William O. Cleverley on Strategic Pricing
An hfm Web Exclusive
Q. What do you see as the biggest challenge to overcoming the myths about strategic pricing?
A. Many people have a negative reaction to the term strategic pricing. Some believe that it is nothing more than maximizing payment from those payers who have billed charge payment provisions. Others see little impact from pricing given the relatively small percentage of business that is paid on a billed charge basis. Both views have elements of truth, but do not capture the primary objective of pricing. Pricing is a management decision process designed to generate adequate revenues for the hospital and to create payer equity to the greatest extent possible. Revenue maximization is not and should not be a singular objective.
Q. What leadership role should healthcare financial executives take to make sure their organizations' prices are fair and defensible?
A. Senior financial executives should be involved in establishing the strategic objectives upon which pricing decisions are made. Specifically, they should define the level of income that is required in the coming budget period. They should also define product lines where market share growth is critical to the hospital's strategic plan. Prices in these areas may be established at levels below full cost to accelerate market growth. Finally, senior financial executives should establish appropriate levels of payer equity, especially for uninsured patients.
Q. What are the key elements of a defensible pricing strategy?
A. Defensibility of hospital prices is ultimately related to five primary factors:
- First, current and proposed prices at the encounter and procedure level need to be compared with those of local or regional peers. High relative prices may imply a need for market correction.
- Second, even in situations where a hospital has high prices, it still may have price defensibility. To defend relatively high prices a hospital needs to establish that it does not have an excessive cost structure and/or that it has a poor payer mix, e.g., high Medicaid and uninsured.
- The third factor relates price defensibility to payer equity. Specifically, payment-to-charge ratios for commercial payers should not exhibit large variations that are not supported by cost savings. If wide variation exists, payers with the lowest payment-to-charge ratios will expand, driving out better payers.
- The fourth factor is the relationship of price to cost, or mark-up. Ideally, mark-ups across departments and procedures should be similar.
- The fifth factor concerns pricing policies for the uninsured. While charity care policies are critical, it is also important to establish discount policies for those who are deemed ineligible for charity care. These patients will most likely have high levels of nonpayment, so establishing greater discounts may not cost much. However, rewarding individuals who are financially able to afford health insurance can send some negative messages for future coverage. Many uninsured already see the hospital as the provider for their healthcare services.
Q. What changes in healthcare payment would you like to see the next administration champion?
A. Long term, payment levels from Medicare and Medicaid need to be adjusted so that actual payments approximate cost. Given current government funding forecasts, there are only two ways in which this can happen. First, the government could modify the benefit structures so that less is provided. This can happen by either reducing the number of beneficiaries or limiting coverage for existing beneficiaries. Second, more of the funding for existing programs, especially Medicare, could come from Medicare beneficiaries. Neither option would be popular, but projected spending levels are untenable and spending must come into equilibrium with funding.
William O. Cleverley, PhD, is president, Cleverley and Associates, Worthington, Ohio, and a member of HFMA's Central Ohio Chapter (firstname.lastname@example.org).