What is the cost-to-charge ratio, and how is it used in hospital financial analysis?

• A. Total charges divided by total costs; used to assess cost efficiency and to set reimbursement expectations.
• B. Total costs divided by total charges; used to assess cost efficiency and to set reimbursement expectations.
• C. Operating revenue minus operating costs; used to measure profitability.
• D. Net income divided by total assets; used to assess return on assets.

Answer: (B)

The cost-to-charge ratio shows how much of what a hospital charges for its services is tied to actual costs. It is calculated by dividing total costs by total charges. This ratio is used to gauge cost efficiency and to set reimbursement expectations because payers and hospitals often use charges as a starting point for payments, and the CCR helps translate those charges into an estimated cost basis. For example, if total costs are $500 million and total charges are $1 billion, the CCR is 0.5, meaning charges are about twice the costs and costs can be estimated from charges by applying this ratio. This helps with budgeting, rate setting, and benchmarking across services or peers.