A discount is not a price: who wrote the number it starts from?
A generic guarantee at 85.5% off AWP, a hospital contract at 50% off charges, an out-of-network allowance at a percent of a database. In each one the discount is real and the base belongs to someone else. The 2024 Medicare file shows what that means for one sepsis admission at 13 Houston hospitals.
- Data
- Medicare inpatient file, 2024 discharges
- Case
- MS-DRG 871, sepsis with MCC, 13 Houston hospitals
- Spread
- Charges $54,321 to $194,025 for one DRG
- 50% off charges
- 1.9x to 6.2x the total payment for the stay
On this page
The pattern
Every one of these contracts is honest about the discount. None of them is honest about the number the discount comes off, because that number is written by the party being paid, or by an affiliate of the party doing the paying.
- Pharmacy. A generic guarantee is written as a percent off average wholesale price. AWP is a list price that the labeler sets. When the pharmacy benefit manager’s parent owns the labeler, the discount and the base come from the same family.
- Hospital. A legacy, stop-loss or out-of-network contract is written as a percent off billed charges. The chargemaster is the hospital’s own price list, and nothing ties it to cost or to any other hospital’s list.
- Out-of-network. An allowance is written as a percentile of “usual and customary” charges from a database the payer licenses and the provider never sees.
The arithmetic is the same each time. A large discount off a high base can cost the plan more than a small discount off a normal one. The audit question is never the percentage. It is who wrote the base, and whether they benefit from it being high.
The pharmacy case
Ginny Crisp, a pharmacist who ran 59 PBM requests for proposal in 2025, described a public-employer contract written at AWP minus 85.5%, and pointed to 46brooklyn Research’s analysis of Quallent, the generic label owned by Express Scripts’ parent: an AWP that averaged about 38 times the label’s own wholesale cost across its products. CVS Health owns a label called Cordavis and Optum owns Nuvaila; the same analysis has not been published for those two. Her three checks: how the contract prices a generic claim NDC by NDC, whether it says anything about affiliated or private-label products, and which labelers show up in the plan’s own generic claims.
The public base on the pharmacy side is NADAC, the national average drug acquisition cost, published per NDC every week. A plan can put each affiliated NDC’s NADAC next to the other labelers’ NADAC for the same drug without licensing anyone’s AWP.
The hospital case: one DRG, 13 Houston hospitals
Medicare publishes, for every hospital and every MS-DRG, the average billed charges and the average total payment for the stay. Sepsis with major complications, MS-DRG 871, is the most common inpatient DRG in the country, so the sample is large. These are the 13 Houston hospitals in the 2024 file.
| Hospital | Stays | Avg billed charges | Avg total payment | 50% of charges | Ratio |
|---|---|---|---|---|---|
| HCA Houston Healthcare Northwest | 169 | $194,025 | $18,776 | $97,012 | 5.2x |
| HCA Houston Healthcare Medical Center | 21 | $185,750 | $15,079 | $92,875 | 6.2x |
| HCA Houston Healthcare West | 134 | $172,734 | $19,753 | $86,367 | 4.4x |
| Houston Methodist Hospitalpriced three ways below | 808 | $156,750 | $22,289 | $78,375 | 3.5x |
| CHI St Luke's Health Baylor College of Medicine Me | 193 | $133,936 | $19,824 | $66,968 | 3.4x |
| Memorial Hermann Texas Medical Center | 409 | $114,869 | $24,783 | $57,434 | 2.3x |
| Houston Methodist Willowbrook Hospital | 507 | $112,600 | $15,427 | $56,300 | 3.6x |
| St Luke's Hospital at The Vintage | 109 | $102,453 | $15,480 | $51,227 | 3.3x |
| Houston Methodist West Hospital | 380 | $99,817 | $15,435 | $49,909 | 3.2x |
| St Joseph Medical Center | 11 | $97,233 | $25,198 | $48,617 | 1.9x |
| Memorial Hermann Hospital System | 1,218 | $80,142 | $17,637 | $40,071 | 2.3x |
| Memorial Hermann Memorial City Medical Center | 308 | $76,314 | $17,323 | $38,157 | 2.2x |
| Harris Healthsafety-net; add-on payments dominate the average; left out of the ranges | 51 | $54,321 | $134,211 | $27,160 | 0.2x |
Same DRG, same city, same year: billed charges span 3.6x across the 13 hospitals. Total payment for the stay spans 1.7x at the twelve without a safety-net profile.
