Price Change – What are Other Hospitals Doing?

It’s no secret that industry leaders are continually tasked to do more with less.  Economic pressures, regulatory changes, technological advancements, transparency initiatives, and payer negotiations continue challenging leaders as the healthcare industry transforms.

Financial goals frequently drive a hospital’s health and long term viability.  As part of the budget cycle, many hospitals identify revenue goals in terms of either an overall percent change or a gross or net dollar change.  Here at Cleverley + Associates, we are often asked what levels of overall price change are being observed.  Here are some of the things we’ve found.

Overall Rate Change– The Hospital Charge Index® (“HCI”), developed by Cleverley + Associates, incorporates two metrics:Medicare Charge per Discharge and Medicare Charge per Visit.  Both hospital specific metrics are adjusted  for case complexity and wage index differences based upon US median values for both measures.  The resulting inpatient and outpatient indices are then weighted by the percent of gross all-payer revenue to arrive at the overall HCI.  The result is the most objective overall charge comparison available and can be calculated for all hospitals serving Medicare patients. The value for the US median is approximately 100, so a higher index score indicates a higher relative charge position.  For example: if Hospital A has a HCI of 120, then they are priced 20% higher than the US median adjusting for case mix and cost of living differences.

A study of changes to the HCI for 3,200 plus hospitals during the years 2014 to 2016 show median inpatient prices increased 3% and median outpatient prices increased 5%. Further examination shows half of all providers implemented price changes +/- 1.5% from the US median.  The remaining providers shifted prices as much as +/- 6% from the US median.  The median target rate of increase is 4% based on the hospitals for which we help develop pricing strategies.

Patient Type Rate Change– Further examination of annual gross rate change into inpatient and outpatient components yields interesting results:

Outpatient charge growth has exceeded inpatient charge growth in the two year study period which may indicate shifting prices to outpatient areas that often have a higher incidence of percent of charge payment.  However, this trend may be ending as hospitals begin to compete for many outpatient services with free standing providers who often have significantly lower prices.  Many of our clients have established dual inpatient and outpatient procedures to enable them to offer lower prices for highly competitive procedures.

In an earlier study that we conducted from 2011 to 2014 we found no significant differences between inpatient and outpatient rates of change.

Further analysis of outpatient pricing trends reveals a correlation between pricing changes and operating margins.  For the median provider in the lower charge growth quartile, the operating margin deteriorated 2.5%.  The median provider in the higher charge growth quartile experienced no change in operating margin from 2014 to 2016.  Though the lowest and highest quartiles have median operating margin shifts that are more extreme at (25.7%) and 21.5%, respectively, the relationship between pricing and operating margins does appear to exist.  As pricing increases, operating margins appear to increase as well.

Remember – Short-term strategies fuel long-term success.  Each year presents a fresh opportunity to gradually improve your pricing position both from a competitive and defensible standpoint.  What steps will you take this year?

By Janessa Welch

Strategic Consultant