It Can Be Done: Automating the Math Required for Defensible, Strategic, and Informed Pricing
May 22, 2019
So now that your organization has committed, often at the board level, to having a more patient-centric and defensible approach to pricing that doesn’t have a negative impact on margin, the real work begins…
Thinking through the process (not to mention the analytics) required to get to strategic, defensible, and informed pricing can feel like you’re at the bottom of a steep, tall, craggy mountain. There will be many variables to contend with and loads of data to sort through. Once the initial analysis is set up, stakeholders will want to slice and dice a hundred different ways. Just thinking through scheduling all the meetings to get buy-in feels like its own mountain.
Like any daunting task, breaking the project up into well-defined, achievable steps is the first and arguably most important step.
Begin with the End in Mind
To start a pricing overhaul, the first thing to do is outline the guiding principles for how your organization will approach pricing. You may not have all the data you need at the beginning to define it completely, but you’ll gain consensus on what questions you’ll need to answer.
Organizations that are excelling in strategic, defensible, and informed pricing are defining guidelines such as:
- The cost to provide services will be a key consideration in pricing. We will use the most accurate and validated data available to inform cost
- We will have a data informed process: financial impact of decisions will be well understood before implementing
- We will differentiate our prices among geography, entity, and services to reflect uniqueness in our services and competitive position…
Once these are defined, the required analytics begin to come into focus.
Analytics to Drive Insights and Decisions
Linking Pricing to Cost, Reimbursement & Margin
To develop defensible pricing, linking the pricing to the most accurate and validated cost data is the starting point. However, unless the organization has invested an advancing cost accounting system, there are likely broad assumptions used to calculate the cost of each charge code.
Especially for health systems that have grown through acquisition, there may be multiple charge masters across entities. There may be different cost accounting systems built on different assumptions.
Organizations that are using advancing cost accounting can produce accurate cost information that incorporates actual acquisition cost for supplies and drugs, time stamps and employee-level payroll for labor expense, non-chargeable supplies and equipment, and employed physician compensation.
Bringing in payments and expected net revenue based on payer contract terms, enables margin to be seamlessly included in pricing analysis.
Identifying Pricing Risks and Modeling Financial Impact
Once the charge masters are combined, costing is validated, payer terms are built, and net revenue is modeled, the fun can begin.
With this data in one place, the analyst can identify charges that are underpriced and are being underpaid, that are overpriced and exposing the organization to risk, or that have unexpectedly low margins.
Once this data is shared, stakeholders will want to know what happens to margins, payer contracts, and volume if the prices are changed. Now, an intensive modeling exercise begins.
Today, This is Hard Work
Today, health system generally conduct pricing studies in one of four ways:
- Hire a consultant to do an analysis once per year which focuses on market comparative pricing
- Use a stand-alone tool that imports data from multiple systems, requires configuration that is duplicative of other systems, and produces results at too high of a level to be actionable in today’s payer environment
- Use Excel
- Don’t look at pricing very often
There Is a Better Way
First and foremost, solving the issue of gathering and normalizing data and doing the math is step one.
Having purpose-built strategic pricing capabilities built into the same platform with system-wide, advanced cost accounting and detailed contract terms significantly reduces the time to gather the relevant data and prepare it for analysis. From there, having pre-built, configurable analyses reduces the time it takes to filter through the data for charge codes to find discrepancies and opportunities.
Multiple charge masters? No problem. Those can be normalized and analyzed together.
Entity, geography and service-specific market comparisons – easy. Tools to enable differentiated pricing – check.
Algorithms to identify charges that are priced lower than “lesser than” clauses and losing revenue or charges that are much higher than the cost to provide services – done.
Modeling tools to understand the impact on net revenue and margin when the charges are updated – of course.
Look at total charges for specific case types and episodes across the continuum of care – yes!
By using sophisticated but user-friendly modeling, pricing studies and scenarios can be done in hours, not months. The focus turns from analyzing mountains of data and scheduling numerous stakeholder meetings to making good, data-informed decisions.
About the Tool
Building on the Best in KLAS StrataJazz® platform, the StrataJazz® Strategic Pricing module allows organizations to easily integrate decision support data to model and model the outcome of proposed changes to prices, contracts, and volume on net revenue and margin.
For more information about Strata Decision Technology and our StrataJazz® platform, schedule a one-on-one, personalized interactive demo with a member of our team.