The Challenge: Why Defensible, Strategic, and Informed Pricing is So Elusive

April 22, 2019

What does it mean for an organization to have defensible, strategic pricing? And why can the journey to defensible, strategic, and informed pricing be so hard?

First, let’s define them.

Defensible Pricing

Defensible Pricing means that prices are determined using a consistent methodology to tie the price of the service to the underlying cost to provide the service. Add in adjustments for what the market will bear, quality, outcomes, competitive position, and you’ve created defensible pricing. Think: “if asked, how would we explain how we arrived at that price?”

As consumers, news agencies and CMS continue to drive the demand for price transparency, healthcare providers will need to deliver that information in patient-friendly terms. For organizations that have a well-defined approach, explaining how prices are set can provide a trust advantage within the community.

Strategic Pricing

Strategic Pricing means that prices are thoughtfully and mathematically generated to optimize net revenue, grow volume, and improve margin. At a time when top line revenue is constantly under pressure, smart pricing is an important lever to increase reimbursement, improve margin, and even attract new patients.

Consider: a number of organizations continue to have percent of charge contracts and carve outs. When charges are increased, the amount paid for services also increases. Often, payers require that overall charges cannot increase more than a defined percent annually. Yet even within those constraints, pricing can increase net revenue.

At a more basic level, if charges are below a payer’s fee schedule, including CMS, the payer pays the charge, not the full reimbursement. Because of this, organizations that conduct a robust pricing analysis and modify their prices to be at least the fee schedule reimbursement can realize millions in additional reimbursement.

Pricing is increasingly important to maintain or grow market share. Based on market factors, competitive position, and organization characteristics, providers can use pricing to grow volume. Start by defining the desired market position and understanding how pricing compares to local competitors. From there, health systems often determine that they want to have varied pricing strategies among services and geographies. Others want to offer competitive bundles of care to commercial payers and employers. Still others want to price in such a way that their payer reimbursement is not impacted, but patients have lower out of pocket costs.

Informed Pricing

Finally, pricing decisions should be informed, meaning pricing should not be changed without understanding the impact it will have on payer reimbursement, patient out-of-pocket expense, and the bottom line.

For many organizations, projecting the impact of pricing decisions is can be a real challenge, which often leads to simple, across the board annual increases for all charge codes, or broad reductions in prices for highly competitive services. Other organizations may seek to raise prices on non-shoppable services – such as inpatient room and board charges – and decrease pricing on shoppable services, such as outpatient imaging. Many health systems want to consider the underlying cost of their services, but often costs are estimated as a percent of charges, making this consideration difficult and at times inaccurate.

Creating Defensible, Strategic, and Informed Pricing

Unfortunately, without labor-intensive modeling – or better yet, automation – these strategies are difficult to pull off. Not only do organizations have tens of thousands of charge codes, but through M&A, organizations may have multiple charge masters and prices. Modeling the impact of pricing changes on reimbursement, let alone volume and margin, is incredibly manual and time consuming.

Mistakes in pricing have outsized impact on volume, payment, and margin. Even small mistakes can become magnified when they affect a patient’s experience in the billing department. Moreover, without knowing the impact on payments and net income, some pricing decisions inadvertently can hurt reimbursement.

The job of creating more defensible, strategic, and informed pricing is too big, too important, and too risky to accomplish internally. Health systems often pay consultants do this work every year… but remain unsatisfied with the results and unable to evaluate pricing proposals in the interim.

With the payer market as dynamic as it is today, Managed Care, Strategic Planning, and Senior Leadership want to become more nimble and nuanced with pricing. They want to understand the financial impact of possible decisions throughout the year. The Decision Support or Revenue Integrity team is left to build complicated models to help answer these questions, or must wait until the consultants come to do next year’s pricing review.

In answer to some of these complicated factors surrounding pricing, Strata Decision Technology’s latest module, StrataJazz^® Strategic Pricing, was built to help organizations base prices on cost, and dexterously model the impact on net revenue, payer contracts – and margin.  With the use of the module, an organization can begin to build out defensible, strategic, and informed pricing, in only a few weeks.