ESTABLISHING DEFENSIBLE PRICING
IN TRANSPARENT TIMES
Central-Southwest Ohio HFMA Biennial Dual Chapter Fall Conference
September 26, 2014
Presented by:
Jamie Cleverley, MHA
Cleverley + Associates
jcleverley@cleverleyassociates.com
Today’s Objectives
1) WHAT IS DRIVING THE NEED FOR TRANSPARENCY &
DEFENSIBILITY?
2) WHAT INFLUENCES HOSPITAL PRICING?
3) HOW DO WE DEFEND PRICES?
4) HOW DO WE CREATE AN APPROPRIATE PRICE STRATEGY?
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WHAT IS DRIVING THE NEED FOR TRANSPARENCY/DEFENSIBILITY?
GROWTH IN HOSPITAL COSTS/CHARGES
National Healthcare Expenditures – Top Five Health Expenditure Categories (Millions)
Source: CMS
What is driving the need for transparency?
1
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GROWTH IN HOSPITAL COSTS/CHARGES
Annualized Change in National Health Expenditures by Top 10 Areas
1980-1990
1990-2000
Home Health
18.1%
Drug
Net Cost of Hlth Ins
13.1%
Home Health
Drug
12.8%
Physician/Clinical
2000-2010
11.6%
Net Cost of Hlth Ins
8.9%
9.9%
Home Health
8.2%
Public Health
8.0%
Drug
7.8%
12.8%
Other
7.5%
Hospital
7.0%
Public Health
12.0%
Net Cost of Hlth Ins
7.3%
Public Health
6.3%
Nursing/Contin Care
11.4%
Dental
7.0%
Other
6.0%
Other
11.1%
Nursing/Contin Care
6.6%
Physician/Clinical
6.0%
Hospital
9.6%
Physician/Clinical
6.2%
Dental
5.4%
Struct & Equip
9.4%
Struct & Equip
5.6%
Nursing/Contin Care
5.3%
Dental
9.0%
Hospital
5.2%
Struct & Equip
4.9%
Total All
11.0%
Total All
6.6%
Total All
6.6%
What is driving the need for transparency?
1
Source: CMS
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GROWTH IN HOSPITAL COSTS/CHARGES
Inflationary Changes by Metric & Year
What is driving the need for transparency?
1
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GROWTH IN HOSPITAL COSTS/CHARGES
Rate Increase Median Limit Value
5.0%
6.0%
5.0%
5.0%
What is driving the need for transparency?
1
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GROWTH IN HOSPITAL COSTS/CHARGES
20%
18%
6%
1966
2010
2020
What is driving the need for transparency?
1
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INCREASED GOVERNMENT/LEGAL/MEDIA ATTENTION
FY 2015 Final Rule:
In the FY 2015 IPPS/LTCH PPS proposed rule (79 FR 28169),
we reminded hospitals of their obligation to comply with the
provisions of section 2718(e) of the Public Health Service Act.
We appreciate the widespread public support we received for
including the reminder in the proposed rule. We reiterate that our
guidelines for implementing section 2718(e) of the Public Health
Service Act are that hospitals either make public a list of their
standard charges (whether that be the chargemaster itself or in
another form of their choice), or their policies for allowing the
public to view a list of those charges in response to an inquiry.
MedPAC suggested that hospitals be required to CMS-1607-F
1205 post the list on the Internet, and while we agree that this
would be one approach that would satisfy the guidelines, we
believe hospitals are in the best position to determine the exact
manner and method by which to make the list public in
accordance with the guidelines.
What is driving the need for transparency?
2
http://www.healthdatamanagement.com/news/hospital-chargemasterprices-codes-revenue-cycle-management-46485-1.html
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GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE
Growth in HSA/HDHP Plans by Year (thousands)
What is driving the need for transparency?
3
Source: Center for Policy & Research, America’s Health Insurance Plans
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GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE
What is driving the need for transparency?
3
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WHAT INFLUENCES HOSPITAL PRICE?
o Sustainable growth
determines reasonableness
of target
o Quality
o Cost
o Market Share
o Capital Intensity
o Payer Mix
PRICE
o Buyers/Sellers
o Barriers to Entry
o Price Elasticity
What influences hospital pricing?
Three spheres of influence on price
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What influences hospital pricing?
Testing price variables
Who is likely to have the highest charges
among hospitals that are:
-Urban vs Rural
-For-Profit vs Non-Profit
-Teaching vs Non-Teaching
-Large vs Small
-High Market Share vs Low Market Share
-High Medicaid/SSI vs Low Medicaid/SSI
-High Cost vs Low Cost
-High Margin vs Low Margin
To what extent will these characteristics be
an influencing factor?
