In most healthcare systems and hospitals, cost data has been deemed inaccurate and untrustworthy. Because of this, using cost as a basis for pricing services has been unimaginable. Most other industries determine the price for goods and services based on the underlying cost to create or deliver them, with an added markup to reach the desired margin. Healthcare operates differently. With cost out of the equation, providers have typically adjusted prices using simplistic methods such as across the board 5% annual increase or relied solely on market comparisons. The problem . . . prices don’t reflect the underlying cost to deliver services. In short, prices are not defensible — an acute problem with a national emphasis on transparency.
Now that cost accounting systems are accurate, pricing should be based upon cost to make it defensible. But you don’t want to base pricing solely on cost without a view toward market competitiveness, negotiated payer rates and bundled pricing. As you can imagine, solving for six or more variables to set pricing is complex. Newer tools on the market use algorithms and what-if modeling to help providers set defensible, geographically-sensitive prices that can be made visible to consumers without concern of backlash.
6 revenue-optimizing opportunities
Despite emphasis on transparent and defensible pricing using a robust data set and algorithms, organizations can increase revenue through laser-focused strategic pricing efforts.
1. Charge-to-fee schedule mismatch: Using traditional methods, teams may struggle to evaluate thousands of charges in the chargemaster verses negotiated fee schedules for each payer. However, using a system to automate the identification of charges lower than CMS payment and other fee schedules can help organizations see services that are not receiving the full negotiated payment. With this modeling, teams can adjust prices to at least match the fee schedule and to ensure full payment.
2. Charge-to-cost mismatch—lower: When charges are lower than the cost to provide the service, there is a clear opportunity to optimize revenue. Use a well-defined markup methodology and adjust the prices to generate target margin. Model the impact on payment and payer thresholds to continue optimization.
3. Charge-to-cost mismatch—higher: Whereas having charges lower than the cost to provide a service can certainly provide a risk, providing services with charges significantly higher than the cost to provide the service increases risk of negative publicity. It may also reduce volume on “shoppable” services as consumers look for lower-priced providers. Again, use a well-defined methodology to adjust prices downward. It is very important to model the impact that the price change can have on bottom line and payer limits, to see the full picture of the pricing decision.
4. Geographic and commodity pricing: Because a hospital or health system’s location can impact its price position in the market, it’s important to determine more regularly utilized services and locations where patients may be more concerned by price. Modify prices to reflect the needs of this micro-market, then model the impact those changes will have on payments, out-of-pocket payments and margin.
5. Competitive landscape pricing: Identify services and locations where the organization has a market-leading position or is highly competitive, then use market data to compare prices to those of peer organizations in the market offering competing services. In conducting this competitive analysis, build pricing strategies for services that reflect the market position, clinical eminence and volume growth plans of the organization.
6. Episodes-of-care: Finally, hospitals and health systems can realize an opportunity by creating bundles that encompass services for a specific patient population or clinical journey, like those tied to diagnosis or surgical procedure. For services that have a leading market position, predictably strong clinical outcomes or low variation in care, consider bundling the related services and offering them to payers and employers for a set price. Leverage clinical and decision support data to model the real impact this episode-of-care may have on volume and profitability.
Regardless of where you identify opportunities for revenue optimization at your organization, you can begin to adopt more strategic, defensible pricing by relating the price of a service to the actual cost — and a well-defined methodology for pricing. With the use of StrataJazz® Strategic Pricing, organizations are already seeing the benefit of using real cost data to anticipate the impact of pricing changes on revenue, volume and even margin. Using algorithms and what-if modeling, providers are starting to set more defensible, strategic prices that are allowing them to respond to national concerns of healthcare costs with more transparency.