Why is Hospital Pricing Strategy So Important?

In many hospital executive’s minds, there is little need for strategy in the establishment of hospital chargemaster prices.  This mentality can often create unfavorable outcomes that can affect the financial and strategic position of the hospital. Let’s review three common simplistic pricing strategies and the possible negative outcomes that might result from their implementation.

Across the Board

A very common pricing strategy employed in many hospitals is to simply increase prices on all items in the chargemaster by a fixed percentage, e.g., 5%.  On the surface, this seems like an efficient and equitable method for setting future hospital chargemaster prices.  Let’s use a specific example to illustrate some possible negative outcomes.  A lab test Assay of Glucose Quantity (CPT 82947) has a current CDM price of $58 which compares to their hospital peer average of $26 and a state independent lab price of $11.  Further increases in the price of this commonly used procedure would only exacerbate the current unfavorable price position.  With current price transparency disclosure, price visibility is much easier and likely to make local newspaper accounts. Another common negative outcome of across the board pricing may be significant levels of lost net revenue in areas where price sensitivity is not an issue.  For example, a level 5 Emergency Room visit (CPT 99285) is not often an encounter that is price sensitive but may have favorable revenue recovery.  This may be the result of either a lesser than provision being activated or the inclusion in an inpatient claim.

Price Reduction on All Shoppable Chargemaster Codes

Another common strategy employed by hospitals in this era of hospital transparency is the reduction of all or most so called “shoppable” procedures to their hospital peer average, or to prices in non-hospital settings such as independent imaging centers.  The logic employed here is very simple and goes something like this, “Since most of our payment is fixed and not based upon actual CDM prices, let’s go ahead and reduce these prices dramatically to improve both our competitiveness and also our public image”. Prices in all other areas are then increased to realize some overall targeted rate increase.  While this may seem very logical, it can often result in sizable amounts of lost revenue because of changes in lesser than claims or reduction in outlier claims.  To further complicate the analysis, these price reductions may not impact the overall charge for the entire encounter.  For example, a hospital may try to reduce it’s price for a Diagnostic Colonoscopy (CPT 45380) to a price that is more closely aligned with local Ambulatory Surgical Centers, but increases in other areas for supplies or anesthesia may more than compensate for the price reduction in the procedure code.

Maximize our Net Revenue Return

The last pricing strategy to be discussed is maximization of the net revenue from price increases.  While the prior two discussed strategies may not have recognized the impact on net revenue, this strategy focuses on the returns without recognizing the possible effect on other market factors.  To be sure, the dramatic increase in hospital costs, especially nursing, during the last two years has created enormous financial pressures to secure additional net revenues to offset the cost increases being experienced.  We have witnessed some actual price increases in excess of 100% purely to generate additional net revenue.   Increases in Nursery prices are often a target for some of these large increases because many existing managed care contracts have negotiated case rates which exceed the normal or expected charges for the encounter.  This then creates a lesser than situation where the hospital is paid less than the negotiated fee.  Increases of this magnitude occur in many other areas where sizable lesser than opportunities also exist and may seem like a good pricing strategy, but there are some serious consequences of this strategy.  For one, large increases will not usually go unnoticed, and the hospital may become the object of negative publicity.  Secondly, payers are almost certain to notice these extreme price swings and will quickly determine the underlying rationale.  The outcome will most likely trigger negative charge audits or the future removal of the contract provisions which created the opportunity.

Summary

Hospital pricing strategy is very important in today’s climate and simple solutions can and often do create unfavorable results.  The correct approach to hospital pricing strategy formulation is to identify all relevant financial and market factors and to relate those elements to the hospital’s overall mission statement. If you have questions or concerns about your current pricing strategy, we want to help. Contact us here!