July 11, 2007
Hospital financial leaders should take the lead in transforming the nation's hospital pricing system, according to the Healthcare Financial Management Association's (HFMA) latest PATIENT FRIENDLY BILLING® Project report, Reconstructing Hospital Pricing Systems. The report is designed to help all healthcare stakeholders—providers, payers, employers, government, and consumers—understand the critical issues and barriers that must be addressed to bring positive and lasting change to the healthcare pricing system.
It includes results from an HFMA survey of hospital and health system financial leaders to help quantify the significance of certain barriers and the predominant methods of pricing and cost accounting. This report also offers short-term actions providers can take to start the reconstruction process.
A rational pricing system should:
- Be simple to administer and communicate to various stakeholders, including members of the general public
- Be established using a framework that is rational and defensible in relation to objective benchmarks, such as cost and market price
- Create accountability by empowering consumers to make price comparisons
- Allow for full coverage of financial requirements related to providing care and other community benefits
- Provide stability and predictability in administrative processes
What Can Hospitals Do?
The report addresses things hospitals can do to overcome specific concerns, like effects on Medicare outlier. The following are some steps that hospitals can take independently to move toward a better pricing system.
Understand cost. Even if a facility predominantly uses market-based methods of price-setting, rational price-setting will require a sound foundation of cost data to ensure prices cover the cost of services rendered. Some organizations use cost-accounting systems to run detailed information related to actual and incremental costs of each service; other organizations use estimates based on relationships of charges to cost or based on cost proxies, such as an ambulatory payment classification system or relative value unit. According to HFMA research, two cost-accounting methods—ratio of cost to charges and Medicare cost allocation—are used in 73 percent of surveyed organizations.
Compare current prices with peers. Healthcare markets are regional, so hospital executives should review competitors' prices using commercially or publicly available databases. Hospitals need to understand how their prices currently compare in the market. MedPAR discharge data available from CMS include total charges by state and DRG. Medicare cost reports enable hospitals to compare their ratios of charges to cost or cost to charges at a departmental level by state and DRG. Some states offer data sets that enable hospitals to benchmark with competitors individually or by region.
Hospitals responding to the recent Patient Friendly Billing survey cited "available competitor/market data" and "Medicare cost report data" as the most frequently used methods to establish prices. Interestingly, those respondents who indicated they had made "considerable" or "some" progress toward rational, transparent pricing were more likely than others to also include the use of a cost-accounting system or activity-based costing among their most frequently used methods to set prices.
Develop a pricing strategy and structure. Using cost and price data collected, hospitals can determine a rational, competitive pricing structure that will guide redesign and update efforts. Hospital leaders should ask such questions as:
- What are the organization's overall strategic and financial objectives that will drive the pricing philosophy?
- Where does the organization want to be on the pricing spectrum, both related to individual specialty services and overall in the market? (For example, are you looking to be a high-volume/low-price competitor in X and Y areas in the 50th percentile, or the 80th percentile overall?)
- How should the organization integrate a differential "value pricing" approach, which involves establishing prices based on assessment of the unique value offered by the organization in specific service areas?
- Should the organization consider a "strategic pricing" approach, which involves price increases or decreases for selected services to align rates with both cost and competitive prices?
- What role should cost play in setting prices? When is it appropriate to set a price at, below, or significantly above cost?
- How should the organization implement its approach to pricing? How will the approach be monitored, evaluated, and updated?
- How will the organization spread the costs of uncompensated services, including government shortfalls?
Plan time to rigorously assess the impact of price changes. Before making major adjustments to prices, hospitals should calculate the impact of various price structure changes, of course. Solid projections using comparative market pricing data and organizational cost data will be needed. Hospitals equipped with high-quality modeling tools will be able to determine where pricing adjustments would—or wouldn't—be most beneficial, based on payer mix and market constraints. Due to possible effect on volume, price increases cannot be assumed to automatically improve hospital revenue; similarly, price reductions cannot be assumed to automatically reduce hospital revenue.
Ensure patients of limited means are not billed for full charges. In a rational, transparent pricing system, organizations do not expect low-income patients who are uninsured or underinsured to pay more for the cost of care than is paid by commercial insurers or government programs for covered individuals. Best-practice hospitals provide clear, consistent discount policies for this population. Just as with price changes or managed care contracts, these policies must be carefully assessed, and not set arbitrarily, to ensure they are in relation to the actual cost of care and what group purchasers are paying.
Simplify and standardize the chargemaster. A simplified chargemaster will enhance a hospital's ability to post prices and provide patients with accurate and timely information on their financial obligations. Many experts recommend keeping the number of charge codes at a minimum.
Steps in ongoing maintenance of chargemasters include:
- Eliminating rarely used or inaccurate codes
- Adding missing charges
- Correcting mismatched current procedural terminology and revenue codes
- Reviewing charges for accurate structure in the ambulatory payment classification environment
- Making sure the chargemaster is compliant with all CMS regulations
Achieving meaningful transformation of the hospital pricing system to facilitate price transparency is a vastly complex endeavor, requiring collaboration among providers, payers, government, employers, and consumers. As collaborative strategies are identified and implemented to eliminate or reduce the barriers experienced by these relevant stakeholders, the rate of progress will accelerate. Pricing reform is not negotiable; all stakeholders must make this a priority.
Source: Reconstructing Hospital Pricing Systems: A Call to Action for Hospital Financial Leaders, PATIENT FRIENDLY BILLING® Project
Additional Resources:
HFMA Audio Webcast Recordings:
If you have questions or comments about HFMA Wants You to Know, contact editor Maxine Harrison.
HFMA Wants You to Know ISSN: 1540-0697. Volume VI, Issue 14. Copyright 2007, Healthcare Financial Management Association. All rights reserved.