The Importance of Defensible Pricing

With Govi Goyal, President of Financial Services, and Brian Prokop, Senior Vice President of Financial Consulting Services at Panacea Healthcare Solutions

In our current healthcare climate, it’s more crucial than ever to maintain defensible and rational healthcare pricing while remaining competitive and optimizing net revenue. As Panacea’s experts can tell you, it’s a tricky balance to strike—but the benefits of a strategic approach to hospital pricing are well worth the effort.

Tune into this episode of 1st Talk Compliance to hear from Govi Goyal, Panacea’s President of Financial Services, and Brian Prokop, SVP of Financial Consulting Services at Panacea, as they share their tried-and-true approaches to developing defensible pricing strategies, and learn how these measures can position hospitals for success in the era of price transparency.

Episode transcript available below.

Grace: Hi, Brian, hi, Govi. Thank you so much for joining me today.

Let’s kick this off with a question about the value of strategic pricing. How does Panacea’s strategic pricing engagement help hospitals develop pricing strategies that are not only defensible but also based on a careful analysis of cost and/or market data?

Govi: Yeah, absolutely. I can jump in here. So, I think it’s important to just talk about, you know, now more than ever, how important defensible pricing really is.

Patients are getting more and more knowledgeable. They’re shopping around, they’re questioning things that look off to them. I would say consumerism is really at an all-time high. And, if you think about it, price transparency is not going away. You know, it’s a requirement that is only expanding both the hospitals and payers have to conform to. There’s the No Surprises Act, where you have, every self-pay patient is required to get a good faith estimate—so there’s a ton of exposure out there to a hospital’s or provider’s prices where it’s even more important now to be able to be defensible.

And it’s not even just for the self-pay population. If you think about it, even if you have insurance, likely you have a deductible and there’s a lot of folks out there with high-deductible health plans.

So, price matters. The higher the price, the higher likelihood that as a patient you’re going to have to pay more.

And again, even if you have insurance, there’s still a lot of payers out there paying on a percent of charge.

So, the chances are that patient is going to be impacted. They’re going to pay more, whether they’re self-pay or insured, because of that higher price, that higher negotiated rate. And Medicaid hasn’t expanded yet to all 50 states. So, there’s still that donut hole and there’s still a significant population.

The other piece is defining defensible prices. A hospital needs to explain how they arrived at their pricing. Is it based on cost? If so, how much? Is it 3 times, 4 times cost? Is pricing based on Medicare payment or reimbursement? Are you 2 times, 3 times APC? Is it based on market data? If it is based on market data, then how much higher or lower than the market should it be and what’s considered the market?

All of these are applicable when we’re trying to get to defensible pricing. Again, you have to be able to explain.

So, here at Panacea, we collaborate with our clients and we gain an understanding of what their current pricing philosophy is, and we work with them to create a road map for their future price clauses that they so they can get to defensible pricing.

But I think Brian could definitely share more and draw upon his experience. Sometimes it is a little difficult to get to good cost data, or even good market data. But I’ll defer to Brian to talk more about that.

Brian: All right. Thanks, Govi. A little bit more about our how Panacea treats hospital pricing: it’s really around looking at market data, looking at cost data, taking a look at those Medicare rates, existing payer contract terms, and really looking at what components of those contracts are going to impact price changes, and where do you stand in the market? How can we align you closer to the market and not have a huge impact on your net revenue there—not negatively impact that net revenue?

That is what we look at when we’re looking at developing a defensible pricing strategy.

Govi: Yeah. So, we have an audit trail basically that will tell you, for every single line item, essentially what that methodology may be, and that can become really helpful if, at any time, the hospital is put in an awkward position where they need to defend their prices.

Grace: I know the term “transparency” came up in that response, and this is a concept that’s likely going to surface a few times through our conversation today, including this next question.

So, in the context of hospital pricing, how does Panacea’s approach establish clear and documented rationale behind pricing decisions? And why is this transparency crucial for both internal understanding and external communication?

Govi: The keyword there—I picked up on two keywords you mentioned. One is “decisions” and the other is “communication.”

