Five Steps For Commodity Pricing Decisions

Hospital executives are facing more pressure to reduce prices and payments as more customers compare their options, especially in certain outpatient services – surgery, imaging, and lab. Commercial margins for outpatient procedures tend to be higher, and changing them can create a lot of financial pressure.

Because of this pressure, many hospitals have abandoned minor outpatient surgery  departments completely, and left those services to physician-owned surgery centers. This isn’t always the best option, and there are ways for hospitals to lower prices and payments for services while remaining competitive.

Here are five ways to make an informed decision about that change.


  1. Determine Current Profitability.

Before you move forward, you have to have a firm understanding of where you are now. Can you absorb the fallout from changes? Do you expect a future increase in volume to cover the loss? Hospitals with above-average margins may do well with large reductions in price and payment, and could create serious competition for freestanding providers.


  1. Access Profitability

Next, analyze the specific sources of loss or profit by payer class, paying special attention to profit from government payers. Identify if there is a cushion of existing profit that will help you make changes. If the cushion is too small, making dramatic changes might not be an option.


  1. Understand Overall Cost Positions

You can’t make changes to price or payment without a clear understanding of the hospital’s cost structure. You may want to avoid reductions in areas that are already low, as the hospital will lose profit. You may see less impact when adjusting areas where costs are high.


  1. Access the Relative Payment Terms of Commercial Contracts

Understanding your payment terms in your existing contracts is crucial before making any changes. These terms will change the consequences of any change you make.


  1. Determine the Net Revenue Effect of Proposed Changes

This is where price studies come in handy. They allow you to analyze not only your current prices, but also see the effect of a pricing change. This kind of analysis will also let you see if potential losses could be offset by an anticipated increase in volume.

Many hospitals are considering lowering their prices to compete with freestanding clinics. Serious price and payment changes should be approached carefully. These five steps are a good place to start when decided if these changes are right for your hospital.


Ways Hospitals Can Control Costs

The first step is to understand your position. One of the things that can be very harmful is when a hospital tries to shave costs in an area where they are already efficient. That can be detrimental to both the hospital and patients.

The first critical pieice is to understand a hospital’s performance and find the places where they have an opportunity to reduce costs.

Once you find an area with room for approvement the next step is to identify what is driving that difference, That allows a hospital to determine how to approach the problem.

Is it a physican preference issue? A lot of care is determined by the physican’s protocol. When evaluating cost, are there phsycians that have a more efficient cost protocol than others?

Are you forgetting charges? Sometimes losses can be explained by something as simple as overlooking charges. For example, the presence of a charge for an injection, but not the needle, can compound quickly. These are great problems to find, because they are easily solved.

Physican preference

On a supply side, do phsycian’s prefer to use certain supplies that may be more expensive. There may be an alternative that is less costly. In some cases, this alternative has simply never been communicated to the phsycians, who continue to use the supplies they’re familiar with.

Certain physicans prefer to practice a specific way. They may want a complete set of lab tests upfront, while another may be more selective in their testing. These different courses of treatment can change a hospital’s cost structure.

Utilization is the use of a service. How many lab tests are being done. If you come in for pain and a doctor runs bloodwork. She may choose to be very selective in the test, while other may run multiple tests. That physician will show a higher cost of care.

Cost per unit is the cost of individual supplies. If the second physician in our example runs 3 tests at $50, while the first runs a single test for $50, cutting down on the number of tests may not actually positively affect cost.

This is one reason why it’s so important to analyze data thoroughly and from multiple angles. Although the answer may seem simple initially, it may be more complicated.

Market share

Enhanced market share often means increased volume. That allows hospitals to spread their costs around. For example, if you have to maintain a CT machine, but it’s only used by two patients, you’re going to lose money at that machine. Increasing your volume on the machine will help pay for maintaining it.

On the revenue side, it give you the opportunity to gain more revenue but it also gives you a stronger position with payers. A hospital with high market share has something to negotiate with when sitting down with payers.

You can increase market share through marketing or attaching well-known names to the facility. Of course, talented physicians with good reputations will increase volume. If the hospital is known for high quality it will drive people to the hospital.

Pricing will always play a factor with volume. If a hospital is known for being expensive, especially for certain procedures, patients will look elsewhere for treatment.

On the other hand, if a hospital is known for being cheap a patient may not trust them for a complicated procedure.

Plant age

Plant age is important because of the utility of the equipment and the usability, but it’s also important because of perception. If a community perceives a hospital as being outdated they may look elsewhere for their care.

Hospitals are trying to be reasonable with expecations and their ability to upgrade. The equipment that a hospital purchases today will be more expensive in five years, most likely. From a planning perspective, a hospital must remain profitable so that it can reinvest in those assets. Not only will they need to repurchase equipment as it breaks or is outdated, but the new equipment will likely be more expensive.

Even non-profit hospitals have to maintain a profit in order to continue providing the best care. Non-profit does not mean no profit. They have to remain mindful of their fixed assets.

Charge Capture and Coding

You don’t want to leave any money on the table. If you’ve performed the service you don’t want to leave anything on the table. The first step to this is identifying when things have been missed. There isn’t an organization out there that doesn’t have some charge capture issues. No one is immune.

That being the case, you need to identify where. We can help hospitals recognize when one service is connected to another. For example, if you run a lab test you need to get the blood out of the patient. If we see a test that requires a blood draw, but not a charge for a blood draw, we know there is a charge capture issue there.

The flipside of that are charges that show up by accident, like a test that wasn’t actually run. This can be an issue with audits, as well as being required to pay the money back.