What’s in Your Pricing Policy?

May 11, 2017 8:23 am

Hospital pricing policies should have firm boundaries but enough flexibility to respond to market changes.

The Affordable Care Act (ACA) intensified scrutiny of hospital prices. As a result, hospitals are taking more deliberate efforts to determine what should be included in a standard pricing policy.

In a survey designed to learn what key elements hospitals and health systems include in their policies, 62 percent of respondents said they have formal pricing policies in place.

Based on input from the 69 healthcare organizations that responded to our survey, larger health systems—those with more than five hospitals—are more likely to have formal pricing policies. Thirteen of the 15 large systems said that they have an established pricing policy. Of the standalone hospitals that responded, slightly more than half reported that they have a policy. We did not receive any responses from for-profit health systems.

The survey also uncovered other points of interest, including the most common elements of pricing policies and the reasons some hospitals do not establish policies. We also learned that most hospitals do not incorporate transparency into their pricing policies.

Common Components of a Formal Pricing Policy

Of the 62 percent of respondents that have established formal pricing policies, 72 percent have elements in their policies regarding how often pricing changes may occur. Most often, hospitals adjust prices annually to line up with their fiscal years or at the beginning of the new rate year of their major commercial contracts. However, some hospitals have more latitude to adjust prices more or less frequently.

Another common component of hospital pricing policies is descriptions of the methods used to set prices for new services throughout the year. Anticipating that this would be a part of most formal policies, we included a follow-up question asking what methods were used most frequently. Seventy-nine percent responded that they utilize competitive pricing information from their peers. This is in line with what we expected, considering that our clients are typically most concerned with their pricing position in their markets.

The other common methods include establishing new prices as multiples of costs or as multiples of Medicare payments, which were noted by 71 percent and 64 percent, respectively. Because the responses overlap, we drew the conclusion that hospitals that have a good understanding of new procedure costs use multiples of the projected costs, but they also rely on Medicare payments as proxies for costs when reliable cost estimates are not available.

Less Common Elements

Forty-two percent of those with established policies have methods for comparing prices with those of market peers. This is a low percentage considering that we believe most hospitals compare their prices to other hospitals. It is somewhat surprising that methods for doing so are not formalized more often.

Among the price comparison parameters hospitals frequently use are goals to be at a certain percentile of their market peers or no more than a certain percentage above their peers. Hospitals with specialty services such as cancer care services or trauma designations often establish even more criteria—one set for services in which the competition is local and another in which the competition encompasses a broader geographic market.

Forty percent of respondents include statements in their pricing policies that considerations will be made based on organizational net revenue needs. This allows some flexibility in rate setting to respond to unexpected changes in the financial environment. For example, hospitals often bump up annual price increases when bond covenants are in jeopardy.

Parameters on setting levels of overall rate changes are included in 35 percent of survey respondents’ policies. These may include language that limits annual rate increases to specific rates such as no more than 5 percent. In addition, 33 percent of policies include specific limiters on the amounts that individual prices can move. For example, a policy might state that no individual price may increase or decrease more than 12 percent.

We were surprised to find that only 35 percent of formal policies include directions or goals for making prices transparent. Considering how much focus pricing transparency has received over the past five years, we expected transparency to be a component of most formal pricing policies. Only 33 percent of policies include methods and timing for providing charge estimates to patients. It’s possible that hospitals have not created policies regarding transparency because the ACA and many state rules have established requirements to make prices available to patients. Hospitals may not see a need to include transparency as a specific policy component because other legislation has provided rules and regulations in that area.

Other elements that were identified in some formal policies include the following:

  • Specific tools or sources to be used for obtaining market data
  • Guidance on identifying market peers
  • Tiered pricing strategies, such as lower prices for outpatient services that are considered commodities
  • Methods for defending prices, such as reasonable margins, costs, and investment in facilities
  • Goals for future pricing position in the market
  • Provisions for external pricing reviews to set rates

Hospital Pricing Policy Elements

Suggested Key Components Of a Formal Pricing Policy

We learned that pricing policies range from those that establish broad parameters that allow hospital finance personnel flexibility in setting prices to very specific parameters that define more precisely how pricing changes are to be performed. Although appropriate methods vary by hospital, there are several important elements that should be considered in every hospital pricing policy:

  • Establish the frequency of price changes and the timing as to when price changes will occur.
  • Define the methods that will be used to set prices for new services and new procedure codes.
  • Allow for consideration of hospital net revenue needs.
  • Identify the method for understanding market pricing position.
  • Provide the method that the hospital will use to defend its pricing strategy (e.g., pricing position compared with peers; evaluation of margins, cost, and efficient use of plant).
  • Establish goals around price transparency and identify how transparency will be incorporated into the overall price strategy.
  • Identify methods for making price estimates available to patients and set goals for the time frame within which those estimates should be provided to patients.

Hospitals Without Formal Pricing Policies

When asked what reasons contribute to the lack of formal pricing policies, the most frequent answer provided—by 31 percent of the 26 respondents without policies—was that their current informal policies work well. Twenty-three percent said there was no pressing need to create policies, while 15 percent stated that a lack of guidance on what should be included in formal policies was a contributing factor.

Finally, 69 percent responded that even though they don’t have formal policies, they follow consistent methods when setting prices. This means that 88 percent of all respondents follow formal policies or consistent methods when setting prices.

Importance of Flexibility

While the number of hospitals with formal or consistent pricing methods is encouraging, all hospitals should establish formal pricing policies that identify the principles they will follow when setting rates.

Furthermore, consideration should be made for allowing exceptions to standard policies when organizations’ revenue needs make changes necessary. In addition, hospitals should not build in too much precision in their policies. Instead, those managing pricing processes should have firm boundaries within which they work, but also enough flexibility to respond to market changes.

Scott Houk is director, consulting services, Cleverley & Associates, and a member of HFMA’s Central Ohio Chapter.


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