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

Banner uses price modeling as conditions dictate but, on average, completes modeling projects about every other year, and only in its larger markets where there are a significant number of competitors to create a credible market basket, explains Dahlen. The markets in which Banner has used price modeling include Phoenix, where the health system has seven hospitals, and northern Colorado, where it has four hospitals.

The market analysis method is beneficial, Dahlen explains, because costing items is complex and subject to interpretation, and involves many factors.

"I cannot say it plays well in all situations, but it certainly is at least a credible rationale to support a pricing strategy," Dahlen explains.

Contemplating Managed Care Contracts

Good price modeling should also include a comprehensive annual review of managed care contracts, taking into consideration the impact of those contracts on pricing. A hospital has to determine what the impact of any price change will be financially. If a hospital raises prices without understanding the payer mix and how it gets paid, those price increases may not generate any additional revenue.

"You need to be able to set pricing that will provide you a reimbursement factor that is greater than your cost," Ventrone says. When setting prices, hospitals need to take into consideration the discounts that managed care payers receive and how any price change will affect those contracts, he explains.

"The payers that are paying percentage-based may look at that very seriously and negotiate a lot harder the next year, particularly if you've had a major price increase in the last year," he explains.

Washoe's Catherine Harris says that benchmarking her organization's pricing has helped in negotiating managed care contracts because it has required Washoe to measure and quantify elements of the chargemaster that had not been focused on previously. "What you don't measure, and what you can't model, you shouldn't be negotiating," Harris notes.

The impact of price modeling, Harris continues, has caused Washoe to change its focus to contracts that are less inclined toward percentage-of-charge structures and include more carve-outs. Payers, she says, recognize that certain high-dollar items, like implants, should be reimbursed separately because percentage-of-charge contracts don't cover the cost. "We're doing the analysis to make sure that we cover our expenses," Harris says.

The Combo Platter, Please

Most providers will probably find a combination of the two models--benchmarking and cost-based--most helpful. In some situations, cost is the best driver to set prices, while in others, market factors come into play. Some items can be price competitive, so a provider may want to set prices on par with the alternatives available to consumers in the market. A hospital, for example, may want to set the price of a radiology exam at about the same level as competitors in the market, such as outpatient diagnostic centers, are pricing the service.