Balancing transparency and revenue performance with rational pricing
Part 1 – Pricing transparency
INSIGHT ARTICLE |
According to the Affordable Care Act, all U.S. hospitals must make the following information available to patients: standard charges for items and services, as well as standard charges for diagnostic-related groups. This is the foundation of pricing transparency in the health care industry. Pricing transparency empowers patients to make meaningful price comparisons and provides greater clarity between caregivers and patients around charges, services, care, out-of-pocket costs and more.
While vastly needed, pricing transparency is a significant change and will impact the entire health care industry by:
- Restoring a free market and competitive forces within the industry
- Bringing greater consumer accountability to health care providers, enabling patients and consumers to make more informed, value-driven, health care spend decisions
- Resulting in greater alignment among procedure cost, charge and payment
- Bringing greater consistency in negotiated managed care discounts
Rational pricing strategy cornerstone
To launch a pricing transparency methodology, health care organizations should establish a rational pricing strategy. The cornerstones of this effort include weighing procedure costs, managed care and market risk.
The first step to launch this strategy involves rebasing charges for items and services leveraging procedure level cost or cost surrogate data and determining the required department-specific markup needed to achieve gross revenue neutrality. The next step involves evaluating the range and relative defensibility of current Department of State markup factors. Following that, multiple scenarios should be evaluated, narrowing and widening cost corridor guardrails, while assessing gross and net revenue implications. If reliable cost accounting data is not available, Medicare fee schedules can be leveraged as reasonable surrogates for procedure-level cost data.
With regard to the managed care cornerstone, an analysis is required to balance short-term net revenue needs, while transitioning to a more defensible, cost-based pricing methodology. The managed care analysis requires intimately understanding payer agreements and payment methodology-related opportunities and risks presented by charge-sensitive contractual agreements. This provides an opportunity to evaluate longer-term revenue risk associated with accountable care incentives, declining utilizations and transparency-motivated charge reduction strategies. In addition, the analysis provides an opportunity to evaluate payer-specific charges and net revenue leakage risks and mitigation strategies, as well as their strategic significance in locking in potential revenue streams into future state and more fixed and capitated agreements.
Finally, under the market risk cornerstone, the following must be considered:
- Market leaders have the opportunity, and even the responsibility to lead the market toward rational, cost-driven and margin-driven pricing strategies
- Market data is irrational and variant; few health care providers have logic-driven, cost- and margin-based pricing algorithms
- The challenge and the art to completing the market risk analysis is determining which procedures and to what degree market matters
- Cost-based pricing recommendations may require multiyear transition plans allowing the market to follow cost-based methodologies
Other considerations health care organizations should consider related to implementing pricing transparency with a rational pricing strategy include:
- Manage this significant change and ensure organizational buy-in by creating a pricing transparency committee and engaging key stakeholders
- Ask for input from stakeholders early in the process
- Communicate strategy and tactics to stakeholders on an ongoing basis
For more information about this topic and other health care industry issues, contact your RSM health care consultant.