ESTABLISHING DEFENSIBLE PRICING IN TRANSPARENT TIMES

Transcription

1 ESTABLISHING DEFENSIBLE PRICING IN TRANSPARENT TIMES Kentucky HFMA Fall Institute October 24, 2014 Presented by: Jamie Cleverley, MHA Cleverley + Associates jcleverley@cleverleyassociates.com

2 Today s Objectives 1) WHAT IS DRIVING THE NEED FOR TRANSPARENCY & DEFENSIBILITY? 2) WHAT INFLUENCES HOSPITAL PRICING? 3) HOW DO WE DEFEND PRICES? 4) HOW DO WE CREATE AN APPROPRIATE PRICE STRATEGY? 2

3 WHAT IS DRIVING THE NEED FOR TRANSPARENCY/DEFENSIBILITY?

4 1 GROWTH IN HOSPITAL COSTS/CHARGES National Healthcare Expenditures Top Five Health Expenditure Categories (Millions) What is driving the need for transparency? Source: CMS 4

5 1 GROWTH IN HOSPITAL COSTS/CHARGES Annualized Change in National Health Expenditures by Top 10 Areas Home Health 18.1% Drug 11.6% Net Cost of Hlth Ins 8.9% Net Cost of Hlth Ins 13.1% Home Health 9.9% Home Health 8.2% Drug 12.8% Public Health 8.0% Drug 7.8% Physician/Clinical 12.8% Other 7.5% Hospital 7.0% Public Health 12.0% Net Cost of Hlth Ins 7.3% Public Health 6.3% Nursing/Contin Care 11.4% Dental 7.0% Other 6.0% Other 11.1% Nursing/Contin Care 6.6% Physician/Clinical 6.0% Hospital 9.6% Physician/Clinical 6.2% Dental 5.4% Struct & Equip 9.4% Struct & Equip 5.6% Nursing/Contin Care 5.3% What is driving the need for transparency? Dental 9.0% Hospital 5.2% Struct & Equip 4.9% Total All 11.0% Total All 6.6% Total All 6.6% Source: CMS 5

6 What is driving the need for transparency? 6 1 GROWTH IN HOSPITAL COSTS/CHARGES Inflationary Changes by Metric & Year

7 1 GROWTH IN HOSPITAL COSTS/CHARGES Rate Increase Median Limit Value 5.0% 6.0% 5.0% 5.0% What is driving the need for transparency? 7

8 What is driving the need for transparency? 1 GROWTH IN HOSPITAL COSTS/CHARGES 8 6% % 18%

9 2 INCREASED GOVERNMENT/LEGAL/MEDIA ATTENTION FY 2015 Final Rule: In the FY 2015 IPPS/LTCH PPS proposed rule (79 FR 28169), we reminded hospitals of their obligation to comply with the provisions of section 2718(e) of the Public Health Service Act. We appreciate the widespread public support we received for including the reminder in the proposed rule. We reiterate that our guidelines for implementing section 2718(e) of the Public Health Service Act are that hospitals either make public a list of their standard charges (whether that be the chargemaster itself or in another form of their choice), or their policies for allowing the public to view a list of those charges in response to an inquiry. MedPAC suggested that hospitals be required to CMS-1607-F 1205 post the list on the Internet, and while we agree that this would be one approach that would satisfy the guidelines, we believe hospitals are in the best position to determine the exact manner and method by which to make the list public in accordance with the guidelines. What is driving the need for transparency? chargemasterprices codes revenue cycle management html 9

10 3 GROWTH IN HSA/HDHP AND CONSUMER DIRECTED HEALTHCARE Growth in HSA/HDHP Plans by Year (thousands) What is driving the need for transparency? Source: Center for Policy & Research, America s Health Insurance Plans 10

11 What is driving the need for transparency? 11 3 GROWTH IN HSA/HDHP AND CONSUMER DIRECTED HEALTHCARE

12 WHAT INFLUENCES HOSPITAL PRICE?

13 Three spheres of influence on price o Quality o Cost o Market Share o Capital Intensity o Payer Mix o Sustainable growth determines reasonableness of target PRICE o Buyers/Sellers o Barriers to Entry o Price Elasticity What influences hospital pricing? 13

