Making prices make sense: a balanced approach to defensible prices: this project is a collaborative effort by MedAssets and the Healthcare Financial Management Association

Healthcare Financial Management, July, 2005

Whichever method is used, it should be uniform across all payers, according to several sources interviewed for this article. (Hospitals may choose to implement discounts for self-pay patients, as long as prices are not different for different patient populations.)

That consistency underscores the entire reason for implementing a price modeling strategy in the first place, says James Ventrone, president of Ventrone Ltd., a healthcare consulting firm in Palatine, Ill. "The end result of price modeling is to work toward developing a consistent methodology to identify where your pricing should be," he says.

And old strategies don't work, Ventrone adds. He says hospitals are recognizing that instead of the strategic pricing models of five, 10, or 15 years ago, which were based on high-volume items that had the highest percentage-based payers, more rational pricing models are needed for today's market.

"In the past two years, we've started to see hospitals using some of these cost and market-based methodologies to take a look at the charges and try to determine where they should be," says Ventrone.

Cost-Based Modeling

For some providers, it's important to look at the cost element as part of that whole equation of what's the appropriate price to charge. This methodology does have its complexities, however, because identifying costs, while perhaps easier for such items as pharmaceuticals and supplies, can be difficult when it comes to procedures.

Hospitals must also be careful about moving to strictly a cost-based markup without first understanding what that markup is going to do to the bottom line because of the nuances in the way they're being reimbursed. Hospitals can put themselves at financial risk if they just make price changes based on cost without factoring in how much of the change is actually going to result in bottom-line revenue, based upon how each payer pays them. At many hospitals, for instance, 10 percent or more of the bottom line is going to be in some way driven off the price that is charged to the patient.

Furthermore, even if a hospital has a good method to directly link costs with charges, which can be a challenge for many, there are still questions about the appropriateness of a markup, and that's where benchmarking comes into play. A hospital needs to look at the market and see what others are charging to determine if its prices are in the same ballpark.

What's Up Next Door?

Benchmarking, or market analysis, involves reviewing prices against the prices of competitors in the same market area. Such an analysis may include comparing current prices to publicly available data such as CMS outpatient data, which is at the CPT level, state data, and certain all-payer proprietary data that covers even non-CPT areas, inpatient services, drugs, and medical supplies.

Benchmarking is advantageous because it can be used as a tool in confrontations over pricing, or as a means to avoid confrontation altogether.

"It really provides us a mechanism to evaluate our pricing," says Dennis Dahlen, vice president of finance for Banner Health, which has 20 hospitals in seven states, including Arizona, Colorado, and Wyoming.