As consumers take on more cost responsibilities for their own health care, providers should adopt a more retail-oriented approach to positioning and pricing strategies to stay viable.


At a Glance

Healthcare providers can learn a variety of pricing lessons from the retail market:

  • For providers, wholesale pricing—“the price to play”—alone is not enough.
  • Once a hospital or health system chooses a market position, the provider creates an expectation that must be met—consistently.
  • Consumer loyalty is fluid, and the price of care or service is not always the motivator for choosing one organization over another; intangibles such as location and level of customer service also drive purchasing decisions.

As the healthcare industry moves toward value-based models of service and payment, and as insurance coverage models require consumers to be more conscious of the cost of their care, consumers increasingly will approach the purchase of healthcare services much as they would a retail shopping experience: “Do I want to pay that much for this service?” To stay ahead, hospitals will find they need to adopt a more retail-oriented approach to pricing, leaving the comfort zone of cost-plus pricing.

The more familiar process of negotiating payment at a provider-payer level will still be part of healthcare providers’ pricing strategy. Now, however, providers also will need to add another level to their pricing strategy—the ability to establish market positioning and pricing that will attract consumers, particularly as consumers are asked to take on greater financial responsibility for their care. Adopting a well-considered, two-part pricing strategy from payer to user can differentiate a provider within a market and, if done properly, lead to both volume and margin gains. Here’s how providers can tackle this newer approach.

From Wholesale to Retail Pricing

To start, healthcare providers should categorize wholesale pricing as “the price to play,” meaning the prices a hospital or health system has to offer to be included in networks of choice. Within this segment, a provider can select a position that reflects the organization’s financial needs, clinical offerings, and dimensions of service or care that differentiate it from its competition. 

Wholesale pricing makes hospital services available; however, end-user or consumer pricing determines how affordable a service is for a patient and thus is more likely to determine how many patients select a specific hospital for that service. We see this example every day in the retail industry: Everyone may want to drive a widely available Mercedes, but the price of this luxury car limits the number of purchases.

General-merchandise retailers offer a good frame of reference to understand positioning and pricing strategies. Such retailers offer a wide selection of products at a wide range of prices with varying levels of service or other intangibles. Hospitals might reasonably pursue the market in a similar fashion. 

Taking a (Market) Position 

As in retail, consumer pricing should follow a provider’s overall market position to be successful. Following are three options for price positioning that providers can adapt from the retail world to the healthcare services arena.

The low-price strategy. Modeled after the Walmart approach, this strategy advances low price but sustains margin at optimal levels. As health care continues to become commoditized, the risk of a completely price-driven healthcare market increases. Community hospitals, especially, may find it increasingly difficult to create meaningful differentiation, making a low-price strategy the default option. A meaningful point of difference in health care is often defined by advanced technology or advanced care. A low-price strategy could result in margins so narrow that little capital is available to invest in the differentiating items.

The good-value strategy. This Target-like approach adds benefits beyond the product’s efficacy. Target touts fashionable merchandise at a reasonable price. With an inventory similar to Walmart, the retailer looks beyond price for differentiation and essentially says, "Our offerings are closer to what you want for your lifestyle, but still within your price range." A hospital adaptation could leverage its service amenities, convenience factors, or packaging of its services for a “good value” position. 

The elite-value strategy. Here, a provider offers access to services and specialists not widely available in the marketplace or to an elite corps of specialists and technology, analogous to Nordstrom in the retail market. This differentiation can be perceived or real. Although the elite-value segment in the retail world is not terribly crowded, the opposite would more likely be the case with hospitals: Advanced care is now widely available geographically, so providers should replace the selling point of convenience with the promotion of benefits resulting from higher value. Academic medical centers, large urban hospitals with centers of excellence, and others may be able to create niche offerings in certain clinical areas. The trick is to identify services in high demand and with corresponding margins—two elements not always present in elite-type services.

Once determined, the market position creates an expectation that must be met. Walmart can’t sell a loaf of bread for $100, and Nordstrom can’t refuse a return. Organizations have to be able to play by the rules they’ve set—and do so consistently. 

Product Pricing—Where to Start

The next step is to determine product pricing that delivers on the chosen market position. Two general product pricing scenarios can be considered: basic services pricing and tiered pricing.

Basic services pricing. This scenario recognizes that services in areas such as diagnostics will have more price sensitivity than others, given the number of people who use these services and the out-of-pocket portion consumers pay. Experts predict that, as out-of-pocket deductibles, coinsurance, and copayments increase, consumers are likely to price shop for services such as these and possibly transfer their results to another provider of choice.

Services seen as “basics” could be likened to loss leaders in retail because such services could provide an entry point for individuals at risk, who might require follow-up visits and additional, possibly higher revenue-generating, services (e.g., joint replacement). The more important challenge is not to provide the lowest price but to have a clear conversion strategy for those diagnosed at risk. By electing to establish a low price point for basic services such as diagnostic imaging without a conversion strategy, a hospital in effect will provide conversion opportunities for other hospitals in the market. Consciously or not, many hospitals are implementing conversion strategies through the use of clinical “navigators,” which will become increasingly critical for moving patients to the next level of appropriate care.

