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

"As long as you don't standardize the pricing part of it," Ventrone adds. "I think that standardizing chargemasters across systems is good."

The Consequences of Not Doing Price Modeling

Providers that don't implement any form of price modeling face both external and internal challenges. First, not being able to defend pricing increases the potential for confrontation with payers. But it's not only payers who can cause problems, says William McFaul. If a hospital's pricing becomes public information, there's an increased risk of exposure to negative publicity if chargemasters among a hospital system are inconsistent or if markups are too high compared with those of other providers in the same market.

"Any individual newspaper in any one city can go around and check all the chargemasters and do a big expose, with a spreadsheet showing hospitals A, B, C, and D. And if you're really out of line, you'll get a major black eye," McFaul says. "So it's a very fine balance for providers."

Without some method of price modeling, hospitals may also find costs way out of line from prices. If a provider, for example, just raises price a certain percentage across the board, the price on the chargemaster may end up having little correlation to the cost of the item.

The consequences of not implementing some form of analysis can also be significant to the bottom line. "To me, having data is strength, so if you have the information, you have a stronger position to move into the future," Ventrone says. "If you don't have that type of information, it can impact your bottom line, possibly very negatively."

For example, Ventrone continues, a hospital may have the lowest charges of any provider in the area, which may be good for the community, but not so good for the hospital. If two different hospitals, for example, have the same percentage of pay contracts with managed care payers, but one is charging considerably less, that hospital is going to have a lot less cash flow.

"The only way to make a profit is based on what you charge and what you pay for the services that you provide your patients," he says. "And there had better be a positive bottom line or, eventually, you're going to close your doors."

But whatever method of determining prices a hospital chooses to use, Ventrone adds, the main thing is that it chooses. "I think that's the most important part--to have a methodology in establishing your prices today," he says. "Also, no matter what method you use, it should be consistent across all payers. That way, if somebody asks you how you set your prices, you can tell them."

Price Modeling Tips

Factor in all three components--cost, market data, and reimbursement--when making pricing decisions.

Make sure that you are pricing your supplies within a reasonable range of your market.

Understand your contracts with your managed care payers and how the impact of price changes on those contracts will impact the bottom line.

Identify your direct costs per procedure in order to know your negotiating points with your managed care contracts.