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Developing a Pricing Strategy in Today’s
Health Care Environment
Las Vegas
May 17, 2006
Anthony Cirillo, CHE, ABC, President
Jeffery P. Tarte, Managing Partner
Applied Revenue Analytics
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Agenda
I.
Introductions
II.
Expectations and Rules of the Road
III.
What is impacting the Healthcare Industry?
IV.
Taking the Matter into the C-Suite
V.
Principles of Pricing in Retail Marketing
VI.
Pricing Philosophies within the HC Industry
VII.
What Hospitals are Doing and How They Do It
VIII.
Making Prices Available to the Public
IX.
Future State
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Rules of the Road
 Here to Exchange Information and Ideas
 Questions throughout welcomed
 There are no stupid questions
 One conversation at a time
 Parking lot items
 Cell phone off or on vibrate
 Provide contact information - will send material
“Never doubt that a small, group of thoughtful,
committed citizens can change the world.
Indeed, it is the only thing that ever has.”
Margaret Mead
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SCOTT & WHITE
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Market Forces





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

Percent of GDP
Employer Backlash
Consumer Driven Healthcare
Media
Class Action Lawsuits
Government Sanctions
Medical Tourisms
Advocates
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% of GDP





16% of GDP
> 7.9 % to $1.9 trillion
62% increase doctors and hospitals
Hospitals costs jumped 8.6% / $571 billion
Physician costs > 9% to $400 billion
 Less focus on pharma
 Increased scrutiny of hospitals
What’s your story?
CMS 1/9/06
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GDP
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Employers Have Had Enough
 Getting out
 Reducing coverage and cost shifting
 GM and Ford
 Uninsured 45 million / Underinsured 16 million
ED Implications
What is your charity care policy?
How is it or is it linked to your pricing policy?
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Mission Implications
Healthcare Financial Management Association – March 2005
Ready for Prime Time? Make Your Financial Assistance Policy a Class Act
Financial Assistance Policy:
 Written and applied consistently
 Eligibility for discounts spelled out (who qualifies)
 Financial need, income levels, expenses and assets considered, etc.
 What services are discounted?
 What are the discounts?
 Proper notice / communication
 Documentation needed
 Time limits
 Payment plans
 Collection activities
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Consumer Driven Healthcare





Numbers low but growing
HSA’s and HRA’s > 30%
Risk plans
Healthcare expenditures per person $6,250
Out of pocket expenditures > 55%
Implications: Care avoidance
Shop on price but do they know how?
Price Packages / Collections
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Media
The Street.com
“It’s inevitable. Hospitals are going to have to
tell us how much they are charging. I’m very
concerned about the hospital group in general,
for all the obvious reasons.”
Sheryl Skolnick, CRT Capital
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Media
 > coverage
 Focus on the uninsured
 Hospitals looking bad
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Media
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Class Action Lawsuits
Richard Scruggs
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Class Action Lawsuits
And Tax Exempt Challenges
Richard Scruggs
Senator Charles Grassley
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Harsh Repercussions
 Aggregate value of income tax exemption for all nonprofits
during a one year period – $4.6 billion
 Median hospital benefits total 1.8 percent of total assets
 Property tax exemption aggregate value - $1.7 billion
 1.36 to 3.28 percent of fixed assets
 Solucient 2005 – hospital margins totally dependent on
operating income
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Harsh Repercussions
 IRS Soft Audits of Executive Comp
 House Ways and Means and Senate Financing investigating
 IRS Considering a 5 Year Review
 expanded 990
 public disclosure of financials
 board duty review
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Perceptions
 AHA Survey – hospitals perceived as for-profit
 50% of bankruptcies linked to healthcare
 Competing doctors charge less AND pay taxes
 Community costs of providing service (fire, police, etc.) increasing
“It is not enough for business to do well; it must also do good.
But in order to “do good,” a business must first “do well.””
Peter Drucker
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Sample Case Study
Assumptions:
- 300-bed hospital
- Net revenue – $135.1 Million
- Profit Margin - $3.5 million or 2.6%
- Spends $34.4 million on supplies
- Property, plant and equipment is $39.9 million
- 1,650 employees
Federal Income Tax
Federal Unemployment Tax
Sales and Use Tax
Real Property Tax
State and Local Net Income Tax
State Unemployment Tax
Total
$1,190,000
$ 92,400
$2,758,000
$1,025,000
$ 577,500
$ 836,880
$6,479,780
(18%)
(1%)
(43%)
(16%)
(9%)
(13%)
5% of revenues; from a profit to a loss
PricewaterhouseCoopers Health Research Institute Acts of Charity –
Charity care strategies for hospitals in a changing landscape
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Charges to Expenses
 U.S. average – 262% markup
 PA – 380% markup; 2nd highest in U.S.
Source: Demonstrating and Improving
Hospital Accountability for Charity
Care, ACHE, 3/15/05, The Lewin
Group
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Government




