Price Standardization For Hospitals

Hospitals have a rational interest in standardizing prices across facilities.  This interest has only intensified with the introduction of Price Transparency requirements. The goal of standard pricing must be considered simultaneously with other goals such as price stability and changes in gross and net revenue. There are several complexities in this analysis that must be addressed.  The two greatest challenges to price standardization are different contract terms and charging practices.

Different contract terms

Within a provider organization there can be different managed care payment rates and terms.  Multifacility organizations are created out of mergers and acquisitions, and different agreements come along with the legacy of prior organizations.  Because of these disparities, each quantity of service has its own unique price value.  This price value is based on the contract term it is associated with.  Many terms are based on either fee schedules, case rates, or a percentage of the charged amount.  Using the term and the quantity, it is possible to calculate the price sensitivity of each charge code.

Charging practices

Facilities employ a variety of charging practices.  Charges are typically hard coded, soft coded, or shell codes.  In one facility a service may have set prices while in another may have a time-based charge.  This creates an issue when the goal is to create a single price.

Solution:

• Sum all of the charges associated with time-based charges
  • Divide the charges by quantity by patient type to establish an average charge
• Associate each of the time-based quantities with a contract term
  • Note that different quantities of service even for the same payer may have different terms from different facilities
• Calculate the combined price sensitivity
  • With the combined price sensitivity, you can use a solver to solve for the new price to meet the objectives. A solver is a software process where the prices are selected based on the rules and the calculated price sensitivity of each charge code.

Without the calculation of the price sensitivity at the charge code level across all quantities, a selected price will have an unknown outcome.  While gross charges can be easily calculated, the net requires a much more detailed process as outlined above.  In addition to the complexities outlined, others such as stop loss, lesser of, and Chargemaster allowed increases create additional complexities.  Depending on the prices’ relative position to each other prior to changing, there may be significant gross revenue changes that trigger rate neutralization when those changes are reported to the payors.

Armed with the knowledge of price sensitivity calculated for each charge code, we can accurately identify charge codes with high price sensitivity so that we can raise these prices to offset our tactical price decreases.  Without a solver, this must be done charge code by charge code.  Again, a solver is a software process where the prices are determined based on the rules and the calculated price sensitivity of each charge code.

Relational Pricing

Price standardization should also consider relational pricing among like services.  It is critical that when combining Chargemasters, the relationship across similar codes is considered.  Hospitals typically will apply some sort of logic when standardizing prices, such as using the average, minimum, or maximum price; however, this approach could lead to illogical prices between codes.  For example, there may be a scenario where using the average price across different charge codes results in having a CT with contrast priced less than one without contrast.  It is best for hospitals to apply a relational weighting structure for like services so that logical pricing is automatically applied for those codes. It is also important to note that this logic only considers the price for those services.  Assessing the contracts and solving for the optimal price relationship is very important to consider when standardizing prices.

Market Position

When standardizing prices, it is extremely important to benchmark the proposed prices against a peer group of competitive hospitals.  Price transparency is more important than it has ever been given the CMS mandate.  While logic previously described can help to standardize prices, it ignores how those new prices would stack up against competitors.  Hospitals should assess how the prices compare as part of the price standardization and ensure that nothing is too far above or below the local hospitals.

Summary

Given the challenges detailed above, it is critical that hospitals engage with a solution partner that can perform all the required calculations.  Precision analysis will allow providers to implement price changes while knowing the actual impact of their decisions, so that net revenue can be optimized.

 

Seth Avery, J.D., CPA
President, Revenue Cycle Analytics
Centauri Health Solutions, Inc.