11/3/2015 1 TRANSFORMATIONAL PRICING: STRATEGIES FOR THE CDM, PAYERS, AND PATIENTS HFMA REGION 9 CONFERENCE 2015 November 16, 2015 Presented by: Jamie Cleverley, MHA Cleverley + Associates [email protected]Today’s Objectives 1) Understand how providers are approaching transparency and defensibility 2) i h i li i f ki 2) Discuss the payment implications for making transformational pricing changes 3) Achieve meaningful change for patients through pricing objectives that move charges closer to payment and/or existing and emerging competition |2|
Transcript
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TRANSFORMATIONAL PRICING:STRATEGIES FOR THE CDM, PAYERS, AND PATIENTS
1) Understand how providers are approaching transparency and defensibility
2) i h i li i f ki2) Discuss the payment implications for making transformational pricing changes
3) Achieve meaningful change for patients through pricing objectives that move charges closer to payment and/or existing and emerging competition
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HOW ARE HOSPITALS APPROACHING TRANSPARENCY/DEFENSIBILITY?
How hospitals ap
pro
Provider research
• 2014 Survey: 78 hospital finance leaders representing 185 hospitals and health systems• 2015 Survey: 58 hospital finance leaders representing 156 hospitals and health systems • Linkage of both to facility charge information via Hospital Charge Index®• Results published in HFMAs hfm (September 2014 Cover Story) and Strategic Financial
Planning publications (Summer 2015 Cover Story)
Facility‐level charge measure:
Hospital Charge Index®
Outpatient Chargesi h d
Inpatient Chargesh d
oach
transparen
cy/d
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Outpatient Charge IndexFormula:
Your Medicare Charge per Visit (RW/WI adj)
US Median Medicare Charge per Visit (RW/WI adj)
Inpatient Charge IndexFormula:Your Medicare Charge per Discharge (CMI/WI adj)US Median Medicare Charge per Discharge (CMI/WI adj)
defen
sibility
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What does pricing transparency mean to you?
How hospitals ap
prooach
transparen
cy/d
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defen
sibility
How do you currently communicate prices to your patients?
How hospitals ap
prooach
transparen
cy/d
| 6 |Source: Cleverley + Associates
defen
sibility
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What makes a pricing strategy defensible?
How hospitals ap
prooach
transparen
cy/d
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defen
sibility
If you make your charges public (transparent), are you confident that you can defend and explain those charges when compared to other facilities?
How hospitals ap
prooach
transparen
cy/d
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defen
sibility
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What makes a pricing strategy defensible?
How hospitals ap
prooach
transparen
cy/d
| 9 |Source: Cleverley + Associates
defen
sibility
Is pricing transparency a factor you consider when planning yearly rate adjustments?
How hospitals ap
prooach
transparen
cy/d
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defen
sibility
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WHAT CDM ACTIONS ARE HOSPITALS TAKING?
Inflationary Changes by Metric & Year
What C
DM actio
n
Hospital charge inflation is decreasing
s are hospitals taki
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ng?
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Average Annual Inflation by Charge Growth Quartile Groups (2011‐2014)
Rate change varies significantly
What C
DM actio
ns are h
ospitals taki
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ng?
Inflation Impact on Hospital Charge Index® by Charge Growth Quartile Groups
What C
DM actio
n
Rate change can quickly alter a hospital’s relative charge position
s are hospitals taki
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ng?
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NORTHEAST2011 HCI 87.4
2014 HCI 83.6
IP Inflation 3.1%
OP Inflation 2.6%
Rate change and charge positions vary by region
What C
DM actio
n
WEST2011 HCI 118.3
2014 HCI 114.0
IP Inflation 2.9%
OP Inflation 2.8%
MIDWEST2011 HCI 93.3
2014 HCI 91.6
IP Inflation 4.0%
OP Inflation 3.6%
SOUTH
s are hospitals taki
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2011 HCI 115.0
2014 HCI 117.1
IP Inflation 5.3%
OP Inflation 5.1%
ng?
Lowest Charge Growth Group
Lower Charge Growth Group
Higher Charge Growth Group
Highest Charge Growth Group
All U.S. Group
Emergency
What C
DM actio
n
Key products/services are experiencing different levels of change
Average Annual Rate Change by Charge Growth Quartile Groups (2011‐2014)
Emergency Room
‐4.5% ‐0.8% 0.3% 3.1% 0.2%
Surgical Procedures
‐1.5% 1.5% 3.4% 6.7% 2.8%
Imaging 1.2% 4.2% 6.5% 9.5% 5.9%
Lab 1 2% 4 0% 5 6% 8 2% 5 5%
s are hospitals taki
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Lab 1.2% 4.0% 5.6% 8.2% 5.5%
Therapy 0.7% 3.2% 4.8% 6.4% 4.3%
Routine Room Rates
1.8% 4.4% 4.7% 7.3% 4.9%
ng?
