December 28, 2005
Any effective pricing strategy requires constant data collection, and the key is staying on top of market trends. A new educational supplement prepared by HFMA with sponsorship from Innovative Health Solutions examines the many aspects of setting a rational pricing strategy, including where to look for sources of market trends data.
"The marketplace is becoming very competitive, both from other hospitals and physician-owned providers," says Gregory Adams, senior vice president and CFO of Holy Name Hospital in Teaneck, N.J. "Market comparisons are important for assessing whether any of your services are out of line with market conditions."
Absent a web-based system or software package designed for comparative pricing, hospitals can collect market data using an Excel spreadsheet for key departments or high-volume procedures across all departments. The spreadsheet can record the item description, service code, HCPCS code, current hospital price, competitor or peer group price (obtained from publicly available data), and Medicare fee schedule amounts.
Outside Expertise
At Winona Health Services in Winona, Minn., finance relies on outside expertise to gather public information and organize it into a format from which to make decisions, according to Michael M. Allen, FHFMA, CPA, vice president and CFO. Winona Health includes a 99-bed hospital, 160-bed nursing home, 80-bed assisted living facility, and other clinics. "Gathering the information is probably something any hospital can do, but synthesizing the data and building various pricing models takes some sophistication that many hospitals don't have," Allen says.
Many commercial products are available that can help healthcare organizations collect market data. On the inpatient side, some products use data from the Medicare Provider Analysis and Review (MEDPAR) file, which contains records for 100 percent of Medicare beneficiaries who use hospital inpatient services. On the outpatient side, the Hospital Outpatient Prospective Payment System file is available, which contains select claim-level data derived from 2004 hospital outpatient PPS claims, updated through December 2004.
Iowa Health-Des Moines, an affiliate of the Iowa Health System that includes three hospitals in central Iowa, uses a commercial software product that utilizes MEDPAR data. Previously, the organization had worked with an outside consultant who helped establish a good foundation for rational pricing: The firm completed a Chargemaster validation, referenced public databases for market data, built a model, and completed some pricing sensitivity studies in aggregate. Two years ago, the system migrated to a commercial product so it could bring the process in-house.
State Resources
State hospital associations also can be a key source of market data. Iowa Health-Des Moines compares its aggregate charge per case and charge per day with competitors through information obtained from reports provided by the Iowa Hospital Association. These data are not case-mix adjusted, so finance managers need to estimate that impact. Depending on where the hospital is located, it also may be possible to explore charge information collected through the state.
Product Line Managers
A hospital's product line managers also can provide invaluable information to finance. They are often aware of local competitors' prices through patient word of mouth or advertising. "Most of our market analysis comes together during the budget process," says Joseph F. Corfits, Jr., FHFMA, senior vice president and CFO of Iowa Health-Des Moines. "Our budget is a top-down process -- after product line volumes are agreed upon, we push down the cost based on standards. Our VPs and managers are provided the opportunity to adjust expenses based on known factors. If there are market-sensitive services that will be adversely affected due to external competition, we will adjust a charge accordingly."
Health Systems
St. Francis Hospital, Wilmington, Del., recently enlisted the help of a vendor to examine market data and fee schedules. St. Francis compiles much of its market information from its state hospital association and MEDPAR data, but is also able to tap into the contracting data available through its system, Catholic Health East, which includes 32 hospitals. When examining the cost-to-charge ratio across the state, St. Francis recognized that it needed to make some adjustments to establish prices at a reasonable yet optimum level.
"In some ways, pricing is easier than in the past because we have better tools," says Bernie Citerone, vice president of finance and CFO at the 395-bed community hospital, which has net revenues of $130 million a year. "But it is also more difficult because there are more services and changes in medical practice. For example, take the introduction of drug-eluting stents, which cost three times as much as traditional stents. We don't know how quickly the changeover will take place. And that poses a challenge for rational pricing."
SOURCE:
What's Your Strategy for Developing Rational Pricing? an educational supplement by HFMA with sponsorship from Innovative Health Solutions.
If you have questions or comments about HFMA Wants You to Know, contact editor Laura Noble.
HFMA Wants You to Know ISSN: 1540-0697. Volume IV, Issue 25. Copyright 2005, Healthcare Financial Management Association. All rights reserved.