Consumer-directed pricing: five dollars for an aspirin … 10 dollars for a Band-Aid … the highest prices charged to those least able to pay

Healthcare Financial Management, Dec, 2005 by Richards L. Clarke

Pricing policies for medical services are easy to criticize and hard to justify. No wonder stories in the press sensationalize the problem.

And the advent of consumer-directed health care with high-deductible health insurance plans will highlight this problem even more. Current systems of pricing are aimed at bulk purchasers, such as insurance companies or governmental payers. They are set with the expectation of significant discounts off the retail price. But increasingly, consumers have all economic incentive to understand pricing, especially for services that are available in venues such as outpatient labs, diagnostic imaging centers, and surgical and treatment facilities. Consumer-directed health care will require us to develop retail prices that are easily compared and that are set competitively.

The problem was brought home to me recently while looking at the financial statements of a large healthcare system. Net patient service revenue was recorded at $2 billion, while gross patient service revenue (revenue recorded at full list price) was listed at $10 billion. Since net revenue reflects what is expected to be paid, why were prices at this system five times higher than that level? Was the system gouging the public or payers to generate excess profits? Was it trying to soak private -pay individuals? Further examination revealed a meager 2 percent operating margin--hardly profiteering. And collections from private payers amounted to only 10 percent of the bills for these patients. So what gives?

I asked this question of the system CFO, who responded that the system's payer contracts drive pricing decisions. Either directly or indirectly, pricing determines the ultimate payment received, even under case-based payment systems. This CF0 indicated that attempts to renegotiate contracts to lower overall pricing that maintained a neutral payment position have failed. So if prices for this system were lowered by a factor of five, for example, without renegotiation of payer contracts, the meager positive operating margin would go negative in a hurry. It's a pricing predicament.

Something must be done. The public continues to demand price transparency to make rational decisions about their care. And the press and consumer advocates will continue to hammer this issue--one that is very hard to explain simply. The provider/payer impasse cannot continue. Hospitals must begin to prepare for consumer-directed health care and rethink their pricing strategies.

HFMA is helping hospitals do just that. Our PATIENT FRIENDLY BILLING[R] project has a wealth of information on this topic--visit www.patientfriendlybilling.org. And this month we're launching a new Patient Friendly Billing project that will give hospitals the tools they need to deal with how consumer-directed health care will affect the revenue cycle.

If we fail to act, pressure will increase for government intervention in pricing decisions. That would cause a regulated pricing environment within a consumer-driven market--as attractive a prospect as a kick in the shins.

A CHARGEMASTER SOLUTION

Find out how to create a chargemaster that achieves regulatory compliance while improving patient billing. See "Management of Chargeable Items" on the Patient Friendly Billing web site (www.patientfriendly billing.org/pdf/mgmt chargeableitems.pdf).