developing a pricing strategy in today’s health care environment

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Applied Revenue Analytics

Developing a Pricing Strategy in Today’s Health Care Environment

Las VegasMay 17, 2006

Anthony Cirillo, CHE, ABC, President Jeffery P. Tarte, Managing Partner

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Agenda

I. Introductions

II. Expectations and Rules of the Road

III. What is impacting the Healthcare Industry?

IV. Taking the Matter into the C-Suite

V. Principles of Pricing in Retail Marketing

VI. Pricing Philosophies within the HC Industry

VII. What Hospitals are Doing and How They Do It

VIII. Making Prices Available to the Public

IX. Future State

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Here to Exchange Information and Ideas

Questions throughout welcomed

There are no stupid questions

One conversation at a time

Parking lot items

Cell phone off or on vibrate

Provide contact information - will send material

Rules of the Road

“Never doubt that a small, group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.”

Margaret Mead

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SCOTT & WHITE

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Market Forces

Percent of GDP Employer Backlash Consumer Driven Healthcare Media Class Action Lawsuits Government Sanctions Medical Tourisms Advocates

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CMS 1/9/06

Less focus on pharma

Increased scrutiny of hospitals

What’s your story?

% of GDP

16% of GDP > 7.9 % to $1.9 trillion 62% increase doctors and hospitals Hospitals costs jumped 8.6% / $571 billion Physician costs > 9% to $400 billion

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GDP

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ED Implications

What is your charity care policy?

How is it or is it linked to your pricing policy?

Employers Have Had Enough

Getting out Reducing coverage and cost shifting GM and Ford Uninsured 45 million / Underinsured 16 million

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Mission Implications

Healthcare Financial Management Association – March 2005

Ready for Prime Time? Make Your Financial Assistance Policy a Class Act

Financial Assistance Policy: Written and applied consistently Eligibility for discounts spelled out (who qualifies) Financial need, income levels, expenses and assets considered, etc. What services are discounted? What are the discounts? Proper notice / communication Documentation needed Time limits Payment plans Collection activities

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Implications: Care avoidance

Shop on price but do they know how?

Price Packages / Collections

Consumer Driven Healthcare

Numbers low but growing HSA’s and HRA’s > 30% Risk plans Healthcare expenditures per person $6,250 Out of pocket expenditures > 55%

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Media

The Street.com

“It’s inevitable. Hospitals are going to have to tell us how much they are charging. I’m very

concerned about the hospital group in general, for all the obvious reasons.”

Sheryl Skolnick, CRT Capital

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Media

> coverage

Focus on the uninsured

Hospitals looking bad

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Video Clip

Media

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Richard Scruggs

Class Action Lawsuits

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Senator Charles Grassley Richard Scruggs

Class Action LawsuitsAnd Tax Exempt Challenges

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Harsh Repercussions

Aggregate value of income tax exemption for all nonprofits

during a one year period – $4.6 billion

Median hospital benefits total 1.8 percent of total assets

Property tax exemption aggregate value - $1.7 billion

1.36 to 3.28 percent of fixed assets

Solucient 2005 – hospital margins totally dependent on operating income

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Harsh Repercussions

IRS Soft Audits of Executive Comp

House Ways and Means and Senate Financing investigating

IRS Considering a 5 Year Review expanded 990 public disclosure of financials board duty review

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Perceptions

AHA Survey – hospitals perceived as for-profit

50% of bankruptcies linked to healthcare

Competing doctors charge less AND pay taxes

Community costs of providing service (fire, police, etc.) increasing

“It is not enough for business to do well; it must also do good. But in order to “do good,” a business must first “do well.””

Peter Drucker

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PricewaterhouseCoopers Health Research Institute Acts of Charity – Charity care strategies for hospitals in a changing landscape

Sample Case Study Assumptions: - 300-bed hospital - Net revenue – $135.1 Million - Profit Margin - $3.5 million or 2.6% - Spends $34.4 million on supplies - Property, plant and equipment is $39.9 million - 1,650 employees

Federal Income Tax $1,190,000 (18%) Federal Unemployment Tax $ 92,400 (1%) Sales and Use Tax $2,758,000 (43%) Real Property Tax $1,025,000 (16%) State and Local Net Income Tax $ 577,500 (9%) State Unemployment Tax $ 836,880 (13%)

Total $6,479,780

5% of revenues; from a profit to a loss

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Source: Demonstrating and Improving Hospital Accountability for Charity Care, ACHE, 3/15/05, The Lewin Group

Charges to Expenses

U.S. average – 262% markup

PA – 380% markup; 2nd highest in U.S.

