© 2004 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights...

1© 2004 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A 26796atl

KPMG, LLP

Pricing Transparency: A Formula for Value

May 24, 2007

HEALTHCARE

ADVISORY

2007 Duke University Health System

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© 2007 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss Cooperative. All rights reserved. Printed in the U.S.A.

With you here today

Mark Higdon, Partner

(410) 949-8530

[email protected]

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Transparency Defined

• Webster’s dictionary

Pronunciation: tran(t)s-'per- әn(t)-sēFunction: noun1 : something transparent; especially : a picture (as on film) viewed by light shining through it or by projection2 : the quality or state of being transparent - free from pretense or deceit : easily detected or seen through : readily understood : characterized by visibility or accessibility of information especially concerning business practices

• KPMG

Internal:Providing Management and the Board with the information necessary to understand the organization’s strategies and to manage the risk of the enterprise.

External: Providing the healthcare consumer with the information necessary to make informed healthcare buying decisions.

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Who Is Causing the Discussion, Debate or Uproar Over Pricing?

• Federal Government / Agencies;

• State Governments;

• Third-party Payors;

• Lawsuits (Legal System);

• The Public (Consumerism); or

• The Media / Press?

Answer: All and others, too, including our employees, MDs, etc…

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Pricing Problem or Simply Noise?

Answer: A lot of Noise, BUT

There is a problem out there also…

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The Difference Between Charges and Costs Continues to Widen

Note: Analysis includes all community hospitals

Source: American Hospital Association Annual Survey of Hospitals.

Markup of Charges over Costs for All Patient Care1994 - 2004

73.8 79.2 85.3 90.2 97.0 103.3112.6

123.6136.9

154.5163.8

0

20

40

60

80

100

120

140

160

180

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Pe

rce

nt

In last five years, charges have increased 60% (over cost increases)

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A recent Hopkins School of Public Health Report announced: Hospitals Charge

Uninsured and “Self-Pay” Patients More than Double What Insured Patients

Pay.

• Uninsured patients are “charged” 2.5 times more for hospital care.

• Gap has grown substantially since the mid 80’s.

• In the 1950’s, the uninsured were charged the lowest prices.

• Charge mark-ups was greatest at for-profit hospitals.

The Uninsured

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The Environment

• President Bush’s agenda

• CMS to publish prices for high volume Medicare procedures

• Consumer Directed Healthcare (CDHC)

• Greater role for employees to finance first dollar coverage

• Need to create and demonstrate “value proposition”

• State legislative pressures for price transparency

• Mandated posting of prices and charity care policies

• Requirement that hospitals cap prices charged to indigent

• Requirement that uninsured be charged no more than rates paid by largest commercial payer

• State hospital association websites offering pricing information

• NCQA Payer requirements to share financial responsibility (United website)

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Proposed Federal Legislation“Health Care HR 6053 Price Transparency Act”

• Bill calls upon the State to establish and maintain laws requiring disclosure of information on hospital charges, to make such information available to the public, and to provide individuals with information about estimated out-of-pocket costs for health care services.

• “This means that State law will require health insurance providers to give patients an actual dollar estimate of what the patient must pay for health care items and services within a specified period of time” - Representative Burgess, M.D.

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AHA Position

• Supports Burgess HR 6053 bill

• AHA Roadmap to Pricing Transparency(1)

1. Federal requirement for states, working with state hospital associations, to expand existing efforts to make hospital charge information available to consumers.

2. Federal requirement for states, working with insurers, to make available in advance of medical visits, information about an enrollee’s expected out-of-pocket costs.

3. Federal-led research effort to better understand what type of pricing information consumers want and would use in their health care decision-making.

4. Hospital-led effort to create consumer-friendly pricing “language” - common terms, definitions and explanations to help consumers better understand the information provided.

Source: AHA Statement of April 29, 2006

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State Government Actions

• 32 States have statutes requiring hospitals to report pricing information that is made available to the public in various ways.

• 5 States have voluntary systems

• State efforts on pricing transparency vary from chargemaster availability (California) to frequent hospital service prices to all inpatient services charges.

Source: AHA Statement of April 29, 2006

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NC Statute

NC Gen. Stats. Ch. 131 E-214.4 - Requires that a report that includes a comparison of the 35 most frequently reported charges of hospitals and freestanding ambulatory surgical facilities be made available to the Division of Facility Services of the Department of Health and Human Services.

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Transparency – Key Questions

• What is transparency?

• Government defined?

• Marketplace defined?

• Consumer defined?

• Media defined?

• What are the objectives for transparency?

• Defensible?

• Logical?

• Rational?

• Justifiable?

• When/how to enter the transparency arena?

• What impact will transparency have on volumes, legislative/media perception?

• What data to share to achieve transparency?

• Chargemaster information

• High volume DRG’s/procedures/tests

• Third-party payment Information

• Quality Indicators

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Elements of Transparency

Communication & Education

PriceQuality

Community

Benefit

Value

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Elements of Community Benefit

Community

Benefit

Charity Care Outreach Programs Medical Education

Unfunded Mandates Essential Services

Unprofitable Services Reduce Gov’t Burden Financial Counseling

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“Community Benefit Reporting”

Catholic Health Association’s (CHA) Instructions for Hospital Community Benefit Report, IRS Form 990, Supplement to Part III

1. Qualitative Description of Community Benefit

– Programs & Services

2. Quantifiable Community Benefit Information

– Charity Care

– Indigent care, short-fall funding

Source: CHA Report, Oct. 18, 2006

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Elements of Quality

Quality

Mortality &

Morbidity StatisticsQuality Indicators Procedure Volumes

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Quality Reporting Is Alive and Well Under Medicare

• 2007 Payment formula: 2% reduction if quality data for 21 different care measures is not reported.