$
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What influences hospital pricing?
Urban/Rural Status by
Hospital Charge Index® Quartiles
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What influences hospital pricing?
Organization Type by
Hospital Charge Index® Quartiles
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What influences hospital pricing?
Teaching Status by
Hospital Charge Index® Quartiles
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What influences hospital pricing?
Median Net Patient Revenue (millions) by
Hospital Charge Index® Quartiles
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What influences hospital pricing?
Median Market Share Percentage by
Hospital Charge Index® Quartiles
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What influences hospital pricing?
Median Inpatient Disproportionate Share Percentage by
Hospital Charge Index® Quartiles
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What influences hospital pricing?
Median Hospital Cost Index® by
Hospital Charge Index® Quartiles
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What influences hospital pricing?
Median Operating Margin by
Hospital Charge Index® Quartiles
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Payer Environment: Markup Ratio/Deductions %
What influences hospital pricing?
Median Payer Environment by
Hospital Charge Index® Quartiles
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Average Cost per Patient = $100
Payer
Medicare
Medicaid
Uninsured
Managed Care
Other
Totals
Number of
Patients
50
10
5
30
5
Net Payment per
Patient
$92.50
$75.00
$5.00
$125.00
???
100
Total
Payment
$4,625
$750
$25
$3,750
???
Total
Cost
$5,000
$1,000
$500
$3,000
$500
$9,150
$10,000
less Total Cost
less Required Profit
$10,000
$500
Balance Remaining
($1,350)
What influences hospital pricing?
Payment is the real key in determining hospital pricing
Required Payment from Five Remaining Patients = $270 ($1,350/5)
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Pricing Model
Use this model for price-setting at facility level:
Price must increase when:
Average cost increases
Price = avg cost +
(NI + fixed pay loss)
charge volume
(1 - charge discount)
Net income requirements
increase
Losses from fixed pay business
increases
What influences hospital pricing?
Payment is the real key in determining hospital pricing
The percentage of charge
paying patients decreases
The discount from charges
increases
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Pricing Model – Payer Impact on Pricing
Avg cost = $100
NI = $4 (4%)
FP loss =
Charge payers =
Charge discount =
Required price =
$0
20%
30%
$171.43
What influences hospital pricing?
Payment is the real key in determining hospital pricing
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Pricing Model – Pricing Sensitivity Analysis
MODEL
#1
#2
#3
Profit margin
FP loss
4%
0
4%
2
4%
0
% charge
Average discount %
Mark-up required
50%
15%
127
20%
60%
325
100%
5%
109
What influences hospital pricing?
Payment is the real key in determining hospital pricing
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HOW DO WE DEFEND HOSPITAL PRICES?
1
2
3
ROI Model
Peer Position
Cost Markup
How do we defend prices?
Three approaches to hospital price defense
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Return on Investment Model
Relating pricing to ROI: the public-utility approach
Public utilities have used a Return on Investment (ROI) model to justify price
increases to rate regulatory boards. The approach isolates the price variable
from the ROI formula (below) and “tests” the remaining elements. If it can be
proved that ROI, Cost, and Investment are not excessive, then price must also
not be excessive. In the following pages, we present these tests.
ROI Formula
ROI =
(volume x price) - (volume x cost)
investment
How do we defend prices?
1
Tests
1.
Is ROI excessive?
2.
Is cost excessive?
3.
Is investment excessive?
If “no” to all three,
price is not excessive.
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Return on Investment Model
Return on Equity
OH Median
US Median
8.3%
9.0%
How do we defend prices?
1
ROE: Excess of Revenue over Expenses/Net Assets
Tests
 Is ROI excessive?
 Is investment excessive?
 Is cost excessive?
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Return on Investment Model
Average Age Fixed Asset
of Plant
Turnover
OH Median
11.0
2.51
US Median
10.3
2.49
How do we defend prices?
1
Average Age of Plant: Accumulated Depreciation/Depreciation Expense
Fixed Asset Turnover: Total Revenue/Net Fixed Assets
Tests
 Is ROI excessive?
 Is investment excessive?
 Is cost excessive?
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How do we defend prices?
1
Return on Investment Model
Facility-level cost measure:
Hospital Cost Index®
Inpatient Costs
Inpatient Cost Index
Formula:
Your Medicare Cost
per Discharge (CMI/WI adj)
US Median Medicare Cost per
Discharge (CMI/WI adj)
Outpatient Costs
Outpatient Cost Index
Formula:
Your Medicare Cost
per Visit (RW/WI adj)
US Median Medicare Cost per
Visit (RW/WI adj)
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Return on Investment Model
OH Median
US Median
Hospital Cost Index®
100.0
100.7
How do we defend prices?