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Implications: Uninsured will compare

Ready to renegotiate?

Worse - Insurers will compare!

Government

Ongoing hearings Threatened legislation to close price gap Forcing issue by publishing price Actively lobbying payers to demand accountability

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States

Massachusetts Health Care Bill

Requiring nearly all residents to purchase health insurance

Allows companies to offer employees cheaper, pared-down health plans – catastrophic insurance, limited doctor’s visits, high-deductible health plans

Companies that do not offer employees a health care plan risk having to pay for an uninsured employee's health care costs if these costs rise above $50,000

Observers believe costs will shift from hospitals to primary care physicians

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Medical Tourism

Healthcare is not local

All things equal, people will shop on price

8% of uninsured earn $75,000+

International examples

Psychological and economic research has shown that people will pay different amounts for the same item,

depending on who is providing it. Steven Levitt, Author Freakonomics and Economics Professor University of Chicago

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Advocates

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Mixed Messages

Reimbursement on sickness when you have a wellness mission!

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Price Transparency

California Healthcare Foundation – deployed 600 mystery shoppers to find price

Kaiser Family Foundation / USA Today – 52% of doctors never discuss price

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CFO Top of Mind

Topics Revenue Generation

Uninsured

Finance Rating

Access to Capital

OIG and Compliance Matters

Capital Construction Projects

New Modalities and Technologies

Departmental Outsourcing

Specialty Hospitals

Single Payor System

Future Physician Shortage

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Who is Interested in What you Charge for Services?

C-Suite

Insurance companies

Board of Directors

Patients

Newspaper

Department Heads

Care Providers

Competitors

Banker

OIG

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If these Statements Describe your Hospital you can Ignore this Material…

CMS owes us money—we do not want it—let them keep it

We have more revenue than we need

We will never raise prices again

Across-the-Board price increases are the best way

We are a not-for-profit so nobody pays attention to operating margin

We could care less how we are reimbursed for our services

We know the cost to deliver every service we perform down to the penny

We can explain the price for every line item in our CDM

We could care less about what our competitors charge or are reimbursed

We would never invest in anything with a 400% guaranteed ROI in 12 months

We cannot improve anything we currently do

“What people say, what people do, and what they say they do are entirely different things!”

Peter Drucker

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“Strategic Pricing”

Across the Board

Medicare Percentage Mark-Up

Selective Service Item Charge Revision

Price Schedules

Market Driven

Charge Based Charging

Parameter Driven Business Rules

Computational Concurrent Mathematical Modeling

Source: Decision Health

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Price

What you have to give up in order to get something

Value

What you are just barely willing to give up to get something

Declining Marginal Utility

What is additional value of another “MRI”

Marginal Rate of Substitution

Rate at which you will substitute a “CAT Scan” for an “MRI”

P = V = C

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Competitive Advantage (Michael Porter, Harvard)

Critical Success Factor (John Rockert, MIT)

Value Creation (Campbell Harvey, Duke)

What is the Right Price? (Bob Barker, Price is Right)

What Influences your Thought Process?

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= 2 cents a cup

= 20 cents a cup

= $1cup

= $3 - $5 a cup

The Experience Economy – B. Joseph Pine II, James Gilmore

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Align price with value

Everyone gets the same deal

Discounting frowned upon creates price sensitive markets spread between published and realized price less objective measures

Retail Price Philosophy

“But unlike most everyone else, the prices we publish for our steel products are the prices we charge. To everyone.

No special discounts. No exceptions.” Ken Iverson, Chairman Nucor Steel

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Use value

Quality and satisfaction data to show value: Why You / Why That Price

Though data says public does not use these yet!

Trade off value for price paid


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Other value determinants:

What alternatives do they have? How easy is it to compare products? Is cost benefit easily seen? People focus on % not absolute What else are they paying for? What is the lifetime value?


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S - C = gross margin

V x Y = lifetime visits

A x N – amount of acquisition money saved

Lifetime Value = ((S-C) x (VxY) – A + (AxN)) x F

WeissMarketing Prof

S = average revenue generated per visit

C = average cost of servicing customer per visit

V = customer expected number of visits per year

Y = the expected number of years the customer will use service

A = the costs of acquiring a new customer

N = the number of people the customer refers to you

F = the correction factor for the time analyzed

What is a Customer Worth?

