Price transparency: ‘Rational pricing’ may lead to reduced costs

Close up of the keys of a calculator

LAS VEGAS--Hospitals need to decide whether to embrace rational or defensible pricing in order to better navigate the current financial environment, according to three finance executives who spoke at the Healthcare Financial Management Association’s Annual National Institute in Las Vegas this week.

Hospitals are under great pressure to moderate their pricing, particularly due to media exposure of the cost of certain healthcare procedures; the continued high rate of healthcare inflation in the U.S. compared to other nations; and state and national legislation that can restrain price increases, noted speakers James English, vice president of revenue cycle financial operations at Florida Hospital, an affiliate of Adventist Health and Richard Lyman, vice president of revenue cycle for Advocate Health Care in Chicago.

But prices can vary even among hospitals within the same system. Such price variations have been shown to hurt consumers.

Lyman, who made clear he was speaking for himself and not Advocate, groused that media coverage can often be misleading: “The press often oversimplifies the situation (by conflating prices with charges), and the patients don’t understand insurance, pricing and how much they’re being charged.

Co-speaker Jim Sink, national healthcare revenue integrity lead for RSM, an accounting and auditing firm, said that defensible pricing is based on the prices set by competing hospitals, a system that can lead to wide variability. Rational pricing instead aims to be the triangulation of the cost of the specific procedure, the market risk created by a shifting in prices and what a variety of managed care contracts pay for such care. “How do you get to the middle without chasing your tail,” he asked.

Hospitals should consider constructing “reasonable cost corridors” that are a product of the breakeven point (which is usually in a range of twice to five times costs) while taking the sensitivity of pricing shifts in mind, according to Sink. The latter can usually be arrived at as a percentage: If a procedure has a 15 percent pricing impact, it means every dollar of its price that is raised leads to 15 cents more in additional revenue. Moreover, while many hospitals have thousands of prices for procedures, large percentages of their revenues are usually linked to just a few hundred procedures.

English noted that Florida Hospital expects to have a rational pricing structure in place by 2018, a shift that may lead to significant pricing cuts. But that also means that moving forward, it will have to make sure charges are comprehensive. “If there’s a 50 buck pickup that’s being missed, we’re going to have to consider getting it,” he said.

The speakers did not make a specific connection as to how rational pricing and price transparency would connect, even though a recent study concluded 45 out of 50 states currently fail at providing consumers with transparent pricing.