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[1].  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.

[1] We know of a New Hampshire hospital asking $2,500 for a CT Scan


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§ 5 Responses to Taking Care in Pricing Care

  • Paul Clermont says:

    In most enterprises, investments in equipment entail some risk; if the utilization is too low to cover the amortization and maintenance, tough luck. But not in hospitals; they just jack up the price to cover, knowing that the insured patient doesn’t care. Equipment vendors have been all too successful, with the result that we have more CT scanners etc. than we need. This leads, especially in doctor-owned facilities, to prescribing more CT scans.

    And we wonder why our health care costs per capita are so much higher than any other country’s, despite no better or not-as-good outcomes?

    The market for health care is unlike any other. Demand is essentially unlimited, purchasing decisions are made by authority figures presumed to know what should be bought and customers are insensitive to prices. Only insurance companies (and Medicare and Medicaid) have any leverage over the hospitals; it’s time they used it.

    • Paul –

      The new health care regime, so-called Obama Care, proposes to put some of the risk onto the providers of care. As our post says, some providers are losing their relationships with insurers because their prices for services are so far out of whack versus local competitors. We don’t want the price a hospital can charge to get so low that the hospital can’t afford to be in business. That said, the Boston Business Journal data is consistent with observations made during last year’s debates; there is too much variance in service prices and too little explanation as to why.


  • jeff leston says:

    I see all my former colleagues are now healthcare mavens. The truth about hospital pricing is that the pricing is based on who can pay the most and how the charge can be strucutred to maximize reimbursement. For example, a friend went to an in-network hospital and was put under by an out-of-network anesthesiologist who charged out of network rates. He certainly had no control over who gassed him. There are optimization and reimbursment strategies under the heading “revenue cycle improvement” and a lot of people who will teach hospitals and providers how to game the system.

  • jeff leston says:

    By the way Paul, there are laws, called the Stark laws, against self referral by physicians. They are not allowed to own labs, diagnostic imaging or other types of testing facilities that they can refer patients to

  • Paul Clermont says:

    Doug, I hope you’re right about Obamacare helping. One of its criticisms, possible justified, is that it doesn’t do enough to rein in costs; we’ll see—if the GOP doesn’t succeed in repealing it or otherwise strangling it.


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