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What C
DM actio
n
External price pressures are increasing – primarily in “retail” areas
s are hospitals taki
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ng?
PAYMENT IMPLICATIONS FOR PRICING CHANGES
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Paymen
t implicati
Three spheres of influence on price
ons fo
r pricin
g chao Quality
o Costo Buyers/Sellers
o Barriers to Entry
o Sustainable growth determines reasonableness
of target
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nges
o Market Shareo Capital Intensity
o Payer Mix
yo Price ElasticityPRICE
PayerNumber of
PatientsNet Payment per
PatientTotal
PaymentTotal Cost
Medicare 50 $92 50 $4 625 $5 000
Average Cost per Patient = $100
Payment is the real key in determining hospital pricing
Paymen
t implicati
Medicare 50 $92.50 $4,625 $5,000
Medicaid 10 $75.00 $750 $1,000
Uninsured 5 $5.00 $25 $500
Managed Care 30 $125.00 $3,750 $3,000
Other 5 ??? $500
Totals 100 $9,150 $10,000
less Total Cost $10,000
???
ons fo
r pricin
g cha
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less Total Cost $10,000
less Required Profit $500
Balance Remaining ($1,350)
Required Payment from Five Remaining Patients = $270 ($1,350/5)
nges
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Pricing Model – Formula for price‐setting
U thi d l f i tti t f ilit l l P i t i h
Payment is the real key in determining hospital pricing
Paymen
t implicati
Price =(NI + fixed pay margin)
(1 ‐ charge discount)
avg cost + charge volume
Average cost increases
Use this model for price‐setting at facility level:
Net income requirementsincrease
Losses from fixed pay businessincreases
Price must increase when: ons fo
r pricin
g cha
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The percentage of charge paying patients decreases
The discount from charges increases
nges
Payment is the real key in determining hospital pricing
Average Cost per Patient = $100
Pricing Model – Sample Calculation
Paymen
t implicati
Average cost = $100
Net income = $4 (4%)
Average fixed payment = $100
f d $
Average Cost per Patient = $100 ons fo
r pricin
g cha
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Average fixed pay margin = $0
Charge payers = 20%
Charge discount = 30%
Required price = $171.43
nges
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Payment is the real key in determining hospital pricing
Pricing Model – Sensitivity Analysis
Average Cost per Patient = $100
Paymen
t implicati
MODEL
# 1 # 2 # 3
Net income = $4 (4%) $4 (4%) $4 (4%)
Fixed pay margin = $1 ‐$3 $0
Ch % % %
Average Cost per Patient = $100 ons fo
r pricin
g cha
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Charge payers = 30% 15% 100%
Charge discount = 50% 60% 5%
Required price = $220 $367 $109
nges
Net
Pricing Model – Revising the formula to evaluate margin impact from desired pricing
Payment is the real key in determining hospital pricing
Paymen
t implicatiNet
income = [(Price X (1 ‐ charge discount) ‐ avg cost) X charge volume] – fixed pay margin
ons fo
r pricin
g cha
MODEL
# 1 # 2 # 3
Required price $260 $367 $109
Average Cost per Patient = $100
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nges
q p $ $ $
Desired price $109 $109 $109
Resulting average margin ‐$12.65 ‐$11.46 $0
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Financial costs of payment reductions
RATE OF REDUCTION
Annual loss of net revenue associated with differing levels of charge reduction and pricing recovery (based on hospital with $500,000,000 in gross charges)
Recovery is variable because of lesser‐of provisions
Paymen
t implicatio
ns fo
r pricin
g cha
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nges
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ACHIEVING MEANINGFUL CHANGE
Achievin
g mean
in
Current Price:
Process
Commit to transparencyDevelop initial guiding policies and goals
gful ch
ange
Price:
$220
New P i
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Price:
$104
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Commit to transparency/defensibility with clear policies and goals
1 2Achievin
g mean
in1 2External Policy Internal Policy
f f f f f
gful ch
ange
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o Public facing document for patients to view
o Meets or exceeds national and state requirements (as applicable)
o Goals for future release of pricing and payment information to the community
o Guiding principles on how strategic pricing and pricing transparency will be developed and evaluated
FY 2015 Final Rule:
In the FY 2015 IPPS/LTCH PPS proposed rule (79 FR 28169), we reminded hospitals of their obligation to comply with the provisions of section
Commit to transparency/defensibility with clear policies and goals
Achievin
g mean
in
hospitals of their obligation to comply with the provisions of section 2718(e) of the Public Health Service Act. We appreciate the widespread public support we received for including the reminder in the proposed
rule. We reiterate that our guidelines for implementing section 2718(e) of the Public Health Service Act are that hospitals either make public a list of their standard charges (whether that be the chargemaster itself or in another form of their choice), or their policies for allowing the public to view a list of those charges in response to an inquiry. MedPAC suggested that hospitals be required
gful ch
ange
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to CMS‐1607‐F 1205 post the list on the Internet, and while we agree that
this would be one approach that would satisfy the guidelines, we believe hospitals are in the best position to determine the exact manner and method by which to make the list public in accordance with the guidelines.
