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The Price of Success

September 1, 2008
by Brian Albright
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To stand out in the evolving healthcare world, hospitals need to get their pricing in order

Mike Nugent

Mike Nugent


Getting a price estimate from a hospital can be a challenge for patients; gathering comparative information from multiple providers is even more daunting. So in April, Alliance Community Hospital, a 204-bed, non-profit facility in Alliance, Ohio, put out a call to community members to help gather comparative pricing data for area hospitals. As an incentive, Alliance offered $100 for each unique explanation of benefits (EOB) document, and corresponding bills (for MRI and CT scans, inpatient stays, etc.) that area residents submitted to its billing department.

“We think this a good way to start, at a grass-roots level, to try and change the healthcare system for the better,” says Alliance CEO Stan Jonas, who notes that his facility is generally the lower cost provider. “We need to educate people, and make it simple for them to shop and compare.”

An increasing number of Americans have been forced to take a harder look at their healthcare costs. There are an estimated 47 million uninsured people in the United States, and another 25 million are considered underinsured. And with more patients subscribing to high-deductible insurance plans, consumers expect hospitals to provide them with accurate and easily accessible price information.

“Hospitals are facing a potent cocktail of the risk of public scrutiny of their pricing practices, increasing inquiries, complaints from patients, and price-based competition from non-hospital providers,” says Michael Nugent, director at Chicago-based Navigant Consulting.

The Bush administration has also called for greater price and quality transparency in the industry, and many states have either established voluntary transparency programs, or require by law that hospitals make price information available.

However, this is where common healthcare industry practices and consumer expectations begin to diverge. Call a mechanic and ask for an estimate, and you can usually get a fairly accurate one in a few minutes over the phone. Call up a hospital and ask for an estimate on a colonoscopy or a knee replacement, and not only will you likely spend a lot of time on hold, but the price provided could vary widely from the actual bill.

Hospitals have a hard time calculating prices in advance because of the complexities of their services, the intricacies of Medicare and Medicaid reimbursement, payer discounts, and other factors. But part of the problem is internal.

“Hospitals aren't organized to price effectively,” Nugent says. “They take a silhouette approach to pricing. The managed care department is totally separate from the charge description master (CDM) 99 percent of the time. Most hospitals also don't have cost data. That's a strategic challenge.”

In fact, before a facility can present truly useful price information to consumers, management should reevaluate pricing practices from the ground up to simplify structure and find ways to adjust prices without impacting revenue.

The price is wrong

It's unclear exactly how much price shopping is going on in the healthcare industry. Most patients still select their providers based on a mix of comfort level, geography, and cost. “Patients still go where their physicians practice,” says Rick Gundling, vice president of the Healthcare Financial Management Association (HFMA), which has launched the Patient Friendly Billing project to promote clearer financial communications with patients. “We're hearing more anecdotally about patients price shopping for care.”

But many patients want to know what their financial commitment will be, as far in advance as possible. Most hospitals provide prices from their CDM, but these numbers, while easy to obtain, are useless to patients.

What patients really want to know is what their out-of-pocket costs will be. While there are many factors that can make those numbers hard to come by, hospitals should be able to give a reasonable estimate for many common procedures in advance, provided they have established a rational pricing structure, and designated a specific department to deal with inquiries.

Geisinger Health System, an integrated health system in Danville, Pa., is probably the farthest ahead on the transparency issue. Geisinger has established a preservice program called ‘MyVisit’ with a dedicated staff to handle financial clearance for the bulk of scheduled outpatients.


William Telleen

William Telleen


Geisinger verifies insurance-benefit levels and calculates out-of-pocket estimates in advance of admission. Patients can get price estimates in person, over the phone, and through the company's Web site. As a fully integrated system, Geisinger is able to provide complete estimates (including physician services) for most procedures.

“We firmly believe that an informed consumer is the best consumer you can have,” says Barbara Tapscott, vice president of revenue cycle operations at Geisinger.

Behind the scenes, Geisinger revamped its pricing structure by taking cost and market prices into account, and uses packaged financial software to keep its costs, prices and revenues in line.

“Within our CDM, we charge more than 30,000 items,” says Tom Sokola, vice president of finance and CFO at Geisinger Medical Center. “To make sure we're market competitive, we use an automated tool to compare ourselves to other organizations, and we also know our cost data.”

According to the HFMA, a key step in effective price communication is a rational approach that involves understanding the cost per procedure, comparing current prices with peer providers, and simplifying the chargemaster. Hospitals should also establish a centralized team to handle pricing inquiries.

“We've been working for several years on strategic pricing,” says William Telleen, vice president of payer relations at Park Nicollet Health Services, an integrated health system in Minneapolis. “The goal is to move to more market-based pricing for commodities like laboratory services and radiology, and to equalize prices so that we're not charging different rates at our clinics and hospitals.”

