I receive care?
Yes, through the hospital's published price transparency file. The file must show your insurer's negotiated rate for specific services. Most insurers also now provide cost estimation tools that show your estimated out-of-pocket cost for planned procedures.
Do all hospitals use the same pricing structure?
No. Physician-owned clinics, federally qualified health centers (FQHCs), and rural health clinics use different rate structures. Ambulatory surgery centers (ASCs) have separate Medicare payment schedules than hospitals. The chargemaster-based system primarily applies to traditional hospitals.
How do DRGs affect what I pay?
DRGs (Diagnosis Related Groups) set the total Medicare payment for an inpatient stay regardless of actual services used. Hospitals keep the DRG payment whether the stay is short or long. You are typically responsible for the Medicare Part A deductible per benefit period ($1,676 in 2026), not a per-day amount for the first 60 days.