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How will prices be defended?
Achievin
g mean
in
1 2 3ROI Model Peer Position Cost Markup
gful ch
ange
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Relating pricing to ROI: the public‐utility approach
Public utilities have used a Return on Investment (ROI) model to justify price increases to rate regulatory boards. The approach isolates the price variable
Return on Investment Model1
Achievin
g mean
in
ROI FormulaROI =
increases to rate regulatory boards. The approach isolates the price variablefrom the ROI formula (below) and “tests” the remaining elements. If it can be proved that ROI, Cost, and Investment are not excessive, then price must also not be excessive. In the following pages, we present these tests.
Tests
1. Is ROI excessive?
gful ch
ange
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(volume x price) - (volume x cost)investment
2. Is cost excessive?
3. Is investment excessive?
If “no” to all three, price is not excessive.
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AR LA MS OK TX US
R
Return on Investment Model1
Achievin
g mean
in
Return on Equity
11.1 7.4 4.4 11.2 12.4 8.7
Hospital Cost Index®
99.4 108.5 113.9 107.1 109.2 101.2
Fixed Asset Turnover
2.46 2.51 2.31 2.79 2.48 2.44
gful ch
ange
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Average Age of Plant
11.0 10.6 11.0 7.9 7.4 10.4
Return On Equity: Excess of Revenue over Expenses/Net AssetsFixed Asset Turnover: Total Revenue/Net Fixed AssetsAverage Age of Plant: Accumulated Depreciation/Depreciation Expense
Level of Comparison Metric
Peer Position Model2
Comparing your pricing to pricing at peer facilities
Achievin
g mean
in
p
FACILITY Hospital Charge Index®
Medicare Charge per Discharge (CMI/WI adj)
Medicare Charge per Visit(RW/WI adj)
DEPARTMENT BETOS Analysis
INPATIENT CASE Charge by MS DRG
Bundling
Level o
f Detail
gful ch
ange
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CPT® is a registered trademark of the American Medical Association. All rights reserved.
INPATIENT CASE Charge by MS‐DRG
OUTPATIENT CASE Charge by APC
PROCEDURE Price by CPT®/HCPCS Code Bundling
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Cost/Markup Model3
Sources of cost data
1) Hospital cost‐accounting system
Achievin
g mean
in
1) Hospital cost accounting systemo Direct Cost
o Fully allocated cost
2) RCCs
Two usual outcomes
Strategy:Relate prices to cost markup
(same or different by d t t)
gful ch
ange
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1) Reduced net patient revenue, e.g.,$5.1 million vs. $9.6 million in ATB
2) Major pricing changes‐99% to 3,580%
department)
Achievin
g mean
in
Current Price:
Process
Commit to transparencyDevelop initial guiding policies and goals
Understand your gful ch
ange
Price:
$220
New P i
Understand your current positionCompare pricing andknow wherepressure exists
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Price:
$104
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Secondary/TertiaryH it l M k t
Compare prices from multiple perspectives
Achievin
g mean
in
Hospital Market
Core Hospital
k
WHO??
SERVICES??
gful ch
ange
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MarketNon‐
HospitalMarket
PRICE PRESSURE??