Tiered pricing. This product pricing scenario could be compared with pricing for cable television or cell phone services, where pricing would correspond with the level of service provided. In the case of a healthcare provider, the level of pricing could depend on the perceived severity of the diagnosis against the evidence of a solution. It could also depend on the organization’s demonstrated level of quality for a particular treatment or product line (for example, whether the organization has received accredited clinical recognition for its care and service in a specific area) or the amenities a hospital provides for patients. Consider three pricing options in a healthcare tiered-pricing scenario: market neutral, higher personal value, and “Angel solutions.”

Market neutral pricing positions the healthcare provider as offering services at a competitive out-of-pocket or coinsurance rate in comparison with other providers. Services that could qualify for this positioning would be those perceived as having a low clinical risk, such as normal newborn delivery or outpatient surgery procedures, and as being “routine.” 

Delivering higher personal value makes more of the existing benefits the healthcare provider has to offer that consumers may be willing to pay extra for, such as single rooms, medical staff board certification of specialists/hospitalists, or even nontangibles, such as strong satisfaction scores.

“Angel solutions” leverage unique procedures or staff skills to deliver effective solutions for a particularly severe diagnosis. Price is not a consideration.

Measuring Pricing Versus Loyalty

After opting for a more general product pricing scenario, a provider can further refine its pricing scenario to ensure it is viable by gauging the impact that incremental price changes could have on a consumer’s choice of service and thus provider. However, gathering this type of intelligence is not easy, despite harbingers of consumers who are increasingly price shopping for their healthcare needs. For one thing, consumers aren’t used to price shopping for healthcare services; for another, they lack access to the information needed to make such comparisons. For example, only 6 percent of Americans have online access to hospital pricing information, according to a 2012 Harris Interactive study (Patient Choice an Increasingly Important Factor in the Age of the “Healthcare Consumer,” Sept. 10, 2012). 

A recent example from a retail pharmacy suggests that customer loyalty is fluid, and money is not always the motivator. In early 2012, pharmacy benefits manager Express Scripts and retailer Walgreens were unable to resolve contractual 

differences, resulting in network exclusion for Walgreens and 60 million prescriptions going up for grabs. The two parties resolved their contractual differences months later, but Walgreens faced the daunting task of recapturing $3.6 billion in lost revenue and $600 million in lost profits. The situation could be analogous to a hospital being kicked out of a large local network.

About two-thirds of consumers use just one pharmacy for their household’s needs, and more than 90 percent have a “preferred” pharmacy, according to research from AccentHealth LLC (Martin, T.W., “Prescription Drug Wars Begin,” The Wall Street Journal, Sept. 17, 2012). So a switch from Walgreens to a competitor could have a lasting effect on Walgreens’ profit margin.

And so the loyalty wars began. Walgreens offered lost customers a $25 gift card to return to the chain. CVS Caremark and other rivals aggressively worked to keep the newly acquired customers, and CVS Caremark predicted it would retain “at least 50 percent” of the Walgreens business. The battle continues today as a clear example that the market can move at its own pace under its own motivations.

But financial incentives may not be the lever retailers thought they would or could be. Consumers cited store location, customer service, and wait time as the three most important factors when choosing a pharmacy, if every pharmacy accepted their insurance, according to the AccentHealth report. In other words, intangibles drive the purchase decision.

If familiarity with a hospital’s pricing is lacking, how can a hospital gauge the impact of price changes on customer loyalty? Before moving down this road, realize that consumers are ill prepared to answer pricing questions based on arguments already presented. And as in retail, price is a moving target, driven by economic and personal conditions outside a hospital’s area of influence. Although you can test pricing scenarios (discussed later), a better index could be establishing levels of loyalty to your physicians, especially those you employ. Higher commitments to physicians can be measured by identifying issues that would lose loyalty such as long wait times for an appointment, inconvenient locations, or other factors as noted in the retail 

pharmacy example mentioned earlier. Arguably, higher loyalty can equate to higher prices, but everything has limits.

Action Steps for Providers

Retail-like price shopping for health care may be a bold new frontier for all parties, but providers can prepare for a more competitive pricing market by considering the approaches outlined earlier. Specific action steps hospitals should consider are listed in the sidebar above. Detail on four of the most critical of these steps follows.

Gather competitive pricing from all sources for a particular market. Pricing information may be more abundant than anticipated. Competitors’ websites are a good place to start looking. Hospitals in some markets are posting pricing information, albeit sporadically. Check out your competitor online for free market intelligence.

National payer websites are also good sources. National insurers such as Aetna have price checking/copayment functionalities online for their members. Users can see a display of price ranges as well as out-of-pocket, coinsurance, or copayments for a procedure within a network. 