The ratio column is the whole argument. At the hospital with the highest charges, half of charges is 6.2 times what the stay was actually paid. At the lowest, 1.9 times. A plan that negotiated “50% off” at both would believe it had the same deal at each, and would be paying three times as much per stay at one as at the other.
The same stay priced three ways
Take Houston Methodist Hospital, 808 sepsis stays in 2024, average charges $156,750, average total payment $22,289.
| Contract | Base | Who writes the base | Plan pays |
|---|---|---|---|
| 50% off billed charges | $156,750 | The hospital | $78,375 |
| 140% of Medicare | $22,289 | Public rule, same for every payer | $31,204 |
| Medicare itself | $22,289 | Public rule | $22,289 |
The percent-of-Medicare contract looks worse on paper, a 40% premium instead of a 50% discount, and pays less than half as much. The difference is entirely in who wrote the base.
The out-of-network cousin
Out-of-network allowances at “80% of usual and customary” have the same shape with the roles reversed: the base comes from a charge database the payer selects, and the provider cannot see how it was built. That is why the No Surprises Act replaced it, for covered claims, with the qualifying payment amount, which at least starts from contracted rates. The structural question survived the law: a percent of a number one side controls is a negotiation about the number, not the percent.
Three checks before you sign
- Price the claim from the public base first. For an inpatient stay, that is the Medicare DRG payment for that hospital, which anyone can compute. For a generic drug, it is NADAC for that NDC. Do this before reading the contract’s percentage.
- Put the contract’s base next to it. Billed charges against the Medicare payment; AWP against NADAC. The gap between the two bases is the room the discount is operating in.
- Ask who writes the base and whether they gain when it rises. If the answer is the counterparty or its affiliate, write the contract on a base they do not control: a percent of Medicare, a per-case rate, or a NADAC-plus fee.
Our contract modeling page prices a DRG claim at a percent of charges, a per diem, a case rate and a percent of Medicare side by side for any hospital. The hospital lookup shows the payment factors behind the Medicare base, and the verify page shows each step of the Medicare price against the official figure.
Questions
Is a percent-of-charges contract always a bad deal?
No. It is a deal whose value you cannot know from the percentage. At a hospital with low charges it can be reasonable; at one with high charges the same percentage is several times the Medicare payment. The chargemaster decides, and the hospital writes the chargemaster.
Why compare to Medicare when hospitals say Medicare underpays?
Medicare is a yardstick, not a claim about the fair price. Its value here is that it is public, computed the same way for every hospital, and independent of either party to the contract. A plan that wants to pay 150% of Medicare can say so in the contract; what it cannot do with a percent-of-charges contract is know what it agreed to pay.
What is NADAC and why does it matter for generics?
NADAC is the national average drug acquisition cost, a per-NDC survey of what pharmacies actually paid to buy the drug, published weekly. It is the public base on the pharmacy side, the analogue of the Medicare payment on the hospital side. A generic guarantee written off AWP can be checked against NADAC for the same NDC without licensing any price compendium.
Where do the Houston numbers come from?
From the Medicare inpatient hospitals by provider and service file for 2024 discharges, which reports average covered charges and average total payment by hospital and MS-DRG. The 50% off charges column is a hypothetical applied to those averages, shown to make the ratio visible. See “About these figures”.
About these figures
Source: the Medicare Inpatient Hospitals by Provider and Service public file, 2024 discharges, filtered to MS-DRG 871 and hospitals in Houston, Texas: 13 hospitals, 4,318 stays. Average billed charges is the file’s average submitted covered charge; average total payment is the file’s average total payment amount, which includes Medicare’s payment, the beneficiary’s deductible and coinsurance and any third-party payment. Ratios divide half of average charges by average total payment at the same hospital. Harris Health is shown but excluded from the ranges because its average total payment ($134,211) is far above its average charges, a sign that add-on and outlier payments dominate its average. The pharmacy figures are as reported by Ginny Crisp from 46brooklyn Research’s published analysis and have not been independently recomputed here. Nothing on this page is a claims determination.