Ongoing hearings
Threatened legislation to close price gap
Forcing issue by publishing price
Actively lobbying payers to demand accountability
Implications: Uninsured will compare
Worse - Insurers will compare!
Ready to renegotiate?
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States
Massachusetts Health Care Bill
Requiring nearly all residents to purchase
health insurance
Allows companies to offer employees
cheaper, pared-down health plans –
catastrophic insurance, limited doctor’s
visits, high-deductible health plans
Companies that do not offer employees a
health care plan risk having to pay for an
uninsured employee's health care costs if
these costs rise above $50,000
Observers believe costs will shift from
hospitals to primary care physicians
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Medical Tourism
 Healthcare is not local
 All things equal, people will shop on price
 8% of uninsured earn $75,000+
 International examples
Psychological and economic research has shown that people will
pay different amounts for the same item,
depending on who is providing it.
Steven Levitt, Author Freakonomics and Economics Professor University of Chicago
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Advocates
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Mixed Messages
 Reimbursement on sickness when you have a wellness mission!
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Price Transparency
 California Healthcare Foundation –
deployed 600 mystery shoppers to find price
 Kaiser Family Foundation / USA Today –
52% of doctors never discuss price
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CFO
Top of Mind
Topics

Revenue Generation

Uninsured

Finance Rating

Access to Capital

OIG and Compliance Matters

Capital Construction Projects

New Modalities and Technologies

Departmental Outsourcing

Specialty Hospitals

Single Payor System

Future Physician Shortage
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Who is Interested in
What you Charge for Services?
 C-Suite
 Insurance companies
 Board of Directors
 Patients
 Newspaper
 Department Heads
 Care Providers
 Competitors
 Banker
 OIG
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If these Statements Describe your Hospital
you can Ignore this Material…

CMS owes us money—we do not want it—let them keep it

We have more revenue than we need

We will never raise prices again

Across-the-Board price increases are the best way

We are a not-for-profit so nobody pays attention to operating margin

We could care less how we are reimbursed for our services

We know the cost to deliver every service we perform down to the penny

We can explain the price for every line item in our CDM

We could care less about what our competitors charge or are reimbursed

We would never invest in anything with a 400% guaranteed ROI in 12 months

We cannot improve anything we currently do
“What people say, what people do,
and what they say they do are entirely different things!”
Peter Drucker
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“Strategic Pricing”

