Developing Pricing for Integrated Care
and Community-Based Services
Featuring:
Erin Westphal, Program Officer
Karen Scheboth, Director of Grants Administration
Eric Thai, Director of Finance
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Webinar Agenda
• About The SCAN Foundation
• New Opportunities for CBOs
• Pricing Methodology
• Pricing Guide Overview
• Types of Costs
• Example Walkthrough
• Q&A
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Our Mission and Vision
Mission: To advance the development of a sustainable
continuum of quality care for seniors.
Vision: A society where seniors receive medical treatment and
human services that are integrated in the setting most appropriate
to their needs and with the greatest likelihood of a healthy,
independent life.
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New Opportunities for CBOs
Why Pricing Matters Now
Changes in the organization, financing, and delivery of health care provide
new opportunities (& challenges)
 Duals Integration Pilots & Managed Long-term Services and Supports
 Health Plans responsible for organizing community-based LTSS
 Limited experience
 Buy it or build it option
 Hospital Readmissions Reduction Programs
 Care Transition Programs
 Integrated Care Models
 Accountable Care Organizations, Health Homes
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Pricing is an Art and a Science
1. Determine your Pricing Structure
2. Estimate your Value
3. Calculate your Cost
4. Analyze your Competitors
5. Set a Price
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Pricing Guide Contents
• Section 1: Pricing Structures
• Section 2: Setting a Price
• Section 3: Other Pricing Strategies
• Appendix of Additional Resources
Includes examples based on CBOs
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Section 1: Pricing Structures
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Section 1: Payment Models
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Fixed vs. Variable Costs
•
•
Fixed costs are not affected by the volume of services or goods produced.
Examples include:
Supervisor salaries
Additional office space
Additional equipment
–
•
•
•
Variable costs will increase or decrease with changes in volume.
– Examples include:
• Hourly wages of nurses or case managers
• Supplies used in performing services
• Fuel for transportation vans
• Supplies needed to prepare home-delivered meals
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Fee For Service Model
Revenues
$
Higher Fixed Costs
Lower Fixed Costs
$
$
Total Revenues
Total Revenues
Total Revenues
Profit
Profit Total
Costs
Loss
Break-even Q
Volume of
Services
Total revenues
increase as volume
increases.
Volume of
Services
With higher fixed costs, a
higher quantity is needed
to become profitable
Total
Costs
Loss
Break-even Q
Volume of
Services
Lower fixed costs will yield
profits with lower
quantities
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Capitation Model
Revenues
$
Higher Fixed Costs
Lower Fixed Costs
$
$
Total
Costs
Total Revenues
Total Revenues
Loss
Profit
Total revenues are
constant as volume
increases.
Total
Revenues
Loss
Profit
Breakeven Q
Volume of
Services
Total
Costs
Volume of
Services
With higher fixed costs
and lower variable costs,
profits are sustained for
larger quantities
Breakeven Q
Volume of
Services
Higher variable costs and
lower fixed costs will
result in losses with lower
utilization
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Section 2: Setting a Price
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Determining Value
Reference Values can be:
- Competitor prices
- Customer’s cost of doing it themselves
Sources of Differentiation Value include:
- Cost savings
- Convenience and time savings
- Brand recognition
- Reliability
- Customer service
- Performance
- Quality
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Determining Costs
Categories of Costs:
1. Fixed or Variable
2. Direct or Indirect
3. Relevant or Sunk
Fixed
Variable
Direct
Indirect
Relevant
Relevant
Sunk
Sunk
Relevant
Relevant
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Direct vs. Indirect Expenses
Direct Expenses apply to a specific project and can be easily
traced to the project.
Indirect Expenses apply to multiple projects so it is harder to
quantify and trace them to individual projects.
Examples:
- Rent
- Utilities
- Finance staff
- IT
Key Difference is Ease of Allocation
Indirect Cost Rate is an inaccurate shortcut
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Relevant vs. Sunk Costs
Relevant vs. Sunk Costs
Another categorization of expenses
Relevant Costs are “future” expenses that will be incurred only if the
service line is offered.
Sunk Costs are “existing” expenses that will be incurred regardless of
whether or not the service is offered.
Examples:
- Existing rent
- CEO salary
- Finance staff
- Human resources
DO NOT INCLUDE SUNK COSTS IN FINANCIAL PLANNING
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Section 2: Setting a Price
Sunk Costs Fallacy & Full Cost Recovery
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Section 2: Setting a Price
Sunk Costs Fallacy & Full Cost Recovery
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Calculating Cost
1) Determine Relevant vs. Sunk Costs
2) Exclude Sunk Costs
3) Determine Fixed vs. Variable Costs
4) Allocate Direct and Indirect expenses
5) Estimate quantity
6) Calculate cost per unit
Pricing Guide includes a Cost per Unit
calculation tool
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Putting it All Together to Set a Price
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Example – Care Managers
A CBO is offering care management services to a health plan
•
Bilateral negotiation
•
In-person visits
•
Requires 10 additional care managers
•
Individuals receiving care management are healthier and require less
hospitalizations
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Example – Determine Relevant vs. Sunk Costs
EXPENSE
SUNK?
Office space
Relevant
Care managers
Relevant
Supplies
Relevant
Mileage
Relevant
Supervisors
Relevant
Training
Relevant
Human Resources
Sunk
Finance
Sunk
Tracking System (IT)
Sunk
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Example – Determine Fixed vs. Variable Costs
EXPENSE
TYPE
Office space
Fixed
Care managers
Variable
Supplies
Variable
Mileage
Variable
Supervisors
Fixed
Training
Variable
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Example – Allocate Project Costs
EXPENSE
TYPE
ALLOCATION
Office space
Fixed
$20,000 per year
Care managers
Variable
$30 per hour
Supplies
Variable
$500 per care manager per year
Mileage
Variable
$10 per visit
Supervisors
Fixed
1.5 supervisors = $90,000 per year
Training
Variable
$500 per care manager per year
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Example – Estimate Quantity and
Calculate Cost per Unit
•
•
•
•
•
FFS payment model
1.5 hours per visit (including travel and reporting)
1,000 members with monthly visits
12,000 visits per year
10 care managers
EXPENSE
TOTAL COSTS
Calculation
COST PER VISIT
Office space
$20,000 per year
/ 12,000 visits
$1.66
Care managers
$30 per hour
X 1.5 hours
$45.00
Supplies
$500 per mgr/yr
X 10 / 12,000 visits
$0.42
Mileage
$10 per visit
X 1 visit
$10.00
Supervisors
$90,000 per year
/ 12,000 visits
$7.50
Training
$500 per mgr/yr
X 10 / 12,000 visits
$0.42
$65.00
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Example – Estimate Your Value
•
•
Reference Value
Telephonic care management = $60 per call
–
Differentiation Value
In-person care management reduces hospital admissions by 5% over
telephonic
Average hospital admission costs $10,000
Total cost savings per year = $500,000 (1,000 members X 5% X $10,000)
Differentiation Value per visit = $41.67 ($500,000 / 12,000 visits)
–
•
•
•
•
Value = $101.67
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Example – Set a Price
$101.67
$65.00
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Questions
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