Although their functionality is somewhat basic, new websites such as HealthcareBluebook.com are increasingly publishing prices for healthcare services within a marketplace. Expect these sites to become more robust once health insurance marketplaces come to market.

Employer websites are another excellent information source. Based on some combination of frustration and efficiency, large employers are taking it upon themselves to post local market prices for hospital services for their employees. In one instance, grocer Safeway listed prices and corresponding copayments for colonoscopies in San Francisco. The list revealed that area prices ranged from $700 to $7,200 for the procedure. Safeway set a reference price of $1,250 as the company’s benefit; almost immediately, employees switched to the lower-priced providers.

Use market research to understand trade-offs consumers are willing to make. In most consumer-driven industries, companies routinely ask consumers what they are willing to spend for products. The process allows the seller to measure price sensitivity and get clear feedback from the purchaser on value propositions. Healthcare providers can do the same. Once a provider identifies its soft selection factors, it can work toward identifying the monetary value consumers would place on having those factors. A conjoint analysis is a reliable means for letting end users express what they are willing to trade off for price versus accessibility: What does the purchaser consider to be “basic” services, and what, if anything, can a provider do to add value and increase price? 

“Sell” the organization’s pricing strategies to physicians and staff. After decades of illogical pricing, a cultural revolution is needed within the hospital to implement price strategies in tune with healthcare reform. Explain to physicians and staff why specific pricing strategies were chosen and invite them to ask questions or offer feedback. (See the sidebar below.)

Set the organization’s market position. Arguably the most critical decision for providers to make is deciding how to market themselves. Is your organization the Walmart, Target, or Nordstrom of your market—or something different? Establishing a market position should be considered a critical strategy for success, and the position the provider seeks to establish should be considered somewhat absolute, as the market routinely accepts the position the seller originally seeks. For example, Walmart tried to move into higher-priced women’s fashion and failed miserably. Retailer J.C. Penney attempted to reposition itself away from constant sales events into “everyday value.” But the strategy met with such strong resistance from the marketplace that it has reverted to price promotions. The strategy has failed so miserably that speculation abounds that the chain could close.

Choose your organization’s market strategy wisely. The market is quite unforgiving, and it is likely that your organization will own the strategy it pursues.

Healthcare providers should select a market position that differentiates their services in the marketplace and then set pricing strategies that attract and retain consumers and build loyalty. Providers that do so will find themselves better prepared for the more consumer-driven marketplace that healthcare reform promises. 


Arthur Sturm is president and CEO, SRK, Chicago. 

Frank Tiedemann is CEO, Salient Strategy for Healthcare, Irving, Texas, and the author of Playbook for the Accountable Care Strategist.


sidebar 1:

10 Considerations for Building a Pricing Strategy

  • Make margin decisions now.
  • Gather competitive pricing from all sources.
  • Use market research to understand trade-offs consumers are willing to make between price versus service.
  • Assess the value to you of a loss leader.
  • Calculate customer value profile to include transaction and downstream.
  • Scrutinize cost reports for accuracy.
  • Inventory your "soft selection" factors.
  • “Sell” the organization’s pricing strategies to physicians and staff.
  • Identify and follow enterprise metrics.
  • Set your market position.

sidebar 2:

Leading an Internal Price-Change Revolution

In establishing a more retail-style-driven pricing strategy to attract con-sumers, hospitals also should find a way to “sell” a more retail-style pricing scenario to their staff and physicians. And it’s by no means an easy sell. 

Hospital culture has developed around three pricing strategies left over from the early Medicare cost-plus era: 

  • Do more, earn more.
  • Shift unpaid costs to private insured patients.
  • Keep raising hospital sticker prices annually to cover general cost increases of labor and cost of goods.

Internal hospital employees and staff, especially physicians, have been conditioned to accept the idea that doing more earns more. A cultural revolution is needed within hospitals to implement price strategies in tune with healthcare reform. Because it took two decades to convince physicians that hospital DRGs were here to stay, we can expect this cultural revolution to take much more than a few memos and meetings with the medical staff.

Every revolution runs on words. Introducing significant change requires a clear, concise story of change. The message is: The end of fee-for-service is near. Prepare for it, adopt new price strategies, and begin to accept new forms of payment for your services. Life will go on. This message should be delivered repeatedly through every channel possible to reach physicians and employees. 

Every revolution has its heroic leaders. In this case, having leading physicians deliver the message and endorse change helps unfreeze the status quo. This education is most effective in small, personal, face-to-face presentations. Physicians love facts and respond well to presentations that give them information they can process themselves.

Hospital employees similarly want to know the truth in a straightforward way that reduces their uncertainty about the future. Attention to shop stewards in organized labor settings can pay dividends when sending a message about dramatic change. 

Finally, a well-prepared board of directors supporting its administration, telling the story of change, can help prevent an unfortunate political uprising to “kill” the messenger.

Publication Date: Wednesday, May 01, 2013

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