Achievin
g mean
in
Hospital Charge Index®
Understand how prices are changing
gful ch
ange
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Achievin
g mean
in
Determine where price pressures are coming from
gful ch
ange
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Achievin
g mean
in
Understand current margin levels by payer and product
gful ch
ange
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Achievin
g mean
in
Understand current margin levels by payer and product
Net Patient Revenue per Equivalent Discharge™
OperatingMargin gfu
l chan
ge
Equivalent Discharge Margin
Arkansas 7,450 ‐0.8
Louisiana 8,464 3.2
Mississippi 9,567 1.4
Oklahoma 9,291 2.5
Texas 9 300 5 7
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Texas 9,300 5.7
US 8,650 3.4
Achievin
g mean
in
Current Price:
Process
Commit to transparencyDevelop initial guiding policies and goals
Understand your gful ch
ange
Price:
$220
New P i
Understand your current positionCompare pricing andknow wherepressure exists
Model impactUnderstand
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Price:
$104
the financial implications through price, payment, cost and profit modeling
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Achievin
g mean
in
General impact associated with various rate strategies
Rate freeze
Reduce pricing for select
Across the board reductions
gful ch
ange
FINANCIAL IMPACT CONTINUUM
LESS IM
PACT
MORE IM
PACT
Reduce pricing for select areas/codes
Outpatient/Retail price
Cost based approaches
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Outpatient/Retail price creation for all codes
Outpatient/Retail price creation for select codes
Achievin
g mean
in
Model impact of different strategies to determine best fit
Strategy Incremental Charges
Net Revenue Impact
Additional impact from outlier/lesser‐
of change gful ch
ange
Across the board reduction
$XXX $XXX $XXX
Cost based approach to 2X
$XXX $XXX $XXX
Imaging to free‐standing average
$XXX $XXX $XXX
il i i f l b $ $ $
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Retail pricing for lab $XXX $XXX $XXX
Reduce outpatient prices by 40%
$XXX $XXX $XXX
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Achievin
g mean
in
Understand specific impact of different strategies
gful ch
ange
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Achievin
g mean
in
Current Price:
Process
Commit to transparencyDevelop initial guiding policies and goals
Understand your
Engage in mitigation
Discuss with payers
gful ch
ange
Price:
$220
New P i
Understand your current positionCompare pricing andknow wherepressure exists
Model impactUnderstand
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Price:
$104
the financial implications through price, payment, cost and profit modeling
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Making large changes will likely require payment term changes
Achievin
g mean
ingfu
l chan
ge
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Making large changes will likely require payment term changes
Achievin
g mean
in
Article excerpt regarding case hospital
gful ch
ange
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Isolating specific term impact can facilitate easier discussions
Achievin
g mean
inContract Carve‐out
Original Charges
Proposed Charges
Incremental Profit
% Change
Payer 1 ‐ PPO I All Other $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO I Csection DRG $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO I Normal Delivery $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO I Normal Newborn DRG ‐ Per Diem $XXX $XXX $XXX $XXX
P 1 PPO I N G l N b L l 1 O h $XXX $XXX $XXX $XXX
gful ch
ange
Payer 1 ‐ PPO I Nursery ‐ General, Newborn ‐ Level 1, Other $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO I Nursery ‐ General, Newborn ‐ Level 1, Other Ancillary $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O Payer‐Provider OP Surg $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O Critical Care $XXX $XXX $XXX $XXX
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Payer 1 ‐ PPO O ER Level 1 $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O ER Level 2 $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O ER Level 3 $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O ER Level 4 $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O ER Level 5 $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O Obs ‐ Per Hour $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O Obs ‐ Per Hour Ancillary $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O OP Cardiac Cath $XXX $XXX $XXX $XXX
Payer 1 ‐ PPO O Trauma Act $XXX $XXX $XXX $XXX
Achievin
g mean
in
Current Price:
Process
Commit to transparencyDevelop initial guiding policies and goals
Understand your
Engage in mitigation
Discuss with payers
gful ch
ange
Price:
$220
New P i
Understand your current positionCompare pricing andknow wherepressure exists
Model impactUnderstand
CommunicateRevise policies
and goals
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Price:
$104
the financial implications through price, payment, cost and profit modeling
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Meet net income expectations?
Evaluating the rate strategy
Does the strategy:
Achievin
g mean
in
Meet net income expectations?
Maintain or enhance competitive position?
Maintain or correct related pricing relationships?
Establish equitable distribution to case categories?
gful ch
ange
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Establish equitable distribution to payers?
Meet transparency/defensibility objectives?
Summary
• Transparency and defensibility initiatives are increasing across the US as hospitals face pressure from patients, payers, and new/existing providers of care. However, there is still significant variation in how individual hospitals are respondingresponding.
• Hospital pricing is impacted by various demographic and operating factors – among them, payment is critical in rate establishment and change. Payment recovery can change with various rate changes as additional outlier and lesser‐of provisions are triggered.
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provisions are triggered.
• Committing to increased transparency and defensibility can lead to transformational pricing change through policy/goal development, evaluating current and proposed price positions, and communicating with payers and patients.
