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How Medicare sets hospital prices

Private insurers pay hospitals mainly on the basis of negotiated per-diem rates, sometimes adjusted for case severity and the particular day in a hospital episode (because the early days of an episode generally incur higher costs than subsequent days), for the individual service going into a hospital episode or for some standard procedures, on a case basis. The levels of these payments are negotiated one on one between individual insurers and individual hospitals or hospital chains, as I have described previously.

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