• Acute Myocardial Infarction (“AMI”) – 8

• Heart Failure – 4

• Pneumonia – 7

• Surgical Infection Prevention – 2

• 2009: 32 Different Metrics

• 29 Process Measures

• 3 Outcomes Measures

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Complications Under Consideration for Elimination of Reimbursement

• Surgical Site Infections

• Ventilator-associated pneumonia

• Catheter-related Bloodstream Infections

• Catheter-associated Urinary Tract Infections

• Pressure Ulcers

• Falls

• Any other adverse event included in the “Never Events” List

• Wrong Site Surgery

• Objects Left in During Surgery

• Blood Incompatibility

• Several Others

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Medicare’s PQRI for Physicians

• Eligible professionals have potential for bonus, up to 1.5%.

• Activity during calendar 2007, lump sum payment in 2008.

• 74 metrics in the data set.

• Benefits – prepare for P4P; access to comparable information.

• Challenges – data collection burden and costs.

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Other Quality Considerations

• Consumerism: Price matters, but isn’t the outcome far more important?

• Bond Ratings: Growing component in the assessment of creditworthiness.

Clinical Outcomes / Patient Safety

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Pricing: A Combination of Several Organizational Policies

PricingCharity Care

Charge(Cost, Market, Contracts, ROI)

Collections

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Pricing Strategies

• If very few (10%) pay charges, why not reduce them by 50%?

• Impact: Reduction of hospital margin by 5% (likely the entire profit amount.)

• Establish the lowest appropriate charge

• Provide sufficient funding to cover costs plus a necessary margin.

Guiding Principles

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Elements of Price

Price

Cost Market Payment ROI

• Internal Cost Accounting

• RCCs

• Full or Partial Costs

• Loss Leaders

• Other

• Competitive Group

• State

• Other

• Consumer Sensitivity

• Commercial Payor Contracts

• Medicare / Medicaid

• Specific Provisions

• Self Pay

• Uninsured

• No Margin / No Mission

• Net Revenues Less Expenses

• PP&E

• Current Cost of Capital

Hospital Inpatient, Hospital OutpatientPhysicians, Others

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Pricing Strategy – Key Questions

• Is it reasonable to have pricing differences within business units or between departments for similar services? If so, how much and for what?

• Chest x-ray performed in Radiology vs. ED vs. OP clinic

• Pricing of niche / consumerism services vs. specialty service, yet maintaining margin?

• Specialty cardiology services vs. Women’s Health

• Effectiveness of charge capture and coding processes? Are we consistent?

• Time-based

• With or without contrast

• Right / left / bilateral

• Correlation with contracting strategies?

• Relevance with Sarbanes-Oxley or other initiatives?

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Pricing Strategies

Rational Pricing

• More robust set of pricing policies meant to defend current pricing position

• Increased transparency through improved disclosure

• Not necessarily different approach to setting policy

• Might include price decreases to demonstrate commitment

• May not be linked to contracting, value proposition

Value Based Pricing

• Linked to quality

• Allows for creation of value proposition

• Premium pricing for services that provide value to customers

• Package pricing

• Requires ability to communicate value proposition

• IT infrastructure necessary to support

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Pricing Strategy Considerations

• Standardized Chargemaster structure

• Standardized Chargemaster not standardized prices (across the system?)

• Facility-based pricing and charge capture / coding processes need to be aligned - Service Lines (CV, OB, etc.)

• Coordinate pricing strategy with payer contracting strategy

• Facility-based pricing decisions

• Market-based pricing for “consumer / commodity” type services

• Pricing levels should reflect value proposition to the consumer of cost, quality and service

• Specialty service pricing reflect facility costs, utilization and global NOI considerations

• Medical supply charges are often areas of significant controversy

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Price


• Comparison of charges to fully allocated costs by center.

• Utilization of internal cost reporting or Medicare cost report data.

• Development of charge to cost ratios by:

• Revenue Center

• Product Line

• DRG or Outpatient Procedure

• Decision matrix: Establish parameters (e.g., 2.5 to 5.0 times cost)

Pricing Analysis

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Price


• Comparison of charges to targeted peer group.

• Utilization of MedPar (or other sources) data for inpatient and / or outpatient services.

• Development of comparative results by:

• DRG / Product Line

• APG / Product Line

• Revenue Center (across all DRGs, etc…)

• Decision Matrix: Establish parameters (e.g., 80th to 135th percentile)

Market Analysis

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Price


• Development of impact analysis on payments (net revenue) of pricing decisions:

• Cost Parameters

• Market Parameters

• Inflation Increases

• Development of impact analysis on consumers for pricing changes:

• Out of pocket for insured

• Uninsured

Payment Analysis / Consumer Impact

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Price


• An important and final component of the pricing analysis is the net impact to the entity

• Effect on volumes / demand

• Effect on margin

Payment Analysis / Consumer Impact

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Final Thoughts

• External Transparency

• Likely driven by states’ initiatives

• Hospital associations heavily involved

• Individual entity actions

• Internal Transparency

• What should Board know about pricing?

• Who makes the pricing decisions?

• Strict compliance with key policies on pricing, collections and charity care.

• Integration of Quality with Pricing (Value Based)

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