Competing with Freestanding Outpatient Centers—Where to Focus on Pricing

One West Coast hospital determined that reducing prices for its imaging and laboratory tests to the state freestanding facility price averages would reduce their total charges by $510 million, a charge reduction of almost 16 percent.

Hospitals are increasingly competing with freestanding outpatient centers for laboratory, imaging, therapy, and surgical service patients. As these freestanding centers siphon away volumes, pricing transparency continues to be at the forefront of discussions when hospitals are setting prices in these areas.

Payers also publicly proclaim that hospital prices are too high and their services too costly. Certain payers such as Anthem have told their enrollees in 13 states that they will no longer pay for CTs and MRIs that are performed in a hospital outpatient setting as of March 2018.

Competition with freestanding centers is more prevalent in urban areas, but even rural hospitals are concerned with how nearby hospitals are pricing ambulatory services for which patients can make a choice based on price.

The pricing differences are significant in these areas, illustrating the challenge that hospitals face as they try to compete (see the exhibit below).

Our research outlines the main services that are affected by lower prices at freestanding facilities and offers solutions, including analysis of cost differences and focusing on prices at competing hospitals.

Hospital Versus Free-Standing Facility Pricing

We have found that hospitals are struggling to identify what services should be targeted. Failing to identify specific procedures, they have taken a broad-brush stroke to reduce everything in their chargemaster down to the level of freestanding entities. The resulting impact to net revenue of these proposed changes is often too significant to absorb in one year. Therefore, we decided to undertake a review to determine the 50 procedures that hospitals should be most concerned about when trying to compete with freestanding outpatient centers on price.

The resulting findings are certainly not a case where one size fits all, but more likely where one size fits most. If a hospital can compete with freestanding entities on price for these 50 procedures, we believe they will have captured the tests for which patients most frequently price shop.

Excluded Services

Our analysis sought to analyze services performed at hospitals versus freestanding clinics. We eliminated many high total charge outpatient procedures performed at hospitals from inclusion because they are not areas where freestanding groups compete or were not areas that rank high on the total volumes performed by these entities. Some of these areas, such as emergency department (ED) visits, were expected, while others were a little surprising, especially certain CTs. Some of the services that were performed in hospitals but not freestanding entities include the following:

• Cardiac catheterization procedures, such as left heart artery/ventricle angiography (CPT 93458), ranked seventh overall for hospitals in total charges, but are not performed in ambulatory surgery centers.
• Electrocardiogram tracing (CPT 93005) is the 12th ranked procedure in total hospital charges, but only ranks 94th in freestanding imaging centers.
• CT head/brain without dye (CPT 70450) ranks fourth in highest hospital charges, but only ranks 56th in freestanding imaging centers, most likely due to these being performed quite often in the ED with a trauma or fall.
• Assay of Troponin (CPT 84484) is the seventh most common lab test in the outpatient hospital setting and is a test to determine if a myocardial infarction has occurred, but it is much lower on the list of tests performed in freestanding labs (244th) due to the acute urgent nature of the test.
• Myocardial perfusion imaging study (CPT 78452) ranks eighth for hospitals in total outpatient charges, but only 108th in freestanding imaging centers.
• CT abdomen and pelvis without contrast (74176) ranks ninth for hospitals, but only 57th for freestanding imaging centers.

Top 50 Procedures

The following services were included in the top 50 most performed procedures at hospitals and freestanding facilities.

See related sidebar: Methodology Used to Identify Top Procedures Performed at Hospitals and Free-Standing Clinics

Laboratory tests (17 procedures). Seventeen laboratory procedures were selected that ranked in the top 30 for freestanding labs and the top 25 for lab procedures performed in hospitals. Topping the list were comprehensive metabolic panel (CPT 80053) and complete blood count with white blood cell differential (CPT 85025). Not surprisingly, routine venipuncture, urinalysis, and blood glucose tests also appear as top procedures.