You know, Brian and I can tell you, there’s a lot of decisions that need to be made in strategic pricing, especially before any of the fun financial modeling can occur.

I think most importantly, we need good alignment in what the scope and approach will be. So, for example, we talk about the scope. Some of the key decisions to be made are: what service lines do you want to focus on? In addition to your ancillary areas, surgical cardiology, radiology, are you also including pharmacy and supplies? Those can take on a project of their own. Do you also want to do professional in addition to hospital pricing?

So, we have to be careful about not trying to bite off more than we can chew.

And you also have to consider your payer caps, so even if you want to focus on all these different areas, you may not have enough revenue to play around with because you’re restricted. Certain payers may have a percentage cap. Maybe Cigna says 2% and Blue Cross is 3%. You can’t increase your gross revenue higher than those caps. You have some restrictions to consider.

But a lot of these decisions need to be made at a high level at leadership level for clients, especially when we talk about what we want to include in the scope, so there’s tremendous communication that needs to happen across different levels.

Panacea, we can make some recommendations. We can look at the market analysis, we can look at contribution factors, which we’ll talk about a little more. We talk about the modeling, but that allows us to basically see where you get the most bang for your buck, and we can also see where you have the most risk—where your price is little too high or too low compared to the market.

You know, another decision that particularly we work with our clients is when we do that market analysis, we have to determine and work with our clients to figure out what peers do we want to pick to be able to do our comparisons with, and what do you consider a peer.

I think Brian can share some thoughts there on when he’s working with the clients to help them pick that solid peer group.

Brian: All right. So, for clients, in selecting their peer groups, the stuff I typically would go over with them is understanding the size of the provider; who do they deem to be their most ideal competitors, or who are they most in competition with in their area? When we’re looking at this, we may start out and look at it from a mile radius perspective, but there may be some providers that we don’t want to include in that selection. An example is, if you’re large short-term care hospital probably don’t want to be compared to a critical access hospital if they’re within the mile radius you’re searching there.

When we’re looking at peer data, one of the questions that does come up from providers is, you know, what should I utilize? Should it be a weighted average or should it be a percentile? Here at Panacea, one of the things we lean towards is trying to push that provider to utilize the weighted average versus a percentile.

One of the key pieces to why we do that is, if you’re using a percentile, you’re not taking into account the volume of a service that that provider is performing, whereas if you’re using a weighted average of that, you’re taking into account which are the big players for this service. If you’re using a percentile, there may be a provider in that percentile base that maybe only has one unit of that service. They’ve only done one.

So, it’s not going to necessarily make sense to use a percentile, and it may, you know, put you in a worse position in the market than you really are in comparison to the main competitors out there.

Govi: Yeah, that’s well said, Brian.

And you know, some of the other decisions that are, I would say, maybe a little bit easier for our clients to think about it as, are there certain items in your in your chargemaster that you want to freeze; for whatever reason you want, they need to remain untouched, and we have to make sure we don’t unintentionally restructure those prices. Or there could be other items where there’s a relationship.

For example, generally speaking, services that can be done all throughout the hospital—they can be done in different cost centers, emergency nursing stations, respiratory—they have the same HCPCS code, so we generally align them with the same price. But hey, if it’s done in the Emergency Department (ED), our costs are higher. So, we want the prices to be higher in there even though it’s the same service.

So, clients may have relationship where they say, all the price needs to be 1.5 times higher in the ED. Or maybe there’s a dependency between professional and hospital pricing where the combined price has to align with other services, or the professional prices should be a percentage of hospital prices, or there are multiple facilities the organization and there has to be a relationship there.

So, there’s a lot of dependencies and decisions that we typically walk through to make sure that we incorporate them into the model.

Going back to the communication piece to it, you know, every everyone involved, even including the chargemaster (CDM) team—so, the CDM team may not be responsible for the strategic pricing, but they are responsible for adding new services to the CDM, so they need to know too what kind of strategy is put into place, what’s the methodology, so that when they’re adding new services to the CDM, for example, that they set the prices accordingly and it’s aligned with the overall strategy.

