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Strategic pricing: Determine your baseline costs

Patient Access Weekly Advisor, October 3, 2007

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Pricing transparency is no longer just an idea for the future of healthcare. Pricing legislation now exists on many state levels, and hospitals are actively addressing the need to strategically price their services, knowing that many customers will shop for the best deal.

In a past HCPro audioconference, Marlowe J. Dazley, Managing Director at Phase 2 Consulting in Salt Lake City, explained the need to determine your baseline costs when deciding whether to increase or decrease your pricing. Pricing models vary among facilities and by geographic region, but your goal should be to understand your true costs and establish pricing that is in alignment with those costs.

A cost-based approach is a three-tiered strategy based on your costs, market, and contracts. Dazley cited an example of this approach involving a client who had a hunch that his facility was losing millions of dollars in operating room services.

In this example, when Dazley layered all of the facility's chargeable direct expenses and its indirect allocation, the cost to provide one minute of surgery was $18.94, but it was charging only $19.21. And because of the structure of some of its contracts, it was still paid a percent of charges, which meant that it received only about 50% of its charges.

"Doing the simple math, [it was] completely upside-down. So [correcting] that, looking at the competition to see how they were pricing procedures, made this a much more profitable organization," Dazley said. "I would encourage all of you to get into the detail of the data to really understand how your charges, with this line item detail, stack up to the market."

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