1
Tests
 Is ROI excessive?
 Is investment excessive?
 Is cost excessive?
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How do we defend prices?
2
Peer Position Model
Comparing your pricing to pricing at peer facilities
Level of Comparison
Metric
FACILITY
Hospital Charge Index®
Level of Detail
Medicare Charge per Discharge
(CMI/WI adj)
Medicare Charge per Visit
(RW/WI adj)
DEPARTMENT
BETOS Analysis
INPATIENT CASE
Charge by MS-DRG
OUTPATIENT CASE
Charge by APC
PROCEDURE
Price by CPT®/HCPCS Code
Bundling
Bundling
CPT® is a registered trademark of the American Medical Association. All rights reserved.
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Peer Position Model: Facility-level comparison
Facility-level charge measure:
Hospital Charge Index®
Outpatient Charges
Outpatient Charge Index
Inpatient Charges
Inpatient Charge Index
Formula:
Your Medicare Charge
per Discharge (CMI/WI adj)
US Median Medicare Charge per
Discharge (CMI/WI adj)
How do we defend prices?
2
Formula:
Your Medicare Charge
per Visit (RW/WI adj)
US Median Medicare Charge per
Visit (RW/WI adj)
Inpatient
Charge Index
Outpatient
Charge Index
Hospital
Charge Index®
Sample Hospital
136.1
119.4
128.9
Peer Average
96.6
65.9
85.2
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Peer Position Model: Facility-level comparison
Hospital Charge Index®
OH Median
US Median
95.8
103.6
How do we defend prices?
2
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Peer Position Model: Facility-level comparison
Medicare Charge per Discharge
(CMI and WI adj)
OH Median
$19,741
US Median
$21,698
How do we defend prices?
2
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Peer Position Model: Facility-level comparison
Medicare Charge per Visit
(RW and WI adj)
OH Median
$349
US Median
$367
How do we defend prices?
2
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Peer Position Model: Facility-level comparison
OH Median
US Median
Inpatient Disproportionate
Share %
7.7
10.2
How do we defend prices?
2
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Peer Position Model: Department-level comparison
CPT®
Description
87075
Culture specimen, bacteria
87076
Bacteria identification
Department/Family Analysis
87077
Culture Aerobic Identify
“Lab Tests – Microbiology”
CPT® is a registered trademark of the American Medical Association.
All rights reserved.
Sample
Hospital
Peer
Average
% of Peer
Average
Office Visits
Emergency Room
Evaluation & Management Total
126.58
406.53
298.09
111.74
323.20
213.27
113.28%
125.78%
139.77%
Procedures – selected detail
Major Procedures – Cardiovascular
Eye Procedures - Cataract/Lens
Procedures Total
193.56
130.76
287.50
113.00
196.93
185.65
171.30%
66.40%
154.86%
Imaging – selected detail
Standard Imaging - Nuclear Medicine
Advanced Imaging - CT/CTA Scan Brain/Head/Neck
Imaging Total
230.29
569.35
467.71
281.86
396.29
343.16
81.70%
143.67%
136.29%
358.81
1,854.80
495.30
368.38
705.90
297.09
97.40%
262.76%
166.72%
Evaluation & Management – selected detail
How do we defend prices?
2
Tests – selected detail
Lab tests - Pathology
Lab tests - Routine venipuncture
Tests Total
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Peer Position Model: IP/OP/Procedure-level comparison
DRG Description
Sample
Hospital
Volume
Sample
Hospital
Average
Charge
Peer
Average
Charge
470
Major joint replacement or reattachment of lower
extremity w/o MCC
795
52,246
45,870
652
Kidney transplant
55
183,983
871
Septicemia w/o MV 96+ hours w MCC
162
460
Spinal fusion except cervical w/o MCC
APC Description
Revision of hip or knee replacement w/o CC/MCC
0301 Level II Radiation Therapy
54
Sample
54,714
Hospital
128,559
Volume
73,391
8,680
147,994
Sample
Hospital
31,379
Average
92,961
Charge
55,107
1,481
468
72
0412 IMRT Treatment Delivery
Level III Therapeutic Radiation Treatment
Preparation
Sample
Hospital
0615 Level 4 Emergency Visits
CPT® Description
Volume
0616 Level 5 Emergency Visits
77418 Intensity modulated treatment deliver
2,652
0310
1,146
2,635
4,642
2,820
Sample
367
Hospital
Average
2,698
Charge
1,265
3,354
24,955
Peer
Average
2,988
Charge
5,210
2,213
11,648
77414 Radiation treatment delivery
4,981
991
851
77334 Radiation treatment aid(s)
2,954
1,650
1,026
99284 Emergency dept visit
2,945
1,331
1,027
77413 Radiation treatment delivery
3,896
991
808
CPT® is a registered trademark of the American Medical Association. All rights reserved.
