Price Change, a Strategic Approach

As many hospitals are nearing the start of their next fiscal year, we thought it would be interesting to look at pricing strategies selected by a significant national sample during the first half of 2019.

Hospitals may take one of two approaches when setting prices by following either an across-the-board (ATB) price change or a strategic approach. The ATB method assumes all prices in the chargemaster change by a constant percentage. For example, targeting a 5% overall price increase would be achieved through increasing each item code in the CDM by 5%. Alternatively, a strategic approach suggests impacting service line specific rate changes based on local market sensitivities and associated financial implications.

Through our strategic modeling approach here at Cleverley, related groups of services may decrease/increase/remain constant based on considerations such as competitive position, payer mix, and overall goals. The summary below highlights selected strategies and the estimated results of our large national sample.

STRATEGIC ASSUMPTIONS

Overall Rate Increase– The median overall rate increase selected was 5% which is also consistent with the average at 4.7%. We observed fairly consistent rates of change for outpatient and inpatient.

Rate Corridor Range and Competitive Constraint– Rate corridors indicate how much groups of related services are permitted to decrease/increase/remain constant. The median rate corridors selected were 0% to 14%, which means prices for services could be frozen or increase by as much as 14% (while as we learned above, still achieving an overall rate increase of 5% for the hospital).

Rate corridors may work together with a competitive constraint to improve pricing position relative to peers. On average, we see 5 peers in the constraint group. In general, this implies that hospitals are defining their market with an average of 5 peer hospitals.

Room Rates and Surgery Assumptions– The observed median routine room & observation rate increased 5%, while surgery related areas increased 6%.

Financial Implications– Please note that high charges do not necessarily correlate with high payment. Performing a scenario analysis can help hospital finance leaders better understand overall payment and net revenue impact prior to implementing changes.

Other Key Findings – During our review, we also look at service line specific rates of change. These vary significantly by hospital. Many hospitals are evaluating patient-sensitive services in light of transparency disclosure requirements. We welcome the opportunity to talk with you about your specific strategy.

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