Across the Board

Medicare Percentage Mark-Up

Selective Service Item Charge Revision

Price Schedules

Market Driven

Charge Based Charging

Parameter Driven Business Rules

Computational Concurrent Mathematical Modeling
Source: Decision Health
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P=V=C
Price
What you have to give up in order to get something
Value
What you are just barely willing to give up to get something
Declining Marginal Utility
What is additional value of another “MRI”
Marginal Rate of Substitution
Rate at which you will substitute a “CAT Scan” for an “MRI”
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What Influences your Thought Process?
Competitive Advantage (Michael Porter, Harvard)
Critical Success Factor (John Rockert, MIT)
Value Creation (Campbell Harvey, Duke)
What is the Right Price? (Bob Barker, Price is Right)
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= 2 cents a cup
= 20 cents a cup
= $3 - $5
a cup
= $1cup
The Experience Economy –
B. Joseph Pine II, James Gilmore
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Retail Price Philosophy
 Align price with value
 Everyone gets the same deal
 Discounting frowned upon
 creates price sensitive markets
 spread between published and realized price
 less objective measures
“But unlike most everyone else, the prices we publish for our steel
products are the prices we charge. To everyone.
No special discounts. No exceptions.”
Ken Iverson, Chairman Nucor Steel
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Retail Price Philosophy
 Use value
 Quality and satisfaction data to show value:
Why You / Why That Price
 Though data says public does not use these yet!
 Trade off value for price paid
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Retail Price Philosophy
Other value determinants:
 What alternatives do they have?
 How easy is it to compare products?
 Is cost benefit easily seen?
 People focus on % not absolute
 What else are they paying for?
 What is the lifetime value?
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What is a Customer Worth?
S = average revenue generated per visit
C = average cost of servicing customer per visit
V = customer expected number of visits per year
Y = the expected number of years the customer will use service
A = the costs of acquiring a new customer
N = the number of people the customer refers to you
F = the correction factor for the time analyzed
S - C = gross margin
V x Y = lifetime visits
A x N – amount of acquisition money saved
Lifetime Value = ((S-C) x (VxY) – A + (AxN)) x F
Weiss
Marketing Prof
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What is a Customer Worth?
S = $50
C = $4
V = 24
Y = 40
A = $15
N=4
F = 1.1
Lifetime Value = ((S-C) x (VxY) – A + (AxN)) x F
((50-4) x (24x40) – 15 + (15x4)) x 1.1) = $48,625.50
Weiss
Marketing Prof
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Price Approaches

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Comparative pricing
Discounts
High-end image Pricing
Introductory offers
Incentive pricing

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
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Convenience pricing
Loss leader
Market share capture pricing
Price lining
Skim pricing




Access pricing / concierge approach
Year-end cafeteria pricing
Barter
Gift cards
 Zero interest
 Integrated pricing (packages)
Marlowe
Healthcare Marketing Report
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Retail Price Philosophy
 Package bundles based on mass customization
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Retail Price Philosophy
 Additive Option Strategy
 Subtractive Option Strategy
Which is better?
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Retail Price Philosophy
Subtractive
 Consumer has perceived power
 Perception of starting at higher level of quality
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Retail Price Philosophy
 Silver
 Gold
 Platinum Maternity Services
 Other examples please!
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Attributes of Leading
Edge Solutions
 Appropriateness (how compare)
 Reasonable and Customary (for what performed)
 Consistency (same throughout house)
 Mathematical Problem Solving
 Optimizes Hospital Business Policies and Practices
 Replicate Process and get the Same Answer
 Defensible and Transparent Equation
 Specificity
 Flexibility
 Computational Concurrency
 Sensitivity Analysis with Major Event Changes
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Attributes of Industry Best Approach

Model any marketing, financial or policy parameter

Defined variables from (3 or 4) to (30 or 40) parameters

What-if analysis while optimizing within model constraints

Model on gross to net ratio or by desired net revenue amount

Set individual department and location parameters

Virtually unlimited and specific benchmarks

Rank using competitors prices

Sensitivity analysis with major event changes
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Frequently Asked
Questions

What do you need from hospital to do the work?

What are sources of benchmark data?

How long does the project take?

How does this keep my prices competitive and defensible?

What is usual, customary and reasonable?

What happens if I change a parameter after we start?

What will this cost?