Peer
Average
Charge
How do we defend prices?
2
2,102
4,272
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Cost/Markup Model
Relating pricing to cost:
Sources of Cost Data
 Hospital cost-accounting system
 Direct Cost
How do we defend prices?
3
 Fully allocated cost
 RCCs
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Cost/Markup Model
Relating pricing to cost:
Two Usual Outcomes
1. Reduced net patient revenue, e.g.,
$5.1 million vs. $9.6 million in ATB
How do we defend prices?
3
2. Major pricing changes, e.g.,
-99% to 3,580%
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CREATING AN APPROPRIATE PRICING STRATEGY
September, 2014 hfm Cover Story: How hospitals approach price transparency
Creating appropriate prices
Understand your goal – does the organization want to be
transparent & defensible?
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Creating appropriate prices
Understand how prices are being communicated and received
September, 2014 hfm Cover Story: How hospitals approach price transparency
| 47 |
Secondary/Tertiary
Hospital Market
WHO??
Core
Hospital
Market
SERVICES??
Creating appropriate prices
Understand your market position
NonHospital
Market
PRICE PRESSURE??
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1
2
External Policy
Internal Policy
o Public facing document for
patients to view
o Meets or exceeds national and
state requirements (as applicable)
o Goals for future release of pricing
and payment information to the
community
o Guiding principles on how strategic
pricing and pricing transparency
will be developed and evaluated
Creating appropriate prices
Develop clear internal and external pricing policies
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Creating appropriate prices
Understand and manage payment
September, 2014 hfm Cover Story: How hospitals approach price transparency
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Payment terms – Inpatient (payer Z & hospital)
* 80 comparison plans
Payer Z
Average Value*
All services % of Billed Charges
Sample
Hospital
81%
DRG Base Rate
$6,125
$4,806
Medical
$1,659
Surgical
$1,921
TCU/Telemtry
$2,036
ICU/CCU
$3,314
PTCA
$4,091
Psych
$711
$485
Alcohol/ Chemical Dependency
$637
$485
Per-Diem Rates
Rehab
Creating appropriate prices
Understand and manage payment
$1,293
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Payment terms – Outpatient (payer Z & hospital)
* 80 comparison plans
Payer Z
Average Value*
All services % of Billed Charges
Sample
Hospital
72%
Radiology (% BC)
75%
38.6% (except case rates
for SPECT, MRI/MRA, &
CT Scan)
Laboratory (% BC)
76%
Fee Schedule
Emergency Department (% BC)
73%
38.6%
Level 1
$93
Level 2
$141
Level 3
$339
Level 4
$600
Level 5
$1,212
Creating appropriate prices
Understand and manage payment
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Critical steps in a hospital’s rate-setting strategy














Set net revenue expectations
Establish initial rate-change limits and parameters
Integrate internal strategic pricing objectives
Use the right data to estimate rate-increase impact
Model your contract terms completely
Assess fee-schedule pricing
Correct issues of pricing relativity
Incorporate cost data
Examine competitive pricing comparisons
Review pharmacy / medical-supply issues
Evaluate impact by case categories
Evaluate impact by payer
Adjust parameters as necessary and implement final CDM changes
Create patient pricing communication documents
Creating appropriate prices
Execute the strategy
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Does the strategy:
Meet net income expectations?
Maintain or enhance competitive position?
Maintain or correct related pricing relationships?
Creating appropriate prices
Evaluating the rate strategy
Establish equitable distribution to case categories?
Establish equitable distribution to payers?
Meet transparency/defensibility objectives?
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Summary
• The need for transparency and defensibility regarding
hospital pricing is likely to increase
• Hospital pricing is impacted by various demographic and
operating factors – among them, payment is critical in rate
establishment
• Price comparison can change significantly based on the
level of comparison
• Defensibility and required net revenue objectives can be
attained through creating a strategic pricing plan and
executing/evaluating the plan through effective modeling
and monitoring
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Thank you. Questions?
Jamie Cleverley
President
Cleverley + Associates
Email: jcleverley@cleverleyassociates.com
Phone: (614) 543-7777
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