Tuesday, 12 January 2016 18:04

Price Transparency in a Value-Based Payment World

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Editor's Note: For continued reading, please download Greg Adam's new white paper, “Hospital Price and Quality Transparency – Evolution or Revolution?” or view our on-demand webcast,"The Evolution of Price Transparency in a Value-Based Payment World".

As the healthcare industry adapts to the new reality of value-based payments, the issue of how best to implement price transparency continues. Given the complexity of how prices historically have been developed by hospitals, it is no surprise that developing rational prices using a methodological approach based on cost and market data can be no easy task. In fact, it could be argued that in order to implement price transparency, hospitals need to start with revamping the way they develop their prices. To focus on the publishing of current prices without having developed a rational methodology as to how prices were established in the first place would be like building a house starting with the roof instead of the foundation. Given the irrationality of some past price development strategies, publishing current prices could be more of a problem than a solution. In many instances this could (and has) led to headlines in the media blasting hospitals for $20 aspirin pills or simple hospital visits costing several thousands.

Now, in a perfect world, hospitals would be able to defer the actual publishing of prices until they completed the development of a rational pricing approach. However, we all know we do not live in a perfect world – and with the increased pressure and initiatives from federal and state governments and the payor community, hospitals do not have the luxury of waiting. One approach to this dilemma is to assess current services and categorize services into groups based upon the competition in the local marketplace. For services that are more of a commodity, such as lab, imaging, and ambulatory surgery, one viable pricing strategy might be to develop prices based off of Medicare or commercial fee schedules or freestanding competitors’ prices. Other high-profile services such as room and board can easily be compared to competitors’ costs and typically reduced, since these services tend to have low contribution factors and therefore decreases have little impact on net revenues. A word of caution here is this: if the hospital has stop-loss provisions in their managed care contracts, it needs to be careful to not negatively impact revenues through these reductions. These measures should be viewed merely as stopgap measures to allow hospitals time to develop a true rational pricing approach based on cost and competitors’ rates while preserving sufficient net revenues based upon net income objectives.

Once the development of rational prices has been completed, hospitals cannot stop there. They need to continue down this path and begin incorporating quality measures into their pricing strategies. While the publishing of quality scores has lagged behind the publishing of price data, it is moving quickly to the forefront of a value-based payment system. As we can all appreciate, this is no different than the other goods and services for which we currently pay. In fact, given the personal nature of healthcare, I would argue that quality is more important than price. Along these lines, hospitals should be assessing their current performance on the quality indicators being published, evaluating their accuracy, and, when necessary, taking corrective action to address any quality issues. On the other hand, where quality is clearly better than that of competitors, hospitals should use this to their advantage in their pricing strategies. Since we already know that Medicare is paying for value and penalizing for poor quality, and the payor community is implementing its own value-based payment methodologies, hospitals need to be proactive in responding to these initiatives.

To summarize, hospitals must address the immediate pressure on how best to implement price transparency in the short term while at the same time developing a long-term rational pricing strategy based upon cost and taking into consideration competitor prices, market dynamics, financial goals, and quality metrics in order to be successful in a value-based payment world.

About the Author

Greg Adams is the chief strategy officer for Panacea Healthcare Solutions and has over 35 years of experience in the field of healthcare, including 20 years’ experience as a hospital CFO. His experience includes financial operations, managed care contracting, physician practice management, patient accounting, patient access, health information management, materials management, and real estate development. Greg is the past chairman of the national HFMA, having served as the chair of its Board of Directors in 2011-12. In that role he oversaw the services the organization provides to its 40,000 members. Greg speaks extensively on healthcare reform and the transition to a value-based payment system. His speaking engagements include national, regional, and state programs. He has previously served as a member of the National Board of Directors for the Healthcare Financial Management Association from 2002-2005 and as president of the New Jersey chapter in 1997-98. He has also served as a member of the Board of Trustees and chairman of the Finance Committee at St. Ann’s Home for the Aged in Jersey City, N.J.

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Greg Adams is the Chief Strategy Officer for Panacea Healthcare Solutions and has over 35 years of experience in the field of healthcare including 20 years experience as a hospital CFO. His experience includes financial operations, managed care contracting, physician practice management, patient accounting, patient access, health information management, materials management and real estate development.  Greg is the Past Chair of the National HFMA, having served as the Chair of its Board of Directors in 2011-12. In that role he oversaw the services the organization provides to its 40,000 members. Greg speaks extensively on healthcare reform and the transition to a value based payment system. His speaking engagements include national, regional, and state programs. He has previously served as a member of the National Board of Directors for the Healthcare Financial Management Association from 2002-2005 and as President of the New Jersey chapter in 1997-98. He has also served as a member of the Board of Trustees and Chairman of the Finance Committee at St. Ann’s Home for the Aged, Jersey City, New Jersey.