What Medicare Pays for Your Surgery

When you check into a hospital for a hip replacement, the hospital generates a bill for $85,000 – and Medicare pays $12,000. This post uses FY2023 CMS data on 146,000 hospital-DRG combinations to show where the gaps between billed charges and actual payments are widest, and why the number on your hospital bill has almost no relationship to what anyone actually pays.

Hospitals bill Medicare 3–7 times what Medicare actually pays. The same surgery — same DRG code, same procedure — can carry a billed charge ten times higher at one hospital than at another across state lines. This post uses FY2023 CMS data on 146,000 hospital-DRG combinations to show where the gaps are widest, which states inflate prices most, and why the number on your hospital bill has almost no relationship to what anyone actually pays.

When you check into a hospital for a hip replacement, the hospital generates a bill. That bill might read $85,000. Medicare looks at the bill, ignores most of it, and pays $12,000. The hospital accepts $12,000 as full payment.

The $85,000 was never a real price. It came from a document called the chargemaster — a hospital's internal price list, often thousands of pages long, set unilaterally by the hospital and reviewed by almost no one. The chargemaster price is what gets billed to patients without insurance, occasionally what gets reported to regulators, and the starting point for negotiations with private insurers. It is, in the words of one health economist, "the most arbitrary and unreasonable prices in American commerce."

The ratio between chargemaster prices and what payers actually pay has grown for decades. In the 1980s, Medicare typically paid 70–80 cents on the dollar of billed charges. By 2023, that figure had fallen to roughly 20 cents on the dollar for the average inpatient procedure. Hospitals bill five times what they accept as payment. And the variation across hospitals and states is enormous.

Every chart on this page draws from the CMS Medicare Inpatient Hospitals by Provider and Service dataset (FY2023), covering 146,427 hospital-DRG combinations at 2,945 IPPS hospitals.

The chart below shows the 20 most common inpatient procedures in Medicare by total discharge volume. For each, the blue bar shows what Medicare paid on average; the orange bar shows what hospitals billed.

A few observations from the top procedures:

• Septicemia and respiratory failure (the top volume DRGs post-COVID) show billed charges 4–6× the Medicare payment.
• Major joint replacement (DRG 470 — hip and knee) is consistently the highest-volume elective procedure. Hospitals bill roughly $60,000–$80,000. Medicare pays around $14,000–$16,000.
• Heart failure and pneumonia show similar multiples.

None of these gaps are cost-based. Medicare's payment rates are calculated from a formula incorporating actual hospital costs, case complexity, and regional wage differences. The billed charges are set by each hospital's chargemaster with almost no public scrutiny.

The national averages mask even more extreme variation at the hospital level. This scatter plot shows every IPPS hospital that billed Medicare for DRG 470 (Major Joint Replacement of the Lower Extremity — hip and knee replacements, the single highest-volume elective surgery in Medicare). Each dot is one hospital.

The dashed reference lines show where billed charges are 1×, 3×, 5×, and 10× the Medicare payment. Most hospitals cluster in the 3–5× band. But a significant tail extends beyond 10×. A hospital billing $200,000 for a knee replacement gets the same Medicare check as one billing $30,000 for the identical procedure.

This matters because:

1. Uninsured patients are often billed the chargemaster rate, though most hospitals have charity care or negotiated payment plans.
2. Out-of-network billing frequently starts from the chargemaster rate, which is why surprise billing can be catastrophic.
3. Private insurance negotiations use chargemaster rates as anchors, even if the final negotiated rate is much lower.

The billed-to-paid gap varies substantially by medical service category. Surgical specialties with expensive equipment — orthopedics, cardiac surgery, neurosurgery — tend to have higher chargemaster rates. Medical services (infectious disease, mental health) tend to have lower ratios.

The ratio at the right of each bar is how many times the billed charge exceeds what Medicare pays. Musculoskeletal procedures (joint replacements, spine surgery) show some of the highest ratios. Mental health and substance use services show lower ratios — in part because psychiatric admissions are reimbursed under a separate payment system (IPPS psychiatric add-on rates) and the base DRG payments are lower.

Charge-to-payment ratios vary dramatically by state. This choropleth shows the discharge-weighted average ratio of billed charge to Medicare payment at the state level.

States with higher ratios tend to have more consolidated hospital markets (fewer competitors per metropolitan area), higher costs of living, or regulatory environments that historically permitted higher chargemaster growth. The variation isn't purely a function of what Medicare pays — Medicare's geographic adjustments account for local wage differences — it reflects genuine differences in how aggressively hospital systems set their internal prices.

The histogram below shows the distribution of charge-to-payment ratios across all 534 DRGs in the dataset (one data point per DRG, discharge-weighted nationally).

The distribution is right-skewed: most DRGs cluster between 3× and 6×, but a significant tail extends past 10×. The handful of DRGs with very high ratios tend to involve expensive devices (implants, cardiac devices) where hospitals have traditionally padded charges most aggressively.

There are also DRGs with ratios near 1× — these are typically short-stay or low-complexity cases where hospital billing practices have historically been more constrained, often because patients are more likely to be self-pay and the chargemaster rate is more likely to be scrutinized.

All data in this post comes from the CMS Medicare Inpatient Hospitals by Provider and Service dataset (FY2023, released May 2025).

• Scope: Inpatient Prospective Payment System (IPPS) hospitals only — the approximately 3,000 acute care hospitals reimbursed under Medicare's DRG-based system. Critical access hospitals, psychiatric facilities, rehabilitation hospitals, and long-term care hospitals are excluded (they have different payment methodologies).
• Fields used: Avg_Submtd_Cvrd_Chrg (average billed charge), Avg_Mdcr_Pymt_Amt (average Medicare payment), Tot_Dschrgs (total discharges), plus provider and DRG identifiers.
• "Charge-to-payment ratio": Avg_Submtd_Cvrd_Chrg ÷ Avg_Mdcr_Pymt_Amt. All averages in multi-hospital aggregations are discharge-weighted.
• Service line categories: Derived from DRG code ranges corresponding to Medicare Severity DRG Major Diagnostic Categories (MDCs).
• Geographic filtering: Restricted to 50 states plus DC; territories excluded from the state choropleth.

The gap between Avg_Submtd_Cvrd_Chrg and Avg_Mdcr_Pymt_Amt is not pure profit — hospitals have costs, and the chargemaster price doesn't represent revenue. What the gap does represent is the difference between a number hospitals make up and a number Medicare computes from actual cost and utilization data. The chargemaster is theater; the Medicare payment is closer to economics.