Just a few months ago, irrational hospital pricing made the cover of Time magazine, and the Centers for Medicare & Medicaid Services (CMS) began to release hospital charge information to the public. It is clear from these developments that pressure is on providers to establish prices for each and every chargemaster line item that more closely align with cost (as adjusted for overhead, uncompensated care, operating margins and shortfalls from federal payors, if any), or a hybrid of cost and market data.
Dispelling the Myth that Charges Don't Really Mean Much Anymore
Some hospital financial managers have stated that the charges reflected in their chargemasters don't really mean much anymore, with 70 to 90 percent of their reimbursement being based on fixed rates. However, it is important to keep in mind that:
- Hospitals often lose hundreds of thousands of dollars each year due to charges being set at two to three times the Medicare rate, when in fact, non-federal fee schedules often reflect higher rates, thereby causing hospitals to be paid the "lessor of charge" and fee amounts. Hospital Zero-Base Pricing will restore reimbursement to allowable levels from these fixed-fee payors.
- Two-thirds of Panacea's Hospital Zero-Base Pricing clients realign their charges based on cost, market data, fee schedules and other benchmarks each year, realizing an overall net revenue increase greater than that which would have been received with an across-the-board increase while at the same time keeping their overall gross charge increase at 6 percent or less. For these clients, with a charge payor mix averaging only 10 percent, the net revenue impact is often more than 500 percent of the annual cost of the price realignment; this sometimes can represent the difference between clients having a favorable versus an unfavorable profit margin.
- Charges do get significant government, payor, media and consumer scrutiny, and all hospitals should be able to document and defend their methods behind establishing each and every line item charge in their CDM to respond adequately to prospective inquiries.
- Charges, if aligned closer to actual costs, provide an improved basis for decision support and profitability analytics.
- A higher percentage of consumers are sensitive to hospital charges due to health saving accounts and higher copay and deductible amounts.
Dispelling the Myth That Cost-Based Pricing Would Unfavorably Impact the Bottom Line
Many CFOs have expressed to us a desire to align their prices closer to actual costs; however, many expressed reluctance due to their false impression that the realignment of prices throughout their CDM would have an unfavorable net revenue impact. The reality is, as with any business, establishing prices usually starts with cost as a basis, then also to be taken into account are overhead, uncompensated care, shortfalls due to less-than-cost reimbursement from federal payors, operating margins, loss leaders, overall operating budget objectives, and what other providers charge for similar services. By factoring in these and perhaps other criteria into the model, we have found that the result is always equal or greater net revenue and significantly more rational and defensible pricing.
No Better Time Than Now to Implement Cost, Market or Hybrid Pricing
For those providers with fiscal years beginning anytime between September and January, there is no better time to begin the process to implement a Hospital Zero-Base Pricing (defensible pricing) approach. Here's why:
- Preliminary models can be formulated in September and October to assist in the budget process to identify new incremental revenue that may result from the process. Those hospitals with September or October fiscal-year start dates still will have time to finalize their models for implementation and make minor modifications following implementation if necessary.
- In September, new competitor or peer hospital outpatient claims data, inpatient claims data and Medicare cost report data that is less than one year old (2012 data) will become available, from which customized peer group ancillary charge data by HCPCS code, room rates and drug and medical supply charge-to-cost ratios can be integrated into a final pricing model.
- Those hospitals with cost report periods beginning in October through January wanting to develop unit cost estimates for each line item in their CDM to introduce unit cost into their pricing models still have time to implement their own study or utilize Panacea's proven Unit Cost Estimator™ system. The benefits of costing out your entire CDM go beyond use for establishing rational, cost-based or hybrid pricing in that, as a byproduct, you can begin to look at profitability of your managed care contract rates and services using the established unit costs as an RVU – rather than leveraging less reliable ratio-of-cost-to-charge (RCC) costing methods.
Panacea has developed the industry's most innovative cloud-based tools to implement and maintain rational hospital and physician pricing, and at no additional cost, its expert financial consultants can assist in modeling if necessary. The tools that Panacea incorporates into its Hospital Zero-Base Pricing approach have gone through and passed a rigorous peer review process by the Healthcare Financial Management Association (HFMA). These tools include:
Hospital Zero-Base Pricing® – This is the base tool, which facilitates the creation of unlimited modeling and what-if scenarios, then calculates and recalculates within seconds the gross and net impact of any modification to the model parameters at the CDM line-item level, payor plan code level, patient type level, department level, and more. Users can zero in on different peer groups for different departments or even selected services, create charge increase and decrease caps, calculate the impact of payor caps, establish custom overrides at the revenue code, service code or department level, and much more.
ComparativeHospitalData.com – This cloud-based system allows clients or Panacea consultants to create unlimited peer groups and reports illustrating peer group charges, cost and volume by HCPCS code, room-and-board rates and charge-to-cost markups by cost center (such as for drugs and supplies). Comparisons to the client CDM are made, and results can be imported into the Hospital Zero-Base Pricing module without any manual intervention needed to upload the peer group data.
Unit Cost Estimator™ – For those hospitals that have the desire to establish or estimate its unit costs for its CDM line-item services but lack the manpower or funds necessary for a full-blown cost accounting system and staff, Unit Cost Estimator can be used to cost out the entire CDM, typically with only eight days of on-site time required by our consultants and six additional weeks of back office work afterwards. The system also can be used by your own staff in similar time frames at less expense under the training and direction of one of our experienced consultants.