Why would I not do this?
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Project Scope
Pricing Analysis objectives:
 Increase incremental net revenue
 Align to desired market position
 Defensible individual item prices
 UCR “certified”
 Szyzgy – alignment of all prices in relationship to all other prices
“Finding the underlying order in apparently random data – Chaos Theory”
Edward Lorenz, Harvard PhD and Math Professor Emeritus MIT
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Rules of Thumb
 Touch about 15% to 25% of the items in CDM
 Focus on proper market alignment & net revenue management
 Biggest impact will be on outpatient services
 Pay attention to Lab, Rad, Am Surg, and ED
 1% to 2% net revenue increase of gross revenue
 Major price update should be tied to your budget process
 Multi facility systems need to address synchronization and
standards issues
 Refine cost and reimbursement analysis
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What is defined, built and loaded
into Mathematical Model
 Analytical parameters
 Upper and lower boundaries
 Applicable maximum overall charge increase
 Patient revenue opportunity equation
 Net revenue opportunity equation
 Price equalization and stepping rules
 Data from Get Ready activities
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Data Sets
Data loaded into model:
 CDM with current prices
 CDM items with both usage and CPT/HCPCS codes
 Payer contract reimbursement terms
 Patient charge detail
 Payer mix
 Health plan information
 Hospital benchmarks from OPPS and Geozip sources
 CMS fee schedules
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Getting Ready

Data files reviewed for completeness

Standardize all data files

Identify items with both Revenue & Usage and CPT/HCPCS codes

Charge sensitive items identified by financial class

Health plans charge detail mapped to individual contracts

Data transformed for processing by analytical engine
 Allocate managed care usage by line item if detail unavailable
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Helping you Help Yourself…
Charge
Description
Master
(CDM)
Pricing Objectives
Model
Optimization
Marketing, Financial & Policy
Provisions of Client
Revenue &
Usage
(Charge code
Revenue & Usage
and plan
level)
External
Pricing
Benchmarks
&
Cross Walks
Mathematical
Formulation
Pricing
Analytics
Managed Care
Contracts
(Plan and code
level)
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Lessons Learned
 Optimize, not maximize
 Consistent, customary, reasonable, appropriate, proper
 Procedure based pricing
 Start with items with CPT/HCPCS and Rev & Usage
 Attention at plan and code level
 Measure – compare - monitor
 Use multiple satellites like your GPS
 Calculate what you get paid by everybody
 Draw a map others can follow
 Get others to do some of the work for you
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What can be modeled into a parameter?
“Nothing will work, unless you do!”
John Wooden, UCLA Coach of 11 time NCAA Champions
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Concurrency and Flexibility

Cap overall annual percentage increase at 5%

Increase observation codes at a 3% Across-the-Board percentage

No item increased if gross-to-net percentage is less than 2%

Set all items between 20th and 50th percentile so at least three hospitals have higher price

Position prices at 65th percentile of market

No individual price increased more than 75%

Lower items where highest in market and position each item as second highest

No prices higher than Main Street Medical Center

Equalize EKG and MRI prices across the organization

Set mammography price to lowest in market & identify alternative revenue sources

No department shall have more than 30% of the net revenue gain from price change

Calculate net revenue impact for price change for BCBCS

Automatically identify procedures/items with stepping issues after price change

Identify best “candidates” to achieve additional $1,200,000 in net revenue
(“run model in reverse”)
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Why Run Iterations
of any Model
 Stay optimized within the model
 Market positioning
 Reasonableness
 Departmental specificity
 Stepping and equalization
 Unit of measure matters
 Multiple prices for a single CPT/HCPCS code
 Unique pricing for:





Observation
Therapies
Rehab
Recurring visits
Etc.
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Minimum Deliverables
 Recommended price changes (up and down)
 Comparative rankings
 Analysis by dept, fin class, rev code, contract, etc.
 File ready for upload
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Value Proposition
 The best achievable result in incremental net revenue
 Mathematical and scientific approach to establishing prices
 Rigorous analysis of each items price positioned to business rules
 Defensible and transparent prices
 Guaranteed return on investment
“Which one of you guys is shooting for second place?”
Larry Bird, In locker room before winning first NBA 3 Point Contest
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Rutherford Hospital $1.39 million
additional net revenue
Rutherford Hospital ($millions)
Pricing Approach
In
Charges
Out
Total
In
Net Revenue
Out
Total
ATB (5%)
FY05
ATB Opportunity
22.94
21.86
1.08
49.92
47.53
2.39
72.86
69.39
3.47
1.06
1.01
0.05
13.34
12.70
0.64
14.40
13.71
0.69
Applied Revenue
FY05
Model Opportunity
19.84
21.86
-2.01
53.02
47.53
5.49
72.86
69.39
3.47
0.97
1.01
-0.04
14.82
12.70
2.12
15.79
13.71
2.08
Model Versus ATB
-3.10
3.10
0.00
-0.09
1.48
1.39
ATB : "Across the Board"
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The Gold Standards
 Double or triple net revenue through selective changes vs.
Across-the-board increases
 Calculate net revenue impact with high degree of confidence
 Appropriate prices lowered
 Dynamic vs. static
 Time-based vs. procedure-based
 Calculate impact on Medicare Outliers
 Bell shaped curve with E&M codes in ED
 Every price is current with fee schedules
 APC and cost multipliers
 Know where you stand within your geographic space, and with peers
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Consider this Litmus Test
 Driven by market, financial, and departmental policies and practices
 Aligns concurrent pricing strategies and rules
 Preserves internal CDM structure
 Optimizes net revenue
 Ensures stepping and equalization done properly
 Facilitates objective and defensible price decisions
 Addresses appropriate updates from fee schedules
 Avoids single focus selective price increases
 Reduces write-offs
 Minimizes re-work and clean-up for PFS and IT staff
 Measures and monitors outcomes
“How to build a winner:
Desire, backed by determination and work ethic”
Michael Jordan, 6 time NBA Champion
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Communicating Price – St. Luke’s Kansas City
 Public interest
 Receiving inquiries across departments
 No standardization
 Consumer confusion
 Lost opportunity
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Communicating Price – St. Luke’s Kansas City
Goals

Provide price

Health plan inclusions and exclusions

Outpatient and frequently requested inpatient

Sell value

Provide payment methods
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Communicating Price – St. Luke’s Kansas City
Pre-requisite




Payer information
Price information
Ease of use
Same day information
 Consistent service
 Know health system value by procedure
 Documentation
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Communicating Price – St. Luke’s Kansas City
 What they collect
 What they then do
 Who was involved
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Communicating Price – St. Luke’s Kansas City
Metrics




