July 13, 2005
PRICE MODELING HELPS PROVIDERS DEVELOP DEFENSIBLE CHARGES
As consumers increasingly bear the burden of their medical expenses and public scrutiny over pricing practices intensifies, healthcare providers must hone or develop pricing strategies that are predictable, rational, and defensible. An effective tool for this purpose is price modeling.
Modeling may involve a host of different methods, but the most commonly used are benchmarking, or market analysis, and cost-based markup.
The Three Factors of Price Modeling
As outlined in a new educational supplement prepared by HFMA and MedAssets, price modeling is in essence a strategy for setting prices and markups on the Chargemaster so that they are based on clear rationale. It incorporates three important factors: costs, comparative market data, and reimbursement.
Costs. For some providers, it's important to look at the cost element as part of the whole equation of what's the appropriate price to charge. This methodology does have its complexities, however, because identifying costs, while usually straightforward for things like pharmaceuticals and supplies, can be difficult when it comes to procedures.
Because of nuances in the way they're reimbursed, hospitals must be careful about relying on strictly a cost-based markup without first understanding what that markup is going to do to the bottom line.
Benchmarking. Benchmarking, or market analysis, involves reviewing prices against the prices of competitors in the same market area. Such an analysis may include comparing current prices to publicly available data such as CMS outpatient data, which is at the CPT level, state data, and certain all-payer proprietary data that covers even non-CPT areas, inpatient services, drugs, and medical supplies. Benchmarking is advantageous because it can be used as a tool in confrontations over pricing, or as a means to avoid confrontation altogether.
Managed Care Contracts. Good price modeling should also include a comprehensive annual review of managed care contracts, taking into consideration the impact of those contracts on pricing. If a hospital raises prices without understanding the payer mix and how it gets paid, those price increases may not generate any additional revenue.
Putting It All Together
Most providers will probably find a combination of benchmarking and cost-based methods most helpful. In some situations, cost is the best driver to set prices, while in others, market factors come into play. Some items can be priced competitively, so a provider may want to set prices on par with the alternatives available to consumers in the market. A hospital, for example, may want to set the price of a radiology exam at about the same level as competitors in the market, such as outpatient diagnostic centers.
Whichever method is used, it should be uniform across all payers. Likewise, hospitals that offer discounts for self-pay patients should make sure those prices are not different for different patient populations.
SOURCE:
Making Prices Make Sense: A Balanced Approach to Defensible Prices, an educational supplement by HFMA and MedAssets.
Additional Resources
- HFMA Roundtable: A Strategy for Defensible, Sustainable Prices
- Strategic Price Setting: Ensuring Your Financial Viability Through Price Modeling
- The Governance Institute's Fax Poll Results -- August 2003 Pricing Strategies
- Articles from hfm (Available online to HFMA members only. Not a member? Join now!)
1. The Price Is Right?, December 2004 hfm
2. Tightrope Walking: Setting Defensible Prices, October 2004 hfm
3. What Price Is Right?, April 2003 hfm
- Educational program recordings
1. Healthcare Pricing: Strategy, Science, and Success Stories, April 2005 Audio Webcast
2. Optimal Pricing Strategies for Healthcare Firms, 2004 Annual National Institute
If you have questions or comments about HFMA Wants You to Know, contact editor Laura Noble at lnoble@hfma.org
HFMA Wants You to Know ISSN: 1540-0697. Volume IV, Issue 13. Copyright 2005, Healthcare Financial Management Association. All rights reserved.