Strategic Pricing for Hospitals An Augusta Healthcare Whitepaper

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1 2012 Strategic Pricing for Hospitals An Augusta Healthcare Whitepaper Augusta Healthcare partnered with T.J. Samson, a typical community hospital, and through a strategic pricing initiative, realized over $4M in annual net revenue. Augusta Healthcare Inc. November 5, 2012

2 Executive Summary Healthcare has always been a dynamic industry and in the last decade hospitals have made significant progress with collecting electronic information on the care provided. As hospitals are trying to determine how best to leverage this information, patients are also becoming aware of the information available to them. When speaking about value in healthcare, the two most important pieces of information for a patient are quality and price. Ask yourself what it means to have a competitive healthcare market, where the prices hospitals charged would reflect the economic value to the patient. And consider how value is determined based on the outcomes for every dollar spent. In markets outside healthcare, value determines price and competitive pricing results in correct pricing. The concept of value is relatively new to healthcare, and over the years hospital prices have come to reflect this. The bottom line is always important and the Augusta strategy helped us realize over $4 million in net revenue in 12 months. What makes this initiative different is that the improvement leveraged our surgical service lines based on our cost structure and gave us ways to understand the value we provide to the patient. Tony Sudduth, CFO T.J. Samson In healthcare finance, the charge master is the central focus when hospitals consider prices. The structure of the charge master and the prices it contains has been influenced by CMS and Medicaid regulations, and various private carrier contracts. Due to this significant and often conflicting influence on patient prices, the contents of the charge master often fail to represent true market based prices. Augusta helps its clients get control over their pricing strategy to address this problem, and ensures they are able to make better pricing decisions. Each client requires a pricing strategy unique to their particular market and facility s strengths. Augusta guides its clients through the complicated task of designing a strategy that ensures they will be able to sustain what they implement. Augusta also believes that you must have a strategy to understand cost variations over time and that this information is required to make important pricing decisions. In December 2010, T.J. Samson partnered with Augusta Healthcare for a Strategic Pricing Initiative. As a result, T.J. Samson realized over $4M in revenue in less than one year. T.J. Samson achieved these results by focusing on pricing for care it provides in the Perioperative areas. Augusta s approach was to provide visibility to T.J. Samson s costs and ensure prices were appropriate and validated for their market. Recovery Results Resulting From 17% net revenue improvement in Endoscopy 6.4% net revenue improvement in Surgery Remained Low Price Leader in Comparable Market Segments Thorough market analysis of prices for entire care event Heavily involving physician and clinical staff Cost allocation modeling and estimating marginal cost coverage

3 The Healthcare Market and Value As hospital executives consider the finances of the healthcare market today the overwhelming diagnosis is anxiety; Augusta believes there are real opportunities. Pressure has mounted from reductions in reimbursement 1 which directly affect the bottom line, and the regulatory environment in which hospitals operate has become more onerous. The pressure on hospitals bottom line is likely to increase, as described by a Thomson Reuters report: Despite the good news on steady operating margins and balanced revenues and expenses, the percentage of hospitals with negative total margins is still growing. In the second quarter of 2010, this number grew to 38 percent for all U.S. hospitals. Between 2009 and 2010, this number grew for every hospital class. 2 Further, one of the key tenets of Healthcare Reform will result in hospitals seeing a $148B reduction in reimbursement over the next 10 years 3. "Patients often have difficulty understanding the charges on their surgical bills and when they decide to call and ask about them we feel they deserve a good explanation about those charges. At the end of the day we want to be confident our prices are fair and reasonable." Richard Schneider, Business Office Director, T.J. Samson Federal and state regulatory billing compliance has always been challenging in healthcare. As a result of voluminous regulations, there have been a number of different interpretations offered by commercial payers and revenue cycle consultants that have guided hospital pricing strategy over the years. Some of these interpretations have ultimately been proven to be wrong, but over time this has greatly diminished the ability of hospitals to fully understand their costs and kept them from designing sound pricing strategies. In the midst of these realities hospitals are attempting to address the notion of value and how best to define, measure it and improve it. So how has healthcare attempted to further understand and define value? In the New England Journal of Medicine, one of the premier healthcare economists from Harvard, Michael Porter, described value in this way: Achieving high value for patients must become the overarching goal of health care delivery, with value defined as the health outcomes achieved per dollar spent. This goal is what matters for patients and unites the interests of all actors in the system. If value improves, patients, payers, providers, and suppliers can all benefit while the economic sustainability of the health care system increases. 4 1 Key Legislative Provisions: Law : Patient Public Protection and Affordable Care Act, Health Care and Education Reconciliation Act of HMFA. 2 Hospital Operating Trends Quarterly. December Key Legislative Provisions: Law : Patient Public Protection and Affordable Care Act, Health Care and Education Reconciliation Act of HMFA. 4 Porter, Michael E., Ph.D. What is the Value of Health Care? New England Journal of Medicine. December 23, P a g e 3