Number of calls
Length of time to respond
How many unfulfilled calls
How many became patients
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Communicating Price – St. Luke’s Kansas City
 Increase in the number of people scheduling and converting
 Call volumes exceed capacity
 Started under marketing, now with Finance
 Mammography and deliveries top inquiries
 Uninsured quoted based on a schedule tied to charity care policy
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Communicating Price – St. Luke’s Kansas City
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Package title : Comprehensive Program - Male
Summary: This is a comprehensive check-up package for male.
1.
2.
3.
4.
5.
6.
Vital Signs and Physical Examination
Eye Exam (tonometry, autorefractometry)
Radiology Studies
3.1 Chest X-ray
3.2 Ultrasound of Whole Abdomen
Cardiac investigations
4.1 Exercise Stress Test (Treadmill) or Echo Cardiogram
Laboratory Studies
Doctor Fee
Package Price: 12,500 baht = $320
Note: The Package Pricing is extended to patients who
settle the bill directly to the Hospital only.
No discount of any kind may be applied to package prices.
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Face Lift (Face, Neck, Upper and Lower Blepharoplasty)
Summary: This is a routine Face Lift Procedure Package with 1
night length of stay in the surgical unit.
The Package Includes:
•
•
•
•
•
•
•
•
Operating Room Charges :
Accommodation for 1 nights in the surgical floor including :
Laboratory Testing :
Radiology Studies :
Medical Equipment and Medical Supplies necessary for the procedure
Anesthesia :
Medications :
Doctor Fees
• Surgeon Fees
• Anesthesiologist Fees
Package Price: 162,000 baht = $4134
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Apollo Hospitals India
Specialities & Procedures
No of Days Stay
in The Hospital.
Estimated Total Cost in US $
COSMETIC SURGERY
Abdominoplasty/Tummy Tuck
2 Days
2900
Face Lift
1 Day
2800
Face Lift with Upper or Lower Blepharoplasty
1 Day
3300
Face Lift with Upper & Lower Blepharoplasty
1 Day
3500
Upper & Lower Blapharoplasty
1 Day
2200
Upper or Lower Blepharoplasty
OPD
1200
Liposuction- Abdomen
OPD
1600
Liposuction- Buttocks & Thighs
OPD
1600
Liposuction-Abdomen,Buttocks & Thighs
1 Day
2700
Breast Augmentation(without Implant)
1 Day
2200
Stapedotomy
2 Days
1420
Tympanoplasty
2 Days
1060
Ossiculoplasty
2 Days
1060
ENT
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Apollo Hospitals India
Specialities & Procedures
No of Days Stay
in The Hospital.
Estimated Total Cost in US $
VASCULAR SURGERY
Carotid Artery Surgery
5 Days
5100
Carotid Angioplasty with Stenting
4 Days
8400
Gastric Bypass
3 Days
6500
Gastroplasty
5 Days
6000
Laparoscopic Hernia Repair
3 Days
2800
Knee Replacement (Unilateral)
7 Days
6400
Hip Replacement (Unilateral)
7 Days
6300
Birmingham Hip Resurfacing(Unilateral)
7 Days
6500
SURGICAL GASTROENTEROLOGY
ORTHOPAEDIC PACKAGES
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Myth – Not a Myth?
 Health care is no longer local?
 Single payer system will happen within 10 years?
 Patients exhibit brand loyalty?
 Choice is prevalent and always will be?
 We are the high cost provider (I know the cost to deliver services)?
 Best method to generate patients: Advertising or word-of-mouth referral?
 Predicted physician shortage will have butterfly effect on prices?
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 Align your prices to your market
Other Implications
 Know the price and share the price
 Be compensated fairly
 Know what competitors charge
 Know what competitors are reimbursed
 Get paid now or you may not get paid later
 Collect at the time of service
 Adjust and integrate revenue cycle
 Real time claims adjudication
 The new PR ambassadors
 Introduce service enhancements
 debit cards
 access to online bills and balances
 online pay
 Rethink the scope of your marketing
 Make the experience the best it can be
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Sustained Success
“Executives do not need or deserve special treatment.
We are not more important than other employees.
And we are not better than anyone else.
We just have different jobs to do.”
Ken Iverson,
Chairman Nucor Steel
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Focus of Future Pricing Decisions
 Margin Management
 Value Creation
 Computational Concurrency
 Cost & Reimbursement Quotient
 Patient Rubric
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“Leadership has numerous ingredients:
intellect, determination, patience, commitment,
consistency, vision, kindness, boldness, the ability to
focus on important broad issues, and above all the
ability to motivate people and persuade them to
accept your ideas.”
David Cooper
Knight-Ridder
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Common Success Factors
 Create value
 Candor
 Eliminate fear of failure
 Data is not knowledge, but the answer lies in the right data
 Embrace change, but change for change sake is stupid
 Listen actively
 Make the tough decisions, make the critical decisions faster
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Applied Revenue Analytics
 Pricing Analytics
 Charge Capture Analytics
 CDM Support
 Disproportionate Share Analytics
 Contract and legal process support
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Fast Forward
 Market and price monitoring
 Integrate CRM tools and continuous feedback tools
 Design price packages based on customer wants and align to value
 Integrate organizational goals into pricing approaches as a component
of marketing strategy
 Develop communication templates to tell the price story
 Customer service training to support consumer driven healthcare
 Tools and templates to tell the other side of the price story
(example, economic impact studies that show economic value of
hospital in community)
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Anthony Cirillo
1-704-992-6005
anthony@4wardfast.com
www.4wardfast.com
Jeff Tarte
1-704-892-4300
jtarte@apprev.com
Applied Revenue Analytics