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Lifetime Value = ((S-C) x (VxY) – A + (AxN)) x F

((50-4) x (24x40) – 15 + (15x4)) x 1.1) = $48,625.50

WeissMarketing Prof

S = $50C = $4V = 24Y = 40A = $15N = 4F = 1.1

What is a Customer Worth?

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Marlowe

Healthcare Marketing Report

Comparative pricing Discounts High-end image Pricing Introductory offers Incentive pricing Convenience pricing Loss leader Market share capture pricing Price lining Skim pricing Access pricing / concierge approach Year-end cafeteria pricing Barter Gift cards Zero interest Integrated pricing (packages)

Price Approaches

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Package bundles based on mass customization


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Which is better?

Additive Option Strategy

Subtractive Option Strategy


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Subtractive

Consumer has perceived power

Perception of starting at higher level of quality


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Silver Gold Platinum Maternity Services

Other examples please!


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Attributes of Leading Edge Solutions

Appropriateness (how compare)

Reasonable and Customary (for what performed)

Consistency (same throughout house)

Mathematical Problem Solving

Optimizes Hospital Business Policies and Practices

Replicate Process and get the Same Answer

Defensible and Transparent Equation

Specificity

Flexibility

Computational Concurrency

Sensitivity Analysis with Major Event Changes

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Attributes of Industry Best Approach

Model any marketing, financial or policy parameter

Defined variables from (3 or 4) to (30 or 40) parameters

What-if analysis while optimizing within model constraints

Model on gross to net ratio or by desired net revenue amount

Set individual department and location parameters

Virtually unlimited and specific benchmarks

Rank using competitors prices

Sensitivity analysis with major event changes

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Frequently Asked Questions

What do you need from hospital to do the work?

What are sources of benchmark data?

How long does the project take?

How does this keep my prices competitive and defensible?

What is usual, customary and reasonable?

What happens if I change a parameter after we start?

What will this cost?

Why would I not do this?

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Project Scope

Pricing Analysis objectives:

Increase incremental net revenue

Align to desired market position

Defensible individual item prices

UCR “certified”

Szyzgy – alignment of all prices in relationship to all other prices

“Finding the underlying order in apparently random data – Chaos Theory”Edward Lorenz, Harvard PhD and Math Professor Emeritus MIT

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Rules of Thumb

Touch about 15% to 25% of the items in CDM

Focus on proper market alignment & net revenue management

Biggest impact will be on outpatient services

Pay attention to Lab, Rad, Am Surg, and ED

1% to 2% net revenue increase of gross revenue

Major price update should be tied to your budget process

Multi facility systems need to address synchronization and standards issues

Refine cost and reimbursement analysis

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What is defined, built and loaded into Mathematical Model

Analytical parameters

Upper and lower boundaries

Applicable maximum overall charge increase

Patient revenue opportunity equation

Net revenue opportunity equation

Price equalization and stepping rules

Data from Get Ready activities

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Data Sets

Data loaded into model: CDM with current prices CDM items with both usage and CPT/HCPCS codes Payer contract reimbursement terms Patient charge detail Payer mix Health plan information Hospital benchmarks from OPPS and Geozip sources CMS fee schedules

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Getting Ready

Data files reviewed for completeness

Standardize all data files

Identify items with both Revenue & Usage and CPT/HCPCS codes

Charge sensitive items identified by financial class

Health plans charge detail mapped to individual contracts

Data transformed for processing by analytical engine

Allocate managed care usage by line item if detail unavailable

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Helping you Help Yourself…

MathematicalFormulation

ChargeDescription

Master(CDM)

Managed CareContracts

(Plan and code level)

Marketing, Financial & PolicyProvisions of Client

Revenue & Usage

Revenue & Usage

(Charge code and plan

level)

ModelOptimization

Pricing Objectives

PricingAnalytics

ExternalPricing

Benchmarks&

Cross Walks

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Lessons Learned

Optimize, not maximize

Consistent, customary, reasonable, appropriate, proper

Procedure based pricing

Start with items with CPT/HCPCS and Rev & Usage

Attention at plan and code level

Measure – compare - monitor

Use multiple satellites like your GPS

Calculate what you get paid by everybody

Draw a map others can follow

Get others to do some of the work for you

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What can be modeled into a parameter?

