Have you ever wondered how hospital prices became so irrational? As is often the case, things changed incrementally.

Hospitals and healthcare systems have experienced years of inadequate inflationary update factors, often reduced by factors such as presumed overcoding under the federal inpatient and outpatient prospective payment systems.

Operating margins, which were once attained through tight operating budget controls and across-the-board price increases to payers, have suffered for decades. Some hospitals that experienced reimbursement shortfalls optimized their chargemaster prices to subsidize such losses and help maintain their financial viability.

The net result of these forces? Many individual chargemaster line item prices have become irrational and indefensible. And in an era of higher deductibles, health savings accounts, increased transparency, and government and consumer scrutiny, it is more important than ever that CFOs and financial managers can explain, document and defend their CDM prices.

Market Alignment is Not Enough

Hospitals around the country have deployed a range of price-optimization techniques to restructure their chargemasters. The result has been wide variation in prices among competing hospitals for similar chargemaster items. Simply realigning prices within market norms may help you defend prices based on your competitors’ average price — but doing so may also leave you with line-item prices that don’t make sense in relation to other charges reflected on consumers’ bills, within your own chargemaster, to prices at competitor hospitals, or to an outside observer’s perception of value or what a reasonable cost for the procedure might be.

The Solution? Hospital Zero-Base Pricing®

Our Hospital Zero-Base Pricing® solution often begins with the identification of missing or outdated chargemaster line items and the respective HCPCS and revenue code assignments. It focuses primarily on reestablishing chargemaster line item unit prices and supports the development of defensible prices rooted in the actual unit cost to perform the service.

It also takes into account a myriad of other benchmarks and rational pricing parameters:

  • Net revenue impact
  • Public relations ramifications related to traditional loss leaders
  • Relative standing of the prices compared with fee schedule floors, freestanding facility prices, and competitor hospital prices for high-volume line items such as chest X-rays and mammograms.
  • Net revenue impact that price reductions or price changes might have on stop-loss reimbursement rates and under lesser-of-charge contract terms.
  • The need to have technology in place to update and maintain rational pricing each year as unit costs, volume, case-mix, payer contract terms, market data, fee schedules and strategic and financial objectives change.

Our Hospital Zero-Base Pricing® solution follow a rational, stepped process, including identifying objectives and priorities, developing effective leadership, teams and timelines, conducting clear analyses of costs and factors that impact revenues, and creating a testable, adjustable model with the flexibility to account for changes in costs, contract terms, APC rates and the like.

Written by Frederick Stodolak, Executive Vice President, Panacea