14 Testing price variables Who is likely to have the highest charges among hospitals that are: Urban vs Rural For Profit vs Non Profit Teaching vs Non Teaching Large vs Small High Market Share vs Low Market Share High Medicaid/SSI vs Low Medicaid/SSI High Cost vs Low Cost High Margin vs Low Margin To what extent will these characteristics be an influencing factor? $ What influences hospital pricing? 14

15 What influences hospital pricing? 15 Urban/Rural Status by Hospital Charge Index Quartiles

16 What influences hospital pricing? Organization Type by Hospital Charge Index Quartiles 16

17 What influences hospital pricing? Teaching Status by Hospital Charge Index Quartiles 17

18 Median Net Patient Revenue (millions) by Hospital Charge Index Quartiles What influences hospital pricing? 18

19 Median Market Share Percentage by Hospital Charge Index Quartiles What influences hospital pricing? 19

20 Median Inpatient Disproportionate Share Percentage by Hospital Charge Index Quartiles What influences hospital pricing? 20

21 Median Hospital Cost Index by Hospital Charge Index Quartiles What influences hospital pricing? 21

22 What influences hospital pricing? Median Operating Margin by Hospital Charge Index Quartiles 22

23 What influences hospital pricing? Median Payer Environment by Hospital Charge Index Quartiles 23 Payer Environment: Markup Ratio/Deductions %

24 Payment is the real key in determining hospital pricing Average Cost per Patient = $100 Payer Number of Patients Net Payment per Patient Total Payment Total Cost Medicare 50 $92.50 $4,625 $5,000 Medicaid 10 $75.00 $750 $1,000 Uninsured 5 $5.00 $25 $500 Managed Care 30 $ $3,750 $3,000 Other 5?????? $500 Totals 100 $9,150 $10,000 What influences hospital pricing? less Total Cost $10,000 less Required Profit $500 Balance Remaining ($1,350) Required Payment from Five Remaining Patients = $270 ($1,350/5) 24

25 Payment is the real key in determining hospital pricing Pricing Model Use this model for price setting at facility level: Price = avg cost + (NI + fixed pay loss) charge volume (1 charge discount) Price must increase when: Average cost increases Net income requirements increase Losses from fixed pay business increases What influences hospital pricing? The percentage of charge paying patients decreases The discount from charges increases 25

26 Payment is the real key in determining hospital pricing Pricing Model Payer Impact on Pricing Avg cost = $100 NI = $4 (4%) FP loss = $0 Charge payers = 20% Charge discount = 30% Required price = $ What influences hospital pricing? 26

27 Payment is the real key in determining hospital pricing Pricing Model Pricing Sensitivity Analysis MODEL # 1 # 2 # 3 Profit margin 4% 4% 4% FP loss % charge 50% 20% 100% Average discount % 15% 60% 5% Mark up required What influences hospital pricing? 27

28 HOW DO WE DEFEND HOSPITAL PRICES?

29 Three approaches to hospital price defense How do we defend prices? ROI Model Peer Position Cost Markup 29

30 1 Return on Investment Model Relating pricing to ROI: the public utility approach Public utilities have used a Return on Investment (ROI) model to justify price increases to rate regulatory boards. The approach isolates the price variable from the ROI formula (below) and tests the remaining elements. If it can be proved that ROI, Cost, and Investment are not excessive, then price must also not be excessive. In the following pages, we present these tests. How do we defend prices? ROI Formula ROI = (volume x price) - (volume x cost) investment Tests 1. Is ROI excessive? 2. Is cost excessive? 3. Is investment excessive? If no to all three, price is not excessive. 30

31 1 Return on Investment Model Return on Equity KY Median 4.9% US Median 9.0% ROE: Excess of Revenue over Expenses/Net Assets How do we defend prices? Tests Is ROI excessive? Is investment excessive? Is cost excessive? 31

32 1 Return on Investment Model Average Age of Plant Fixed Asset Turnover KY Median US Median How do we defend prices? Average Age of Plant: Accumulated Depreciation/Depreciation Expense Fixed Asset Turnover: Total Revenue/Net Fixed Assets Tests Is ROI excessive? Is investment excessive? Is cost excessive? 32