“Nothing will work, unless you do!”John Wooden, UCLA Coach of 11 time NCAA Champions

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Cap overall annual percentage increase at 5%

Increase observation codes at a 3% Across-the-Board percentage

No item increased if gross-to-net percentage is less than 2%

Set all items between 20th and 50th percentile so at least three hospitals have higher price

Position prices at 65th percentile of market

No individual price increased more than 75%

Lower items where highest in market and position each item as second highest

No prices higher than Main Street Medical Center

Equalize EKG and MRI prices across the organization

Set mammography price to lowest in market & identify alternative revenue sources

No department shall have more than 30% of the net revenue gain from price change

Calculate net revenue impact for price change for BCBCS

Automatically identify procedures/items with stepping issues after price change

Identify best “candidates” to achieve additional $1,200,000 in net revenue (“run model in reverse”)

Concurrency and Flexibility

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Stay optimized within the model

Market positioning

Reasonableness

Departmental specificity

Stepping and equalization

Unit of measure matters

Multiple prices for a single CPT/HCPCS code

Unique pricing for:

Why Run Iterations of any Model

Observation Therapies Rehab Recurring visits Etc.

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Recommended price changes (up and down)

Comparative rankings

Analysis by dept, fin class, rev code, contract, etc.

File ready for upload

Minimum Deliverables

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The best achievable result in incremental net revenue

Mathematical and scientific approach to establishing prices

Rigorous analysis of each items price positioned to business rules

Defensible and transparent prices

Guaranteed return on investment

Value Proposition

“Which one of you guys is shooting for second place?”Larry Bird, In locker room before winning first NBA 3 Point Contest

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Rutherford Hospital $1.39 million additional net revenue

Rutherford Hospital ($millions)

Pricing Approach In Out Total In Out Total

ATB (5%) 22.94 49.92 72.86 1.06 13.34 14.40FY05 21.86 47.53 69.39 1.01 12.70 13.71

ATB Opportunity 1.08 2.39 3.47 0.05 0.64 0.69

Applied Revenue 19.84 53.02 72.86 0.97 14.82 15.79FY05 21.86 47.53 69.39 1.01 12.70 13.71

Model Opportunity -2.01 5.49 3.47 -0.04 2.12 2.08

Model Versus ATB -3.10 3.10 0.00 -0.09 1.48 1.39

ATB : "Across the Board"

Charges Net Revenue

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The Gold Standards

Double or triple net revenue through selective changes vs. Across-the-board increases

Calculate net revenue impact with high degree of confidence

Appropriate prices lowered

Dynamic vs. static

Time-based vs. procedure-based

Calculate impact on Medicare Outliers

Bell shaped curve with E&M codes in ED

Every price is current with fee schedules

APC and cost multipliers

Know where you stand within your geographic space, and with peers

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Consider this Litmus Test

Driven by market, financial, and departmental policies and practices

Aligns concurrent pricing strategies and rules

Preserves internal CDM structure

Optimizes net revenue

Ensures stepping and equalization done properly

Facilitates objective and defensible price decisions

Addresses appropriate updates from fee schedules

Avoids single focus selective price increases

Reduces write-offs

Minimizes re-work and clean-up for PFS and IT staff

Measures and monitors outcomes

“How to build a winner:Desire, backed by determination and work ethic”

Michael Jordan, 6 time NBA Champion

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Communicating Price – St. Luke’s Kansas City

Public interest

Receiving inquiries across departments

No standardization

Consumer confusion

Lost opportunity

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Goals

Provide price

Health plan inclusions and exclusions

Outpatient and frequently requested inpatient

Sell value

Provide payment methods

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Pre-requisite

Payer information Price information Ease of use Same day information Consistent service Know health system value by procedure Documentation

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What they collect

What they then do

Who was involved

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Metrics

Number of calls Length of time to respond How many unfulfilled calls How many became patients

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Increase in the number of people scheduling and converting

Call volumes exceed capacity

Started under marketing, now with Finance

Mammography and deliveries top inquiries

Uninsured quoted based on a schedule tied to charity care policy

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Package title : Comprehensive Program - Male

Summary: This is a comprehensive check-up package for male.

1. Vital Signs and Physical Examination 2. Eye Exam (tonometry, autorefractometry)3. Radiology Studies

3.1 Chest X-ray 3.2 Ultrasound of Whole Abdomen

4. Cardiac investigations 4.1 Exercise Stress Test (Treadmill) or Echo Cardiogram

5. Laboratory Studies 6. Doctor Fee

Package Price: 12,500 baht = $320Note: The Package Pricing is extended to patients who

settle the bill directly to the Hospital only. No discount of any kind may be applied to package prices.

