Time for Hospitals to Pursue a ‘Nip and Tuck’ Chargemaster Pricing Strategy?

The August 2017 edition of hfm includes an excellent article by Jamie Cleverley, “Closing the Price Gap for Commodity Services,” which offered some thought-provoking ideas regarding price transparency in healthcare provider organizations. It’s a topic I have touched on previously in this column, and Cleverley’s article got me thinking about it again. The idea of lowering charges to compete with freestanding providers in diagnostic testing and ambulatory procedures is one worth examining. These “commodity” services are ones that, from the economist’s perspective, are more price-elastic, which means they are more responsive to competitive pricing because people are more likely to price shop for them.This idea prompted me to think that we need to take perhaps an even bigger picture view of charges.

Admittedly, some services, such as emergency services, are not price-elastic in this way—clearly, no one price shops for cardiac care while having a heart attack. But many of the services included in a hospital chargemaster may have some price sensitivity. For patients who have insurance—i.e., the majority of most hospitals’ patients—the “price” for their services in reflected in their copayment or deductible. But the full charges are what continue to draw headlines, without regard for patients’ out-of-pocket responsibility after insurance or the negotiated fees with the insurers. And the media focus becomes especially acute when hospitals attempt to collect charges on self-pay patient accounts. Price transparency initiatives do not focus on net revenues. They focus on charges, and as I have said before, the spotlight on charges is headed toward providers.

In the past, I have suggested that healthcare finance leaders should try to educate consumers and the public on the fact that charges necessarily entail more than a simple markup on the invoice price of an item. Even the most skeptical critic of hospital pricing will accept this point as being legitimate. As more and more people pay larger portions of the fees for care out of pocket, hospital charges are under increasing scrutiny. Do we need to sustain those charges, especially when payments may have little relationship to charges? It’s a hard question to answer, but one we ought to ponder.

How We Got Here

Most of us remember how we got to this point: Looking at the payer mix for chargemaster items, hospital administrators would simply increase the charges on items that had lower utilization in financial classes with fixed prospective payments. Many readers of this column may recall increasing charges in ambulatory surgery and emergency department (ED) but not so much in respiratory care. I know I do.

Then there were the times when hospital leaders looked for opportunities to push accounts into charge-based outlier payments. Been there, done that. Targeted chargemaster increases were being made there, too. In retrospect, I must acknowledge that those were effective pricing strategies at the time. But times have changed, and today, less of our business is driven by charges than it was in any time since I started in this business in 1982. As Cleverley suggests, we should revisit this issue.

The Rationale for Taking First Steps

This is not intended as purely altruistic appeal to “roll back charges to promote social welfare.” Hospitals have very real and very compelling business concerns, and as has been so aptly expressed many times regarding hospitals, if there is no margin, there is no mission. I also recognize that going to a hospital’s board and proposing reducing charges in the absence of evidence that the organization will not be hurt can be career limiting.

But if there is little or no impact on net revenues, why should we not review the cosmetics of our pricing—perform a little “liposuction” on the chargemaster. Maybe a “nip” or “tuck” job is just what hospitals need to make their pricing more defensible.

I do an exercise with my healthcare finance students in which we examine the impact of a chargemaster increase in a case where the hospital’s payment is determined primarily using prospective payment and fee schedules. You know the drill: Nearly the entirety of the increase simply goes to contractual adjustment. That kind of change can make a hospital’s gross revenues look great, but it does not help the bottom line. My students often ask, “Why bother increasing charges if we just write it all off?” We then talk about “lesser of charges or negotiated fee” clauses in contracts, and they begin to understand hospitals must make sure they charge more than the prospective payment to get the full prospective payment.

Of course, in the real world, we have hedged that bet and face little risk of actually charging less than negotiated fee. But perhaps we’ve gone too far. What is our real net revenue yield for the chargemaster item that is more than a thousand times cost and actually gets paid in less than 1 percent of cases? Is it worth the problem with perception we encounter when we try to explain the charge to our community? It’s a point worth considering.

How to Assess the Impact of Pricing Change

Cleverley provides a great framework for evaluating potential impacts of a chargemaster rollback. It’s a great project for hospital payment teams, because the recipe is written. The risk to outlier payments is one that must be taken seriously, however, and poses the greatest concern within such an evaluation. There also is a risk of leaving already-thin prospective payment amounts on the table. The challenge is in finding just the right balance.  

To do so, I suggest that the payment teams be asked to address questions in a three-part evaluation of the hospital’s net revenue risk:

Part One—How many cases per year are being paid based on charges, with no prospective fee or no Patient Friendly Billing discounts? How much net revenue is coming from those cases? On those charge-based payments, how much more is the hospital making than it would on a negotiated fee?

Part Two—How many cases are paid using a charge-based outlier threshold and how much is that additional outlier payment—beyond the fixed prospective payment?

Part Three—How many cases were paid less than negotiated rates due to the “lesser of” provisions in force within the contract with the insurer?

The aim should be to determine the total amount of that net revenue risk. If the same chargemaster item (as opposed to revenue code) is coming up again and again, the hospital can make a case for leaving the charge alone and defending the pricing for that item, based on the rationale that it should be at least somewhat defensible if changing the price would make a material impact on the hospital’s net revenues. Hospital leaders also might want to also consider how much time and effort would be required to defend or negotiate down private-pay accounts off those charges. It might be more cost effective to reduce the fee and then stand behind it.

A Moment of Truth

Margin makes mission. So hospitals should certainly keep the margins. But they also should take a sober and critical look at their chargemasters and ask themselves if there are any areas that might attract unfavorable attention. They might find a little chargemaster liposuction is just what they need get that fit and trim look back in their pricing.