Taking Care in Pricing Care
January 17, 2011 § 5 Comments
Pricing is a difficult skill at any time and in any market. Determining how much of costs to recover, by offering or by service, within the limits of market demand requires a comprehensive understanding of a myriad of factors and forces including; market dynamics, competitive drivers, internal direct and indirect actual costs, the appropriate allocation of indirect costs, and calculations regarding gross sales projections.
If you’re running a hospital in today’s newly regulated, capital intensive and competitive environment proper pricing can make the difference between success and failure. The new health care regimen requires that health insurers reimburse reasonably for services rendered. They cannot allow some hospitals to demand high prices for standard services while others are receiving a lower price. From a reimburser’s perspective all prices must be “efficient.”
Currently hospitals are quoting quite different prices for the same or similar services, a practice that cannot survive. A recent investigation in the Massachusetts market by the Boston Business Journal uncovered wide ranges in prices for CT Scans, Weight Loss Surgery, Angioplasty and C-Sections.
Source: Boston Business Journal, Dec. 3-9, 2010
As seen, pricing varies widely in these local hospitals. There is a 100% variance in CT Scans. Leaving out the CT-Scan as an outlier, the most expensive option for a service tends to be 40% more costly on average than its lowest priced competitor. This leads price conscious insurance companies to make choices. In one case a local care group, Partners HealthCare, is being written out of certain insurer programs due to pricing levels.
One key requirement for pricing success is branding selection and clarity. For example, some time back a well known large Boston hospital looked into defining its brand. As the story goes they were inconsistent in how they wanted to be perceived by their customers. It should be obvious that the operational needs of, say, psychiatry are more about communication and social skills while that of heart surgery are more weighted toward technical surgical and procedural skills. It is difficult at best to be good at one thing but impossible to excel at everything. In our example the skills and market reputation favored technical offerings but their pricing favored social skills and the result was that the beds were full but not with patients requiring the offerings at which they excelled. This negatively affected their costs, effectiveness and severely impacted profitability. This hospital has since re-focused on its brand clarity, priced its services to attract patients that match its skills, and seen strong success as a result.
Pricing discrepancies like those shown above are often the result of utilizing a limited ‘cost plus’ pricing model that does not give full consideration to:
- Your true cost of service
- The purpose of the service relative to your Brand and its archetype strategy
- The competitive environment
- Patient alternatives
- The perceived value of your services
- Aligned product/service portfolio profit models
For example, hospitals might consider if their CT Scan service is supportive of heart surgery, is a standalone product, or is supportive of a radiology service strategy? Each alternative necessarily supports different cost structures, pricing and purpose strategies which cannot be intertwined without potentially unfavorable consequences.
The Plexius Group does not propose pricing strategy as a cure all but we do believe there are opportunities to fundamentally improve business prospects by aligning skills, branding, market clarity and pricing. Hospitals should examine how to best position and price their services to compete effectively and profitably in the local market.
George Daniels, Randy Atkin and Doug Brockway contributed to this post. Their contact information can be found at http://www.plexiusgroup.com/contact_us.html.
 We know of a New Hampshire hospital asking $2,500 for a CT Scan