Grace: Okay, got it. That’s actually a great lead-in to our next question, which is going to focus on the chargemaster.

Could you elaborate on how Panacea ensures that chargemaster, or “CDM,” prices are not only defensible but also optimized to yield the optimum net revenue for hospitals?

Govi: Yeah, absolutely. So, there are the basically two main goals that were seeking to accomplish with strategic pricing.

One is being defensible, which we’ve been talking about in great detail here, and that’s all to do with just being able to explain how you arrived at your prices, being market sensitive, and so forth.

But the other piece, which we haven’t touched upon yet, is the net revenue aspect and working with hospitals and health systems and providers to make sure that we meet their financial goals and not only get them more in line with the market, but also optimize their net revenue so it’s greater than what they would have gotten if they just did an across-the-board.

But it’s important to know that these aren’t competing goals. You can decrease your overall peer position—and let’s hypothetically say you’re 5–10% above the market and you want to bring that down a couple percentages—you can decrease that, but still be able to get a net revenue increase that’s possibly greater than just doing an across-the-board.

This is very difficult to do if you don’t have a really sophisticated modeling tool. You have to have a modeling tool that’s able to handle many, many objectives, different parameters and constraints. This is not something that you can simply do in Excel or Access.

And so, at Panacea, we continually evolve our modeling capabilities, which is able to support a more accurate gross and net revenue calculation from any price changes and be able to support these multiple objectives: both defensible [pricing] and net revenue goals, at the same time being mindful of any constraints like payer caps.

But just to kind of deep dive here a little bit on some of the modeling capabilities here that I think are important: getting to accurate modeling is critical because oftentimes payers will scrutinize and do an audit and you have to be able to show the payers your analysis to support your price increases in the event that an audit does happen.

So, one of the unique things we do is we will take the usage data and we’ll take it at the payer plan level, but also the patient class level. For example, if a typical hospital working with does 1,000 EKGs in a year, we need to see the breakdown. What percent of those are Blue Cross Blue Shield, HMO, outpatient? What percent are Cigna, PPO, ED or inpatient? And so forth, because each of those different categories—depending on the patient class, the payer, the plan—could have a different reimbursement rate, different payer percent charge paying.

So, to get to that granular level and incorporate that can really optimize your net revenue calculations.

I’m just kind of hitting the surface there. I’ll put Brian on the spot here a little bit. Brian, do you want to talk a little bit more about the modeling process, whether you want to talk about maybe some of the other reports? And also, we haven’t talked about stop-loss/lesser-of; that might be good to weave in too.

Brian: Yeah, I can elaborate on that, Govi.

So just some of the other stuff in relation to modeling that we have the capability of doing is not only, you know, using market data, using Medicare rate, using commercial contract rates in developing that rational defensible pricing strategy; it allows us to develop a model utilizing all those factors as base factors there, but then we can also make adjustments to these based on specific service categories like labs, CT, MRI…we can break that down even further if we want to, to the revenue code level and to take it even further steps down to that individual CPT code, if we need individual changes made to those, as well as the service code within your CDM. We can do individual code adjustments as needed to align with the market and, you know, potentially optimize or improve net revenue for the hospital.

So, from that data we can generate reports. Govi mentioned the audit trail report, but there’s numerous other reports that you can see, what is my gross and net impact as well as market position by service category by revenue code, by department, by individual payers. You can see that information when we do these analyses.

Another thing that we’re able to provide with the extract is when we do provide it out to hospitals, it also has what’s known as a user price override section where a user can go into the exported data, make a change, and they can actually see what the impact is going to be on gross and net revenue by making that change within the export itself there.

Other things I think about here as well, when we’re talking about modeling and everything we take into consideration, you know, I put it into four different buckets:

You have your percent of charge contracts or components of a contract that are percent of charge; you have your items that are line item fee schedules that are at risk from a line item lesser-of; you have your case level components, which can be at risk for case level lesser-of such as DRG’s case rates and whatnot; and then there’s also stop-loss and outlier provision.