There are a number of significant obstacles to improving pricing, including Medicare charge structures, private payer contracts, and uncompensated care. Many hospitals are reluctant to reduce charges because doing so could affect Medicare reimbursement.

Providers who've gone through this process say that simplifying the pricing structure is a multi-year project that will involve working closely with Medicare to adjust cost-to-charge ratios (where possible), and with payers to simplify and contract terms.

“We're trying to make the discount between what we charge and what the payers pay us more reasonable,” says Telleen. “We've had more luck with that on clinic pricing. Hospital pricing is more difficult, but we work hard on our payer contracts to make certain we're not hurting our revenue stream.”

Cost-based analysis and revenue modeling will present hospitals an opportunity to lower fees for some commodity services, and raise them for others based on value, performance, and market conditions. Commercially available software tools can help hospitals determine optimal pricing and contract rates.

“Historically, the finance department has just reacted to the next proposal from Blue Cross or Cigna,” Nugent says. “With modeling, you can proactively know what the optimal contract will look like. It gives you an upper limit, and you can go into those negotiations more tactically.”

Hospitals also have to explain and defend their prices in the context of their market, and in terms of quality. “Hospitals tend to be more expensive than ambulatory surgery centers, for example,” says Carolyn Asquith, corporate director of managed care at Baptist Health South Florida, Miami. “What we have going for us is the quality of our services, the equipment in our facility, and the quality of our physicians. We explain all of that to the patient.”

Nugent warns that hospitals should avoid competing on price alone, and points to the airline industry as an example of how price-based competition can cripple. “Prices in the airline industry have been based on forecasted demand and market pricing, but barely on cost,” Nugent says. “The lesson to learn there is that prices need to be a function of cost, forecasted demand, market prices, Medicare reimbursement, and value.”

Bargain hunting

Once the underlying price issues are solved, what information should a hospital make available, and how should that data be presented? As a general rule of thumb, hospitals should provide as much information as they can, as early in the process as possible, and make that information easy to obtain on the Web, by phone, and in person.

A study of 64 hospitals, conducted by the California Healthcare Foundation, found that only 32 percent of “mystery shoppers” who called hospitals looking for prices, and 25 percent of those who visited in person, were able to obtain the information in one call or visit. Most of the hospitals did not have a clearly designated person or department to handle price inquiries, and the information provided was inconsistent.

“When we first posted our price list online, it took me 10 minutes to find it,” says Alliance's Jonas. “We fixed that by putting the link right on the home page. And if you follow that, we put our competitors links up there, too.”

The more information made available, the better. Some of the best Web-based pricing portals include list prices, average payments from Medicare and commercial insurers, patient out-of-pocket rates, contact information, comparisons with other providers, and quality data. Whoever answers those price inquiries also has to be able to explain why a given service is more or less expensive than a competing facility.

“Whatever you do, don't let the payer do it for you,” Nugent says. “A lot of health systems have no strategy to get this information to their patients. Who will intercede? The payers. In what other industry would you let an intermediary convey your value proposition to the market?”

Different hospitals have taken different approaches to determining exactly who will handle price questions. Park Nicollet made that function part of the patient financial services department. Patient access liaisons handle pricing questions, while the payer relations department provides the tools to calculate price estimates.

Baptist Health has set up a centralized pricing office (with six full-time financial analysts) through its managed care department to provide price quotes using a combination of fixed-rate pricing and historical data, along with payer contract rates. Those quotes are recorded in an internally developed tracking database.

“Patients have become very savvy,” says Lilly Macias, director of corporate pricing at Baptist Health. “They know what questions to ask. Sometimes we get patients who give us quotes from other facilities to see if we can match that rate. It's almost like they're shopping for a car.”

This trend is only going to continue as providers, insurers, consumer groups, and state hospital associations make more comparative pricing information available online. Medicare has conducted a number of pilot programs that could impact billing and reimbursement practices, and some hospitals are testing new strategies to make pricing more predictable. Geisinger, for example, is rolling out a program called “Proven Care,” under which it calculates a global payment to cover best practices for certain procedures, and assumes the financial risk for any complications or readmissions.

Keeping up with transparency requirements will force hospitals to try new pricing approaches, and move beyond simply providing chargemaster information.

“You have to evolve and look at what others are doing,” Telleen says. “Stay as dynamic as possible in terms of what data you provide patients, and make certain that as you are doing that, you put your best foot forward in terms of how you present the information.”

Brian Albright is a contributing writer based in Columbus, Ohio.
Healthcare Informatics 2008 September;25(9):49-54

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