Imaging procedures (18 procedures). Imaging is the area where we have experienced the most requests for reducing prices to the level of freestanding centers and is one of the areas of greatest pricing pressure for hospitals (Houk, S., and Cleverley, J., “ Price Transparency: Where Does the Hospital Industry Stand Today,” Strategic Financial Planning, HFMA, Winter 2017). Eighteen procedures were selected including six MRIs, two CTs, one PET (position emission tomography) scan, two chest X-rays, diagnostic mammogram, five echography/ultrasound procedures, and a bone density X-ray.

Surgical procedures (6 procedures). Six surgical procedures were selected including four endoscopy procedures, cataract surgery, and an epidural injection of the spine.

Therapy services (6 procedures). Six procedures were selected including physical therapy (PT) evaluation, therapeutic activities, and therapeutic exercises.

Other procedures (3 procedures). Two sleep study procedures and an electrocardiography holter monitoring procedure ranked high for services performed by entities categorized as freestanding imaging centers.

Case Examples

Recently, a West Coast hospital requested that we assess the impact of reducing prices for all their imaging and laboratory tests to the freestanding California average. Doing so reduced total charges by $510 million, which resulted in an overall charge reduction for the hospital of almost 16 percent. When we tested the impact of just reducing prices on the 17 laboratory tests and 18 imaging procedures that we identified as part of the top 50 hospital procedures, it reduced the total charge impact by half. This amount is still a significant impact to the hospital, but could be absorbed over a three-year period of price reductions more easily than the original $510 million.

We also utilized the 50 procedures list for two Midwestern hospitals that each have one main hospital competitor in their local market. Rather than trying to reduce prices to the level of freestanding entities, the hospitals focused instead on being competitive with their hospital peer on these services. We believe this may be a more reasonable approach in markets where freestanding competitors do not exist.

We realize that making these strategic price reductions may create some distortion in the chargemaster prices for related services, but this needs to be included in any effective retail pricing strategy that allows hospitals to better compete with these freestanding centers.

Payment Issues to Consider

Even when a hospital tries to compete with the freestanding entities on price, the issue of payment is another key factor that needs to be evaluated. Many health plans pay labs, imaging, therapy, and outpatient surgery services based on fee schedules or case rates. In these cases, payers may be paying hospitals higher negotiated rates than they would pay the freestanding centers. Patients who pay deductibles or copayments based on negotiated fixed rates will not see reductions in their out-of-pocket payments. Therefore, hospitals may need to consider renegotiating reduced payment in these areas and offset that reduction with improved payment in other areas to maintain payment neutrality. Because hospitals operate with relatively low margins—4 percent in 2016—they cannot afford to take hits to their net revenues.

Another concern is lesser of language in fixed fee contracts. In such cases, payers will pay hospitals the lesser of charges or negotiated fixed rates. Reducing prices to compete with freestanding entities may put many claims into these lesser of arrangements, so it is important to be able to test the potential payment impact.

High charge claims that exceed outlier payment thresholds may also be impacted by price reductions.

One strategy that many hospitals use to negate this impact is to have separate pricing for inpatient and outpatient services for imaging, laboratory, and therapy services. An argument can be made that tests performed on an inpatient are costlier and more resource intensive than the same test performed for an ambulatory outpatient.

For those plans that pay hospitals based on discounts from billed charges, new payment methods would need to be addressed to keep the hospitals whole.

Long-Term, Coordinated Strategies

The results of our study show that hospitals can make limited and more strategic reductions to prices if they focus on areas where competition for services is strongest. Ultimate outcomes will look different based on the specific situations encountered in various markets.

As we learned in our case examples, approaches can not only position your pricing more in line with freestanding centers but can also be applied where the competition is still mainly other hospitals.

Changes to address price transparency and competition may not happen quickly, but hospitals need to stay ahead of the curve as payers and patient patterns adjust in this cost-conscious industry.

Hospitals will need long-term, coordinated pricing and payment strategies. If hospitals are going to make price concessions, they need to be done in concert with managed care strategies, so hospitals maintain their margins and viability going forward.

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Scott Houk is director, consulting services, Cleverley + Associates, Inc., and is a member of HFMA’s Central Ohio Chapter.