4 Porter goes on to say that value is defined as outcomes relative to costs, and these costs must be fully understood for the full cycle of care for each patient s condition. The only way to accurately measure value, then, is to track patient outcomes and costs longitudinally. The current organizational structure and information systems of health care delivery make it challenging to measure (and deliver) value. Thus, most providers fail to do so. 5 From the healthcare industry s perspective, understanding these costs is therefore imperative to measure the value we provide to patients. Just as hospitals must understand how costs influence value, patients will measure value based on quality and the price they pay. This is why price being tied to costs becomes so important moving forward when we speak about value. As hospitals continue to work on reducing costs and improving reimbursement they must also adjust their vision to understand their discreet costs and at the same time look toward the value they provide to their patients. Augusta Delivers Contingency Fee Structure Strategic Pricing Initiatives are measured by the net revenue improvement your hospital achieves. We enter our relationship with the objective of being a trusted advisor. Augusta engages in a joint exercise to achieve agreed measurable results and our fee is based on our success and on a contingency basis. Snapshot of T.J. Samson Community Hospital As a regional healthcare provider, T.J. Samson Community Hospital s stated vision is to be a good steward of the available resources and utilize them to anticipate and meet the health needs of the region. Located in Glasgow, Kentucky T.J. Samson is a 196 bed acute care facility serving approximately 14,000 people in the local community. Annual patient discharges are approximately 87,000 which include the surrounding rural communities as well as Bowling Green. Their annual surgical volume is 1400 inpatient, and 4700 outpatients with services that include ENT, General, Gynecology, Laparoscopic, Ortho, Robotic, Urology and Vascular. 5 Porter, Michael E., Ph.D. What is the Value of Health Care? New England Journal of Medicine. December 23, P a g e

5 About Augusta Healthcare Augusta Healthcare is passionate about helping clients succeed and is founded on the belief that a combination of intelligent analysis, demonstrated expertise, and expert facilitation can provide a highly valuable strategic service. We bring a unique and insightful perspective to the issues our clients encounter each day. Augusta understands that there is more than one solution to every problem and we will strive to position ourselves as a trusted advisor to each client. Most importantly, Augusta Healthcare s recommendations are actionable and we pride ourselves in executing them alongside you. Hospital pricing is complex and should never be oversimplified. Hospitals often lack insight to detailed cost variations. Augusta s goal is to provide hospitals a clear line of sight to their costs and the prices they charge. We believe a sound pricing methodology is more than simply comparing the average charges of competitors in the market; we help our clients set appropriate prices based on cost and patient value. As any solid business would, we set the right prices for the products and services our clients offer. Augusta will work closely with you to improve pricing decisions setting strategic direction about pricing and how to continue to monitor and understand costs. We do this by generating insights from research, and skillfully facilitating leadership meetings to arrive at solutions that are practical and unique to the needs of each client. Strategic solutions are designed collaboratively with our clients, so that good ideas are adopted, and successful plans are implemented. This approach results in outcomes that are valuable, relevant, and lasting. Augusta Healthcare Inc. Philadelphia, PA Augusta Healthcare Inc and all other Augusta Healthcare products or services names are registered trademarks or trademarks of Augusta Healthcare Inc. in the USA and other countries. indicates USA registration. Other brand and product names are trademarks of their respective companies. Copyright 2012, Augusta Healthcare Inc. All rights reserved.