Five Steps For Commodity Pricing Decisions

Hospital executives are facing more pressure to reduce prices and payments as more customers compare their options, especially in certain outpatient services – surgery, imaging, and lab. Commercial margins for outpatient procedures tend to be higher, and changing them can create a lot of financial pressure.

Because of this pressure, many hospitals have abandoned minor outpatient surgery departments completely, and left those services to physician-owned surgery centers. This isn’t always the best option, and there are ways for hospitals to lower prices and payments for services while remaining competitive.

Here are five ways to make an informed decision about that change.

Determine Current Profitability.

Before you move forward, you have to have a firm understanding of where you are now. Can you absorb the fallout from changes? Do you expect a future increase in volume to cover the loss? Hospitals with above-average margins may do well with large reductions in price and payment, and could create serious competition for freestanding providers.

Access Profitability

Next, analyze the specific sources of loss or profit by payer class, paying special attention to profit from government payers. Identify if there is a cushion of existing profit that will help you make changes. If the cushion is too small, making dramatic changes might not be an option.

Understand Overall Cost Positions

You can’t make changes to price or payment without a clear understanding of the hospital’s cost structure. You may want to avoid reductions in areas that are already low, as the hospital will lose profit. You may see less impact when adjusting areas where costs are high.

Access the Relative Payment Terms of Commercial Contracts

Understanding your payment terms in your existing contracts is crucial before making any changes. These terms will change the consequences of any change you make.

Determine the Net Revenue Effect of Proposed Changes

This is where price studies come in handy. They allow you to analyze not only your current prices, but also see the effect of a pricing change. This kind of analysis will also let you see if potential losses could be offset by an anticipated increase in volume.

Many hospitals are considering lowering their prices to compete with freestanding clinics. Serious price and payment changes should be approached carefully. These five steps are a good place to start when decided if these changes are right for your hospital.