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Face Lift (Face, Neck, Upper and Lower Blepharoplasty)

Summary: This is a routine Face Lift Procedure Package with 1 night length of stay in the surgical unit.

The Package Includes:

• Operating Room Charges : • Accommodation for 1 nights in the surgical floor including : • Laboratory Testing : • Radiology Studies : • Medical Equipment and Medical Supplies necessary for the procedure • Anesthesia : • Medications : • Doctor Fees

• Surgeon Fees • Anesthesiologist Fees

Package Price: 162,000 baht = $4134

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Apollo Hospitals India

Specialities & ProceduresNo of Days Stay in The Hospital. Estimated Total Cost in US $

COSMETIC SURGERY

Abdominoplasty/Tummy Tuck 2 Days 2900

Face Lift 1 Day 2800

Face Lift with Upper or Lower Blepharoplasty 1 Day 3300

Face Lift with Upper & Lower Blepharoplasty 1 Day 3500

Upper & Lower Blapharoplasty 1 Day 2200

Upper or Lower Blepharoplasty OPD 1200

Liposuction- Abdomen OPD 1600

Liposuction- Buttocks & Thighs OPD 1600

Liposuction-Abdomen,Buttocks & Thighs 1 Day 2700

Breast Augmentation(without Implant) 1 Day 2200

ENT

Stapedotomy 2 Days 1420

Tympanoplasty 2 Days 1060

Ossiculoplasty 2 Days 1060

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Specialities & ProceduresNo of Days Stay in The Hospital. Estimated Total Cost in US $

VASCULAR SURGERY

Carotid Artery Surgery 5 Days 5100

Carotid Angioplasty with Stenting 4 Days 8400

SURGICAL GASTROENTEROLOGY

Gastric Bypass 3 Days 6500

Gastroplasty 5 Days 6000

Laparoscopic Hernia Repair 3 Days 2800

ORTHOPAEDIC PACKAGES

Knee Replacement (Unilateral) 7 Days 6400

Hip Replacement (Unilateral) 7 Days 6300

Birmingham Hip Resurfacing(Unilateral) 7 Days 6500

Apollo Hospitals India

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Health care is no longer local?

Single payer system will happen within 10 years?

Patients exhibit brand loyalty?

Choice is prevalent and always will be?

We are the high cost provider (I know the cost to deliver services)?

Best method to generate patients: Advertising or word-of-mouth referral?

Predicted physician shortage will have butterfly effect on prices?

Myth – Not a Myth?

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Align your prices to your market

Know the price and share the price

Be compensated fairly

Know what competitors charge

Know what competitors are reimbursed

Get paid now or you may not get paid later

Collect at the time of service

Adjust and integrate revenue cycle

Real time claims adjudication

The new PR ambassadors

Introduce service enhancements

debit cards

access to online bills and balances

online pay

Rethink the scope of your marketing

Make the experience the best it can be

Other Implications

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Sustained Success

“Executives do not need or deserve special treatment. We are not more important than other employees.

And we are not better than anyone else. We just have different jobs to do.”

Ken Iverson, Chairman Nucor Steel

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Margin Management

Value Creation

Computational Concurrency

Cost & Reimbursement Quotient

Patient Rubric

Focus of Future Pricing Decisions

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“Leadership has numerous ingredients:intellect, determination, patience, commitment,

consistency, vision, kindness, boldness, the ability to focus on important broad issues, and above all the ability to motivate people and persuade them to

accept your ideas.”

David CooperDavid CooperKnight-RidderKnight-Ridder

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Create value

Candor

Eliminate fear of failure

Data is not knowledge, but the answer lies in the right data

Embrace change, but change for change sake is stupid

Listen actively

Make the tough decisions, make the critical decisions faster

Common Success Factors

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Pricing Analytics Charge Capture Analytics CDM Support Disproportionate Share Analytics

Contract and legal process support

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Fast Forward

Market and price monitoring

Integrate CRM tools and continuous feedback tools

Design price packages based on customer wants and align to value

Integrate organizational goals into pricing approaches as a component of marketing strategy

Develop communication templates to tell the price story

Customer service training to support consumer driven healthcare

Tools and templates to tell the other side of the price story (example, economic impact studies that show economic value of hospital in community)

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Anthony Cirillo1-704-992-6005

[email protected]

Jeff Tarte1-704-892-4300

[email protected]

developing a pricing strategy in today’s health care environment

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