What is 'Unallocated Benefit'

An unallocated benefit is a health insurance provision, in which the insurer covers extra hospital expenses up to a predetermined maximum amount, instead of specifying a maximum payment for each individual type of expense.

BREAKING DOWN 'Unallocated Benefit'

An unallocated benefit reimburses policy holders for extra hospital expenses, such as the costs of anesthesia, X-rays, lab tests, medications and supplies, all of which may be provided without entirely conforming to a schedule.

Grouping these various costs together saves the insurance company a lot of time and resources because it prevents it from having to examine each individual expense. Instead, it just ends up reimbursing the person for a certain amount of the total cost for the various expenses.

A health insurance policy's schedule of benefits lays out which services the policy covers, how much the policy will pay toward the cost of those services and how much the policyholder is expected to contribute. It also states the policyholder's annual deductible, annual out-of-pocket maximum and lifetime maximum, and shows the difference in benefit amounts, if a medical service is acquired from an out-of-network provider, rather than an in-network provider.

How Costs are Calculated for Unallocated Benefits

Hospital reimbursement contracts are negotiated with each payor separately and depend on the relative leverage the hospital and health plan have with each other. Every payor contract has different terms and conditions.

Each hospital has a chargemaster or charge description master (CDM) list that often contains more than 45,000 line items. The CDM list includes every product, procedure, or labor cost incurred by the hospital—up to and including each aspirin, knee implant, diagnostic test, and bed linen.

Hospitals create chargemaster prices by multiplying the cost they pay for a product by 300 to 1,200 percent.

With every patient having a different health plan, hospital administrators and CFOs track the revenue generated by every inpatient treatment, deductible, co-pay, and hospital contract by using something called the cost-to-charge ratio (CTCR).

Calculating CTCR is simple. Simply divide the cost of the item by the chargemaster price. Thus, if a hospital pays $1,000 for a device and marks it up to $10,000, the CTCR is 0.1. The lower the number, the more likely that a product or procedure is revenue positive for the hospital. Each year, hospitals submit average CTCRs for their departments to the Centers for Medicare & Medicaid Services. These reports are published in the American Hospital Directory, which is public data. 

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