Strategic Pricing is a strategy for setting prices and markups on the CDM so that there is a clear rationale that makes sense to a variety of concerned parties, from providers and payers to the general public, and for a variety of reasons, from covering actual costs and optimizing net revenues to avoiding payment confrontations. It incorporates three important factors: costs, comparative market data, and reimbursement. Pricing strategy revolves around reviewing the CDM on a regular basis to determine whether any changes are required.
Pricing involves generally two main methodologies: benchmarking, or market analysis, and cost-based markup. Even if a hospital has a good method to directly link costs with charges it needs to look at the market and see what others are charging to determine if its prices are in the same ballpark.
Benchmarking, or market analysis, involves reviewing prices against the prices of competitors in the same market area. Benchmarking is advantageous because it can be used as a tool in confrontations over pricing, or as a means to avoid confrontation altogether. How often a Strategic Pricing is implemented depends on the model used. In general, an annual review is sufficient for benchmarking price. A market analysis requires comparative hospital data, and most facilities will limit this action to annually or once every other year.
Providers that don’t implement any form of Strategic Pricing face both external and internal challenges. If a provider, for example, just raises prices a certain percentage across the board, the price on the CDM may end up having little correlation to the cost of the item. The consequences of not implementing some form of analysis can also be significant to the bottom line.
BRHS offers a comprehensive Chargemaster Strategic Pricing Review, resulting in a pricing structure that is competitive, market-based, and compliant. It can be performed in conjunction with an Area Rate Comparison which serves to enhance the overall results of the Strategic Pricing initiative.
The goal of a CDM Strategic Pricing Initiative is to increase the hospital’s net revenue. By performing an in-depth analysis of the Charge Description Master (CDM) as well as current utilization data and the most recent Medicare Cost Report, we make detailed pricing and related operational/reporting recommendations that will have an immediate positive impact on net revenues. To do so, we utilize a Windows-based software program specifically designed to assist hospitals to optimize their net revenues, while also ensuring that the pricing structure is competitive, market-based and compliant.
The underlying concept is to structure rate changes among departments and individual charge items to achieve the greatest increase in the “bottom line,” while simultaneously keeping overall rate increases to a predetermined minimum. In effect, a hospital can even restructure rates, i.e. increase net revenue yet not increase prices overall.
The Strategic Pricing includes an analysis of the Chargemaster; an optimization of the charges and recommendations for other revenue enhancements based on current utilization, and a review of the facility's Cost Report.
Key Features:
- Considers every line item in CDM with activity
- Utilizes data downloaded from hospital’s computer system
- Compares prices to Medicare fee schedule to ensure minimum markup
- Compares prices by HCPC to market prices of area hospitals (see below) in order to identify opportunities and ensure competitiveness
- Considers payer mix & department costs to help target price changes
- Models alternative pricing scenarios to determine each item’s optimal price
- Lets hospitals restrict rate increases for price sensitive items
- Provides an upload file with new rates to help avoid manual keying
- Bottom line oriented - maximizes net revenue gain and compares benefits to across the board rate changes
- Looks at patient mix & department costs to determine pricing
- Allows the facility to lower many charge line items that are heavily utilized by Medicare, Medicaid, and Self-pay patients and still not effect facility profitability
- Program has the ability to manipulate prices within a department that would result in a decrease in overall departmental charges and either maintain or increase departmental profitability
- Can be a powerful marketing tool, it could allow the facility to lower overall charges and yet maintain or enhance profitability. The facility could announce an overall 5% price decrease and yet increase profitability (the lower charges would only result in lower contractual)
Because of the trend by third party payors toward per diem contracts and outpatient discounts, the CDM Strategic Pricing Initiative has become a more valuable rate setting tool than in past years. Rate changes must now be more finely implemented to generate necessary increases to the Hospital’s “bottom-line” and to insure that rates are competitively priced. The CDM Strategic Pricing Initiative includes an evaluation of the facility’s Cost Report, all managed care payment methodologies, and all commercial/indemnity payers to develop a new pricing structure that produces the optimal increase in net revenues for the facility. The results of the CDM Strategic Pricing Initiative are significantly better than those obtained through across the board increases.
Given the major reductions in collectable revenue brought about by the initiation of APCs, it is imperative that Hospitals optimize their financial return from third party payors. A CDM Strategic Pricing Initiative can provide tens/hundreds of thousands of dollars in additional collectable revenue depending on the size of the facility and patient mix.
A CDM Strategic Pricing Initiative for a Critical Access can be particularly beneficial. Due to the multiple levels of reimbursement from third party payors and the Medicare Program, optimizing rates for a Critical Access Hospital requires specialized knowledge and skills.
To really understand all of the reimbursement implications in a Critical Access facility, the consultant should have experience in cost-based (pre-DRG) reimbursement. A BRHS officer has worked with the Fiscal Intermediary for Texas (Blue Cross) during Medicare Cost-based reimbursement, was a Senior Regional Audit Director, and was responsible for the Cost Reports for over 200 hospitals. A BRHS officer is a nationally recognized expert on Medicare, prospective payment, and Cost Reports. He has extensive experience in Cost Report preparation, negotiations with numerous fiscal intermediaries, reopening Cost Reports, and with presentations to the PRRB. This provides BRHS with a significant level of experience in Cost Report reviews and analysis.
A CDM Strategic Pricing Initiative for a Critical Access Hospital is more complex and requires more extensive calculations to appropriately evaluate the impact of rate changes on the Medicare Cost Report, as compared to optimizing rates on a non Critical Access Hospital. In order to properly optimize the rates for a Critical Access Hospital BRHS will:
- Perform an optimization based on targeting commercial and managed care payers.
- Analyze the impact on the Medicare Cost Report:
- Evaluate the projected reimbursement impact on inpatients based on costs;
- Evaluate the projected reimbursement impact on outpatient payment rate; and
- Evaluate the projected impact on the combination of inpatient cost and outpatient rate.
At this point a second pricing iteration will be run taking into account the new parameters developed through the analysis of the Cost Report. In the final step you take the initial rate optimization run and compare the revised revenue by payer class to the latest Cost Report for the Hospital and make any required adjustments by department or individual charge item. This is achieved in the form of a simultaneous calculation to insure that the net bottom line is optimized when the initial optimized rates and the Cost Report impact are combined.
CDM STRATEGIC PRICING SAMPLE DATA
Average Range
Beds 219 42 – 688
ADC 173 30 - 601
Charge Payers 13% 4% -29%
Overall Rate Increase 6% 0%-11% _________________________________________________________
Additional Net Revenue $643,000 $179,000 - $2,312,000
Additional Net per Bed $3,428 $1,430 - $8,220