Strategic Pricing with a Focus on the Market

By Mark Jeziorski

Generating additional third party payments and improving the overall profile of your hospital’s prices relative to the market is possible. By strategically setting prices in the context of the prices in the market, additional third party payments can be generated and a better price profile achieved.
Strategically setting prices means using the charge sensitivity of a charge/service code to influence how its price is changed. Charge sensitivity is a measure of how much third party payments change for a given change in price. Setting prices in the context of the prices in the market means the prices of other hospitals are considered when developing new prices. Finally, the price profile describes the distribution of your prices relative to the prices of the other hospitals in terms of percentiles (e.g. percentage of your prices between the maximum price and the 75th percentile, percentage of your prices between the 75th and 50th percentiles, etc.).

Conducting a strategic pricing project with a focus on the market is a significant undertaking but one that can be worthwhile. A high level of computer model building skills is required and experience working with the Charge Description Master (CDM) and revenue and usage files is extremely helpful. The approach for conducting such a project has many components. However, based on our experience, there are six key components of a successful approach.

Key Component 1 - Setting the Parameters for the Project

There are various parameters that influence the development of the prices when prices are established strategically. Some of the critical parameters include, but are not limited to, the following: the targeted change in gross revenues, maximum allowable price increase, minimum prices and whether prices for the same services should be equalized.

Some of these parameters affect how the pricing model is constructed. As a result, they need to be established early in the process.

Key Component 2 - Defining the Market

The market consists of the hospitals that will be used as benchmarks for price comparisons. This market needs to be defined. The market could be hospitals within a certain geographic area, hospitals of similar size within a certain geographic area or similar hospitals throughout the entire country. The last definition for the market might be most appropriate for specialized hospitals. Once the hospitals have been identified, their prices can be obtained from various vendors.

Key Component 3 - Working With the Benchmark Data

Hospital pricing data may not always be robust. There may be minimal or no hospital prices for some of the charge/service codes in your CDM. A decision needs to be made as to how these situations will be addressed. Possibilities include using the prices of other hospitals or multiples of third party reimbursement rates as the benchmarks for price comparisons.

Another aspect of working with benchmark prices that needs to be considered is outliers. A benchmark hospital’s price is an outlier if it appears to deviate markedly from the prices of the other hospitals. A decision needs to be made as to whether outliers are going to be identified and excluded from the analysis. If they are going to be identified and excluded, a definition of an outlier needs to be established. Finally, benchmark prices are not current and could be more than a year old. These prices can be used as is or a trending factor can be applied to them in an effort to estimate current prices. Each of the two approaches has its benefits and pit falls.

Key Component 4 - Having a Comprehensive Scope

The benefits derived from the project are directly related to the scope.

The benefits will increase as the scope of items included in the project increases. In order to generate the maximum amount of benefits, the scope should include items in the CDM with CPT/HCPCS codes, room and board charges, items charged on the basis of time (e.g. operating room charges, recovery room charges, etc.) and cost-based items (e.g. pharmacy, pharmaceuticals, supplies, implants, etc.).

Key Component 5 - Developing a Pricing Model

A critical component of the successful approach includes developing a sophisticated model that is able to accurately calculate changes in payments that result from changes in prices. The model should incorporate the benchmark prices, managed care contract terms, historical usage at the charge/service code, patient type, plan code and service/registration area level and claims data to address “lesser of” and “stop loss” contract provisions. The model should be designed to develop initial prices that optimize third party payments given the set of constraints (e.g. maximum increase in gross revenues, prices not exceeding a certain level, prices not going below the minimum prices, equalization of prices for charges codes with the same CPT/HCPCS code, etc.).

Key Component 6 - Review of Every Price from the Model

Models are wonderful tools that provide tremendous benefit in the realm of strategic pricing. However, models are not perfect. Some of the imperfections are due to the benchmark data and some are due to the high cost of developing more sophisticated models that require less intervention. As a result of these imperfections, a review of every price generated by the pricing model should be conducted. The review should include, but not be limited to, checking that items are leveled appropriately (e.g. CT with contrast is priced higher than a CT without contrast).

Another Consideration

Hospitals receiving Medicare outlier payments may want to determine the impact of the new prices on outlier payments and the cost-to-charge ratios. In fact, these hospitals may want the new prices be developed such that additional third party payments are generated without impacting the amount of outlier payments. Incorporating the impact of pricing changes on outlier payments and cost-to-charge ratios will add another layer of complexity to the process.

Conclusion

Strategically setting prices while focusing on the prices in the market can result in additional third party payments and an improved profile of prices. A successful approach that has been utilized to achieve these results involves six key components. For hospitals receiving Medicare outlier payments, the approach could also include determining the impact of the pricing changes on outlier payments and the cost-to-charge ratios or establishing prices that do not impact the amount of outlier payments.

About the Author

Mark Jeziorski is President of Sophical Solutions. Mark can be reached at markj@sophicalsolutions.com.