Setting Competitive Prices with the Consumer in Mind
Transparency needs to be a consideration when setting defensible prices for new and established services.
Setting prices is one of the most challenging responsibilities for finance leaders, who must balance two somewhat competing principles, says Brian Workinger, director of customer engagement at Craneware. “Prices need to be reasonable to the patient and rational to the organization,” Workinger says. “Then finance leaders have the responsibility of ensuring the appropriate margin from an established pricing structure. It is a difficult balancing act in the era that we are in today.”
Finance teams recognize that margins derived from pricing are important to maintain healthy bottom lines. In fact, 10-25 percent of hospitals’ revenues are charge-related, Workinger says. When margins are off, finance leaders may not be able to make the strategic investments they need in key areas like technology, plant and equipment, and new service lines.
How Healthcare Charges and Payments Vary Across the Country
Finance teams with access to reliable models that determine the impact of contract terms, payer mixes, volumes, and other factors that are constantly evolving are better prepared to make financial decisions, Workinger says. Considering these factors, along with competition and patient loyalty, can create more rational and defensible pricing structures.
Workinger says leaders should think about the following questions when developing pricing models:
- What is the desired and/or budgeted margin from a pricing adjustment?
- Where are the most consumer-sensitive items, such as computed tomography magnetic resonance imaging?
- Are there specific payer terms with “lesser of billed charges” language that can directly affect margin?
- What is the most desirable market position for prices?
- How will the pricing structure affect market share?
- What is the relationship between the service price and actual cost of providing that service?
Workinger offers the following advice to finance leaders on developing better pricing and transparency strategies in their organizations.
Get buy-in from the board. These community leaders should help broadly shape organizations’ approaches to pricing and price transparency, Workinger says. For example, boards can help finance leaders clarify their market positions, namely how they want their prices to measure up to competitors’ prices. They also can help ensure that such initiatives reflect organizations’ broader missions, visions, and values.
Ensure data is accurate. “Hospitals today are still relying heavily on the ratio of costs to charges to estimate the cost of providing care,” he says. “This makes it difficult for them to establish prices based on what margins they need. Achieving accurate activity-based costs ensures measurable net margins from price.”
Promote collaboration between clinical and financial teams. Finance, managed care, and service line leaders should work together to address pricing and transparency issues like patient estimates or pricing new services, Workinger says.
One way to ensure pricing is consistent and rational is to create a pricing committee comprised of leaders from key areas, such as finance, managed care, and clinical departments. Such a committee would be responsible for signing off on any pricing-related item or issue.
Patient access leaders who often hear about pushback from patients on prices also should be encouraged to offer input to the committee. “Having these leaders involved in the decisions helps them better explain to frontline staff how the organization established its prices,” he says.
Be sure to provide price data along with quality data in transparency efforts. This allows patients to make more informed decisions when selecting services for which outcomes matter most, such as joint or heart surgeries, Workinger says. Offering quality data also may help strengthen patient loyalty, which is critical as consumerism evolves.
Take time to review and reflect when pricing new service lines. “Even with a cost-accounting system, there might not be a cost baseline for determining a price for a new service,” he says. Having established price-setting policies will lessen the burden when working from limited data. Workinger says the industry norm is to use Medicare payment as the baseline, and then apply a multiplier. “My recommendation is to start with this information as a reference point, but only on items that are not bundled. Then when you have more access to data—including volume, comparative prices, and payer mix—reassess the price,” he says.
Still, finance leaders sometimes fail to carefully review their prices and will instead raise prices across the board (ATB) 3-5 percent each year. “When hospitals implement an ATB increase, they run the risk of missed margin improvement and pricing items currently above market even farther out,” he says.
Help patients understand the basics. Resources like HFMA’s Understanding Healthcare Prices: A Consumer Guide can help patients better understand their responsibilities and make more informed decisions.
“Pricing should not be a once-a-year task, even though that is the norm in many organizations,” Workinger says. If organizations truly want to adopt more rational pricing strategies and make their prices more transparent to consumers, they need to review their prices year-round.
“Finance leaders should get feedback from their department heads on what pushback they’re getting on prices and adjust their prices to better meet the market,” he says.
Laura Ramos Hegwer is a freelance writer and editor based in Lake Bluff, Ill., and a member of HFMA’s First Illinois Chapter.
Interviewed for this article:
Brian Workinger is professional services manager at Craneware, and a member of HFMA’s Central Ohio Chapter.