33 1 Return on Investment Model Inpatient Costs Inpatient Cost Index Formula: Your Medicare Cost per Discharge (CMI/WI adj) US Median Medicare Cost per Discharge (CMI/WI adj) Facility level cost measure: Hospital Cost Index Outpatient Costs Outpatient Cost Index Formula: Your Medicare Cost per Visit (RW/WI adj) US Median Medicare Cost per Visit (RW/WI adj) How do we defend prices? 33

34 1 Return on Investment Model Hospital Cost Index KY Median US Median How do we defend prices? Tests Is ROI excessive? Is investment excessive? Is cost excessive? 34

35 2 Level of Detail Peer Position Model Comparing your pricing to pricing at peer facilities Level of Comparison FACILITY DEPARTMENT INPATIENT CASE OUTPATIENT CASE PROCEDURE Metric Hospital Charge Index Medicare Charge per Discharge (CMI/WI adj) Medicare Charge per Visit (RW/WI adj) BETOS Analysis Charge by MS DRG Charge by APC Price by CPT /HCPCS Code CPT is a registered trademark of the American Medical Association. All rights reserved. Bundling Bundling How do we defend prices? 35

36 2 Peer Position Model: Facility level comparison Inpatient Charges Inpatient Charge Index Formula: Your Medicare Charge per Discharge (CMI/WI adj) US Median Medicare Charge per Discharge (CMI/WI adj) Facility level charge measure: Hospital Charge Index Outpatient Charges Outpatient Charge Index Formula: Your Medicare Charge per Visit (RW/WI adj) US Median Medicare Charge per Visit (RW/WI adj) How do we defend prices? Inpatient Charge Index Outpatient Charge Index Hospital Charge Index Sample Hospital Peer Average

37 2 Peer Position Model: Facility level comparison Hospital Charge Index KY Median US Median How do we defend prices? 37

38 2 Peer Position Model: Facility level comparison Medicare Charge per Discharge (CMI and WI adj) KY Median $20,524 US Median $21,698 How do we defend prices? 38

39 2 Peer Position Model: Facility level comparison Medicare Charge per Visit (RW and WI adj) KY Median $387 US Median $367 How do we defend prices? 39

40 2 Peer Position Model: Facility level comparison Inpatient Disproportionate Share % KY Median 12.0 US Median 10.2 How do we defend prices? 40

41 2 CPT Peer Position Model: Department level comparison Description Culture specimen, bacteria Bacteria identification Culture Aerobic Identify CPT is a registered trademark of the American Medical Association. All rights reserved. Evaluation & Management selected detail Department/Family Analysis Lab Tests Microbiology Sample Hospital Peer Average % of Peer Average Office Visits % Emergency Room % Evaluation & Management Total % How do we defend prices? Procedures selected detail Major Procedures Cardiovascular % Eye Procedures Cataract/Lens % Procedures Total % Imaging selected detail Standard Imaging Nuclear Medicine % Advanced Imaging CT/CTA Scan Brain/Head/Neck % Imaging Total % Tests selected detail Lab tests Pathology % Lab tests Routine venipuncture 1, % Tests Total % 41

42 2 DRG Peer Position Model: IP/OP/Procedure level comparison Description Sample Hospital Volume Sample Hospital Average Charge Peer Average Charge Major joint replacement or reattachment of lower 470 extremity w/o MCC ,246 45, Kidney transplant , ,994 Sample 871 Septicemia w/o MV 96+ hours w MCC ,714 Sample 31,379 Hospital Hospital Average 460 Spinal fusion except cervical w/o MCC ,559 92,961 APC Description Volume Charge 468 Revision of hip or knee replacement w/o CC/MCC 72 73,391 55,107 Peer Average Charge 0301 Level II Radiation Therapy 8,680 1,481 1, IMRT Treatment Delivery 2,635 4,642 2,820 Level III Therapeutic Radiation Treatment 0310 Sample ,955 11,648 Preparation Sample Hospital Peer 0615 Level 4 Emergency Visits Hospital Average 2,698 Average 2,988 2,102 CPT Description Volume Charge Charge 0616 Level 5 Emergency Visits 1,265 5,210 4, Intensity modulated treatment deliver 2,652 3,354 2, Radiation treatment delivery 4, Radiation treatment aid(s) 2,954 1,650 1, Emergency dept visit 2,945 1,331 1, Radiation treatment delivery 3, How do we defend prices? CPT is a registered trademark of the American Medical Association. All rights reserved. 42

