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Developing a Pricing Strategy in Today’s Health Care Environment

Developing a Pricing Strategy in Today’s Health Care Environment. Las Vegas May 17, 2006. Anthony Cirillo, CHE, ABC, President. Jeffery P. Tarte, Managing Partner. Agenda. Introductions Expectations and Rules of the Road What is impacting the Healthcare Industry?

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Developing a Pricing Strategy in Today’s Health Care Environment

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  1. Developing a Pricing Strategy in Today’s Health Care Environment Las Vegas May 17, 2006 Anthony Cirillo, CHE, ABC, President Jeffery P. Tarte, Managing Partner

  2. Agenda • Introductions • Expectations and Rules of the Road • What is impacting the Healthcare Industry? • Taking the Matter into the C-Suite • Principles of Pricing in Retail Marketing • Pricing Philosophies within the HC Industry • What Hospitals are Doing and How They Do It • Making Prices Available to the Public • Future State

  3. Rules of the Road • Here to ExchangeInformation 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 “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

  4. SCOTT & WHITE

  5. Market Forces • Percent of GDP • Employer Backlash • Consumer Driven Healthcare • Media • Class Action Lawsuits • Government Sanctions • Medical Tourisms • Advocates

  6. % 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 • Less focus on pharma • Increased scrutiny of hospitals What’s your story? CMS 1/9/06

  7. GDP

  8. Employers Have Had Enough • Getting out • Reducing coverage and cost shifting • GM and Ford • Uninsured 45 million / Underinsured 16 million ED Implications What is your charity care policy? How is it or is it linked to your pricing policy?

  9. 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

  10. 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% Implications: Care avoidance Shop on price but do they know how? Price Packages / Collections

  11. 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

  12. Media • > coverage • Focus on the uninsured • Hospitals looking bad

  13. Media

  14. Class Action Lawsuits Richard Scruggs

  15. Class Action Lawsuits And Tax Exempt Challenges Richard Scruggs Senator Charles Grassley

  16. 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

  17. 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

  18. 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

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

  20. Charges to Expenses • U.S. average – 262% markup • PA – 380% markup; 2nd highest in U.S. Source: Demonstrating and Improving Hospital Accountability for Charity Care, ACHE, 3/15/05, The Lewin Group

  21. Government • Ongoing hearings • Threatened legislation to close price gap • Forcing issue by publishing price • Actively lobbying payers to demand accountability Implications: Uninsured will compare Worse - Insurers will compare! Ready to renegotiate?

  22. 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

  23. 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 andEconomics Professor University of Chicago

  24. Advocates

  25. Mixed Messages • Reimbursement on sickness when you have a wellness mission!

  26. Price Transparency • California Healthcare Foundation – deployed 600 mystery shoppers to find price • Kaiser Family Foundation / USA Today – 52% of doctors never discuss price

  27. 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

  28. 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

  29. 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

  30. “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

  31. P = V = C 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”

  32. 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?

  33. = $3 - $5 a cup = 2 cents a cup = 20 cents a cup = $1cup The Experience Economy – B. Joseph Pine II, James Gilmore

  34. Retail Price Philosophy • 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 “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

  35. Retail Price Philosophy • 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

  36. Retail Price Philosophy 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?

  37. What is a Customer Worth? 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 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

  38. What is a Customer Worth? S = $50 C = $4 V = 24 Y = 40 A = $15 N = 4 F = 1.1 Lifetime Value = ((S-C) x (VxY) – A + (AxN)) x F ((50-4) x (24x40) – 15 + (15x4)) x 1.1) = $48,625.50 WeissMarketing Prof

  39. 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 Marlowe Healthcare Marketing Report

  40. Retail Price Philosophy • Package bundles based on mass customization

  41. Retail Price Philosophy • Additive Option Strategy • Subtractive Option Strategy Which is better?

  42. Retail Price Philosophy • Subtractive • Consumer has perceived power • Perception of starting at higher level of quality

  43. Retail Price Philosophy • Silver • Gold • Platinum Maternity Services • Other examples please!

  44. 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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