July 28, 2004
No one yet has figured out a formula or come up with a chart to tell hospitals when and how much to change their pricing. However, years of reimbursement challenges, coupled with pent-up capital demand and skyrocketing labor and technology expenses, have spurred hospitals to ensure their charges are set appropriately.
A new HFMA educational supplement, published in the July issue of hfm and sponsored by 3M Health Information Systems, examines how you can take a strategic approach to price-setting, and identifies common pitfalls to avoid when pursuing that strategy. Here are just a few of the pitfalls to watch out for:
Across-the-Board Markups
Many hospitals equate strategic pricing with across-the-board markups from year to year. In many cases, across-the-board markups have little impact on net revenue, particularly for services that are primarily charged to Medicare or Medicaid patients. Strategic pricing is just that: strategic. It should involve selective price increases or decreases for each item code to achieve an overall charge increase.
Lack of Pricing Standardization Throughout the Institution
Few issues are likely to bring more customer complaints than services that are priced one way in Department A and another way in Department B. A careful examination of the charge description master (CDM) can help correct these problems.
Pricing Below Fee Schedule
Medicare pays the lower of the fee schedule or charge. Many finance managers assume that Medicare is paying cost -- at least theoretically. So, if a hospital sets a price below fee schedule, it fails to capture even its cost. Chief financial officers should treat Medicare APC payments as a fee schedule, and review fee schedules from Medicaid or other payers to make sure prices are set appropriately.
$5 Aspirin and Other Public Relations Nightmares
Hospitals must take into account high-visibility charges during their pricing strategy. When setting prices, hospitals should be sure their prices and level of profit are reasonable -- for the hospital, board of directors, and the community. They should also evaluate the effects of their pricing on their uninsured and underinsured patient populations and adjust accordingly.
Not Understanding Your Market Situation, Particularly as it Relates to Managed Care Payers
"When thinking about your competitive situation, you have to take into account what the HMO's current hospital network would be and how easy it would be for them to shift patients to another hospital if they had to drop you from the network," says Robert J. Town, Ph.D., assistant professor of health economics at the University of Minnesota's School of Public Health in Minneapolis. Town co-authored a report on hospital pricing and competition in the September 2001 issue of the Journal of Health Economics. The study used data from hospitals in Southern California to estimate factors affecting the negotiated prices paid to hospitals by two major HMOs. The authors found that a hospital's bargaining power -- and, hence, its price -- decreases when HMOs are able to construct alternative networks outside the hospital.
Failure to Bundle Appropriate Charges
Some providers may be unaware that most routine supplies should not be billed separately to Medicare; these are considered part of the room or procedure rate. For example, gowns, gloves, and masks should not be billed as separate items for a surgical procedure. Again, CDM reviews can help identify problematic areas.
SOURCE:
Strategic Price Setting: Ensuring Your Financial Viability Through Price Modeling, an HFMA educational supplement sponsored by 3M Health Information Systems.
Additional Resources
- Revenue Cycle: HFMA Products and Services
- Pricing Strategies: The Governance Institute's Fall Poll Results
- "What Price Is Right?" by William O. Cleverley, Ph.D., hfm, April 2003 (online access available to HFMA members only; non-members see "How to Get Articles")
- "The Hospital Cost Index: A New Way to Assess Relative Cost-Efficiency," by William O. Cleverley, Ph.D., hfm, July 2002 (online access available to HFMA members only; non-members see "How to Get Articles")
- HFMA's Internet Guide to Billing and Collections for the Uninsured (online access available to HFMA members only)
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 III, Issue 16. Copyright 2004, Healthcare Financial Management Association. All rights reserved.