43 3 Cost/Markup Model Relating pricing to cost: Sources of Cost Data Hospital cost accounting system Direct Cost How do we defend prices? RCCs Fully allocated cost 43

44 3 Cost/Markup Model Relating pricing to cost: Two Usual Outcomes 1. Reduced net patient revenue, e.g., $5.1 million vs. $9.6 million in ATB How do we defend prices? 2. Major pricing changes, e.g., 99% to 3,580% 44

45 CREATING AN APPROPRIATE PRICING STRATEGY

46 Understand your goal does the organization want to be transparent & defensible? Creating appropriate prices September, 2014 hfm Cover Story: How hospitals approach price transparency 46

47 Understand how prices are being communicated and received Creating appropriate prices September, 2014 hfm Cover Story: How hospitals approach price transparency 47

48 Understand your market position WHO?? Secondary/Tertiary Hospital Market Core Hospital Market Non Hospital Market SERVICES?? Creating appropriate prices PRICE PRESSURE?? 48

49 Develop clear internal and external pricing policies 1 2 External Policy Internal Policy Creating appropriate prices o Public facing document for patients to view o Meets or exceeds national and state requirements (as applicable) o Goals for future release of pricing and payment information to the community o Guiding principles on how strategic pricing and pricing transparency will be developed and evaluated 49

50 Understand and manage payment Creating appropriate prices September, 2014 hfm Cover Story: How hospitals approach price transparency 50

51 Understand and manage payment Payment terms Inpatient (payer Z & hospital) * 80 comparison plans Payer Z Average Value* Per Diem Rates All services % of Billed Charges 81% Sample Hospital DRG Base Rate $6,125 $4,806 Medical $1,659 Surgical $1,921 TCU/Telemtry $2,036 ICU/CCU $3,314 PTCA $4,091 Psych $711 $485 Alcohol/ Chemical Dependency $637 $485 Rehab $1,293 Creating appropriate prices 51

52 Understand and manage payment Payment terms Outpatient (payer Z & hospital) * 80 comparison plans Payer Z Average Value* All services % of Billed Charges 72% Radiology (% BC) 75% Sample Hospital 38.6% (except case rates for SPECT, MRI/MRA, & CT Scan) Laboratory (% BC) 76% Fee Schedule Creating appropriate prices Emergency Department (% BC) 73% 38.6% Level 1 $93 Level 2 $141 Level 3 $339 Level 4 $600 Level 5 $1,212 52

53 Execute the strategy Critical steps in a hospital s rate setting strategy Set net revenue expectations Establish initial rate change limits and parameters Integrate internal strategic pricing objectives Use the right data to estimate rate increase impact Model your contract terms completely Assess fee schedule pricing Correct issues of pricing relativity Incorporate cost data Examine competitive pricing comparisons Review pharmacy / medical supply issues Evaluate impact by case categories Evaluate impact by payer Adjust parameters as necessary and implement final CDM changes Create patient pricing communication documents Creating appropriate prices 53

54 Evaluating the rate strategy Does the strategy: Meet net income expectations? Maintain or enhance competitive position? Maintain or correct related pricing relationships? Creating appropriate prices Establish equitable distribution to case categories? Establish equitable distribution to payers? Meet transparency/defensibility objectives? 54

55 Summary The need for transparency and defensibility regarding hospital pricing is likely to increase Hospital pricing is impacted by various demographic and operating factors among them, payment is critical in rate establishment Price comparison can change significantly based on the level of comparison Defensibility and required net revenue objectives can be attained through creating a strategic pricing plan and executing/evaluating the plan through effective modeling and monitoring 55

56 Thank you. Questions? Jamie Cleverley President Cleverley + Associates jcleverley@cleverleyassociates.com Phone: (614)