Why Can’t Hospitals Just Lower Charges?

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Finding the perfect balance between creating a patient-centric experience without sacrificing net revenue.

It’s no secret that healthcare premiums continue to rise and significantly outpace both employee earnings and the rate of inflation.

In fact, since 2011, single coverage deductibles are up a staggering 63% and premiums are up 19%. The increase in premiums alone almost doubles the increase in employee earnings (a modest 11%) and more than triples the rate of inflation (6%).

According to a 2017 Kaiser Family Foundation Survey, for a family covered by an employer plan, this equates to $18,764 in annual premiums.

With the cost of healthcare at an all-time high, the average patient might point the finger at the healthcare provider and pose this question:

“Why can’t you just lower your charges?”

However, we know it’s not that simple.

At a time when healthcare costs are more important to the patient than ever before, now is the time for healthcare providers to develop strategic pricing strategies not only to defend their charges, but to locate areas for cost adjustments.



Below we’ll examine several key factors why healthcare providers can’t just lower charges and offer some insight into how they can analyze charges to determine if there are any areas where decreases are feasible without impacting net revenue.

Step 1: Avoid across-the-board price increases

Often times, providers choose to take the easy route by assigning a certain percentage increase across-the-board, but this strategy isn’t very effective.

The reason is that the whole point behind developing a pricing strategy is to pinpoint areas where pricing adjustments can be made and identifying specific areas that can, and should, be left alone. Applying an across-the-board increase would affect services that don’t need adjusting, potentially pushing prices beyond the market average.

Much like using Microsoft Excel to model and manage future payer contracts, these challenges have evolved to become too complex to use the same strategies for solving all of your pricing complications.

Instead, many providers are finding that they prefer to use Chargemaster modeling software to view all of their services and case rates simultaneously to evaluate the contracts’ performance at the end of every fiscal year.

Step 2: How to Strike the Right Balance to Avoid Hurting Your Bottom Line

But there’s another reason why hospitals can’t just lower their charges…

With so many variables affecting how charges are processed and evaluated, the addition of services and related charge items combined with newly established reimbursement methods make this process challenging to keep up with until providers can establish a procedure for analyzing these charges. In fact, on average, a hospital will have 11,000 Chargemaster lines, 50-70 different departments, 20-30 payer contracts and thousands of patient visits per week.

Ask yourself the question “which areas are priced too high relative to the market and is there a way to lower those charges without hurting your bottom line?”

This should enable hospital executives to determine if the high charges are justified or if the charges are inflated relative to the actual reimbursement for services relative to the market.

One strategy providers use to maintain a balanced pricing strategy is to target items that have fixed-fee contractual reimbursement rates. The trick here is to identify the ideal price point where you can lower charges at the charge code level without sacrificing net revenue and test lesser of charges hits at the case level for a various number of pricing scenarios.

Many contracts do change annually, however, so you may be leaving revenue on the table if the contract allows for changes and you don’t take advantage of it.

For example, if Aetna has gross charges of $18m a year and approximately 25% of reimbursement ($4,500,000) is a percent of charge or outlier, then not taking advantage of a 5% increase ($4,725,000) would result in a $225,000 missed revenue opportunity.

Step 3: Pay Attention to the Details

In order to understand just how much a contract can change from year to year, here’s a real-life scenario to illustrate how it works.

Let’s use a tonsillectomy (CPT-42820) as an example…

In this scenario, hospitals are paid the lesser-of-charges (or the contractual rate) which covers a certain group of procedures and services. At a high level, if the hospital’s claim level charges are $7,890 and the contractual case rate for Aetna is $1,940, a hospital could lower their charges to $1,940 and still avoid the lesser of charges (LOC) from affecting your bottom line for Aetna, but what impact will this decrease have on your other payers?

To understand this, we really need to look at each payer contract individually. Taking Cigna from the example, with it being percent of charges, ever dollar change in claim level charges has a direct impact on Net Revenue.

Let’s use the tonsillectomy example again with four different payers:

Payer 1 (Aetna) pays a $1,940 per case-rate and has 35 cases annually (Case rate)

Payer 2 (Cigna) pays $3,156 of charges and has 75 cases annually (Percent of charges)

Payer 3 (United Healthcare) pays a $3,810 per case-rate and has 26 cases annually (Case rate)

Here is a breakdown of the charges involved for this procedure:

As you can see, the cost of the procedure is driven by the OR, anesthesia, and recovery. If you were to raise the charges for these items, it would affect many other surgeries and procedures (i.e. newborn delivery), some of which are price shopped and many of which are already high compared to the market.

Due to the high charges, you must balance this loss against losing patients. This is not something that can be quantified so it truly is a balancing act and a strategic decision.

Generally speaking, hospitals don’t benefit from the high charges unless there is a straight discount contract but you’d have to balance lesser of charges to make sure you meet the threshold for LOC to not kick in.

Coming full-circle, knowing how lesser of charges can affect your organization depends on an organization’s ability to predict future outcomes through modeling what-if scenarios. Using outdated software will only make the process more convoluted especially when analyzing large amounts of charge codes.

Step 4: Plan Ahead for Next Year’s Chargemaster Review

When planning for a Chargemaster review, it’s important to implement a timeline ahead of the hospital’s new fiscal year. This allows for time to:

  • Compile and analyze market price position
  • Build models and scenarios
  • Incorporate feedback from department level leadership
  • Tweak those scenarios
  • Allow time to notify payers of the upcoming price changes

This entire process typically requires 90-120 days. For instance, if your hospital’s new fiscal year begins July 1, then your Chargemaster project should kick-off no later than April 1.

By preparing in advance for Chargemaster adjustments, your organization automatically has the advantage in the market because you are able to identify the most pressing pricing issues while focusing on how to maintain net revenue.

About The Author
Brad Josephson is the Director of Marketing at PMMC, a leading provider of healthcare revenue cycle management and contact management services utilized in hospitals and physicians offices. Brad has years of experience working with the healthcare revenue cycle and an extensive knowledge of implementing pricing strategies for hospitals and healthcare organizations.

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