How is this pricing strategy impacting those four areas when we’re making changes?

So one of the things that we do to make sure that we’re not negatively impacting lesser-of or stop-loss is, we take your claims data, run the new prices through, and identify how are we impacting case level lesser-of; how are we impacting line item lesser-of; how are we impacting stop-loss and outlier provisions; and how are we impacting those percent of charge components of the contract to see what your overall net impact is. Is it better than what you would have received doing an across-the-board increase and are we aligning to market?

Grace: I see. Thank you. A lot of considerations there.

So, we touched on this earlier a bit, but how does the growing demand for price transparency place increased pressure on hospitals to be transparent about their pricing structures, and what challenges do they face in justifying the costs associated with medical services?

Govi: Yeah, hospitals are being asked to a lot, aren’t they? Not just this year, previous years too, but especially this year, as many are aware, starting in July of this year—and believe or not, it’s going to be here before you know it, at least CMS allowed for that grace period—there are substantial new requirements that are that are hitting the machine-readable files. If you think your machine-readable file is big right now, it’s probably going to double in size.

That puts a tremendous amount of pressure on hospitals to comply with these new requirements, because some of these requirements are really going to change the way hospitals have approached putting together their price transparency files. Gone are the days where you can just rely on claims and payments data. You really need to be leveraging your actual payer contracts, because CMS is requiring you now to put in the charge methodology, which is really the rate methodology—are you getting paid by case rate, per unit, fee schedule, and so forth, right?

And then further down the road, in January of 2025, there’s going to be additional requirements in pharmacy, which can get complicated because you have to interpret data from the formulary and put your unit and type of measurement in there.

There’s also the estimated allowed amount, which I’ve seen a lot of questions from hospitals in the community about, which requires the combination of claims data, payments data, payer contracts, for instances where clients might be getting paid a percent of charge on a DRG, or maybe they’re stop loss lesser of provisions, where there’s not a standard negotiated rate, right?

These are not easy asks. You can take that and combine it with the good faith estimates, right, which give more exposure to your pricing and are also very difficult to produce that itemized estimate.

So, enforcement is increasing. We know that. CMS is reducing the window, they’re going straight to corrective action plans, so they’re bypassing the warning letters, and if they identify errors in your file, you no longer have 200 plus days to fix it. You only have 90 days to correct it, and if you don’t correct it, you can get hit with penalties, and so you have to be able to be ready to update your files and be able to provide contracts or additional data that CMS may request.

The Patient Rights Advocate group is out there. Again, as I mentioned earlier, you don’t want to be in the newspaper, you don’t want that public shaming. Now, they’re probably more about making sure that hospitals are displaying their prices versus pointing out where prices might be too high.

But, you know, I’ll tell you, there’s still a lot of variation out there in prices and rates. And Brian can tell you too, you can look at two hospitals that are right down the street from each other, they’re both about the same bed size, teaching status, not for profit, and you look at their machinable-files and there could be a ton of variation in how much they’re charging and how much they’re being reimbursed for the same services or the same payers.

I mean, the jury still out on whether or not overall healthcare expenses are going to go down and who’s really benefiting the most: is it the patient, hospital, or payer?

But I do think with this increased pressure in transparency and, you know, hospitals being able to have to justify the prices, what we’re going to see is probably some of that variation not entirely go away but be more consistent. If hospitals are benchmarking their prices, they’re going to start to get more in line in the market. If payers see that other payers are reimbursing more or less, they’re going to try to justify to pay less to providers.

So it’s this game that’s going to be played over again, and I think we’ll over time we’ll start to see that variation start to go down.

Grace: Yeah. Like you said, there’s a lot of pressure on hospitals right now.

We’re about at that time. Thank you both so much for joining me and sharing your expertise. And to our listeners, thank you for joining us for our conversation today. I hope you learned something new to take with you.

If you have any questions about anything you heard today or if you want to continue the conversation, please visit Panacea’s website at or reach out to us on social media.

Stay tuned for more thought provoking episodes on 1st Talk Compliance. Until next time, take care and stay informed.