PRICING

Hospital Pricing Terminology and Practices

• Hospitals have two sets of prices: 

List prices: gross charges

are a standard set of prices established by hospitals each year (generally) for all their services. e.g. “rack rate”.All patients are charged the same list price for the same service. 

Net prices: what one actually pays

The price received by the health care provider net of discounts

Very few patients actually pay the list price

Insurance companies and other third party payers generally pay a discounted price that is significantly below the list price.  

Uninsured patients (self-pay/cash) are charged the list price and then depending on the individual hospital’s pricing policy, may be offered a discount.  

A complex mix of differing payment schemes and contracting arrangements as well as market

forces drives hospital-pricing strategies

Objectives of EnterpriseLow cost service to masses

Revenue

Market Share

Growth

Profit

Brand Image

Price As an Indicator of Quality• Price often seems to be perceived as an indicator

of product quality by the following consumers.

– (a) persons trying to achieve status.

– (b) occasional consumer who is not knowledgeable in a product area. e.g purchase of a camera.

– (c) the buyer is impressed with the importance of quality but has difficulty in identifying it.

• Economy pricing- GOVT HOSPITALS

• Mass market pricing- HEALTH CHECK• Premium pricing-

PRICE OF NEW TECHNIQUE SURGERY• Luxury pricing-

KDAH Hospital

Price as an indicator of quality

Price As an Indicator of Profit

A 1 % in price, provided that volume remain stable, will results in a 6% in operating profit

Ref : Mc Kinsey Report on Hospital operating Profit

• Reinforces in the consumer’s mind the image that the product has for quality and benefits.

• It is difficult to build a Brand Equity based on superior performance or other desirable product attributes if the product is priced below competing brands.

Price As an Indicator of Brand Equity

Historically, manufacturer have used three methods for establishing price:

COST-PLUS PRICING

COMPETITIVE PRICING

VALUE-BASED PRICING

Cost – Plus Pricing INVOLVES Pricing every product or service to yield an “adequate” return over all costs fully and fairly allocated

Use the following elements to determine price –variable cost, allocated fixed costs per unit, unit sales costs, unit sales volume forecasts to apply fixed costs.

Measures price performance by profit per unit

Cost Classification• Fixed Costs : These are costs where the total

expenditure does not change with the level of activity. For instance rent of a factory will not increase or decrease if volume of through put goes up or down by 10 %

• Variable Costs : These vary directly with changes in output. The cost of materials consumed in the product will vary almost in direct proportion to changes in volume.

The variable costs are• Material • Labor

The fixed costs are • Administration • Selling costs

Cost Based Pricing Example ABC Radiology Services

Cost in Rs./MRI

•Manpower Professional fees 100Technician fees 120

Maintainence person charges 10

•Material Film 100

Chemicals 20

•Miscellaneous Electricity 150

Assume Factor of Capital Expenses 1000Total Cost 1500

Apply 100 % profit 1500Price per MRI 3000

Expected Patient turnover per month 500

Price per MRI Rs. 3000/-

Cost – Plus PricingSTRENGTHS

• Simple to administer

WEAKNESSES

•Usually leads to an overpricing in weak markets and an under pricing in strong ones

•Does not take into account Brand Equity or Positioning

Competitive – Based Pricing

INVOLVES

• Pricing to achieve sales and market-share objectives

STRENGTHS

• Price cutting can be the easiest way to achieve sales objectives

WEAKNESSES

• Adverse long-term impacts of a price cut to achieve sales objectives

– May lead to price wars

– Reduces Profitability that may limit resources for product development or other innovations that enhance or sustain competitiveness

– Can have negative impact on Brand Equity

Competitive based Pricing Example

Cost of MRI at Jupiter scan centre 6000Cost of MRI at Gokul scan centre 6200Cost of MRI at Ajit scan centre 5800

Price per MRI Rs. 5500/-

Value – Based Pricing

INVOLVES • Maximizing the difference between value created for the consumer and the cost incurred by the company to deliver

• Using consumer value to drive cost targets

• Prices lowered only when the value offered is lower than that offered by the competition

STRENGTHS

• Price is used to enhance and maintain differentiation

• Greater potential for profit maximization

•Most closely supports principles of Brand Equity

WEAKNESSES

• Often leads managers into the trap of pricing to what they think consumers are willing to pay versus what the products and services are really worth

•Generally a more complex process, therefore more time consuming

Value – Based Pricing

Value Based Pricing ExampleABC Radiology Services

•Quality of Machine – 1.5 Tesla Machine, the latest amongst the lot, which offers clarity of images for accurate diagnosis even for the smallest part like finger. Contains versatile set of coils for head, body, spine and joints.

•Quality of Manpower – team of specialists specifically trained to handle these state of the art machines, so as to give the exact picture and aid in proper diagnosis.

Price per MRI Rs. 6500/-

Operations oriented pricing

CARDIAC PACKAGES

Angiography Alone – Rs. 12000/-

CABG alone – Rs. 138000

Angioplasty Alone – Rs. 80000 (excluding Stent)

Angiography with CABG – Rs. 143000

Angiography with Angioplasty – Rs. 85000 (excluding Stent)

Other Pricing Strategies

Patronage oriented pricing

•BRAND EQUITY BASED

-BRAND EQUITY OF A PERSON

(CABG by Dr.Top Rs. 2 lacs, By other Drs. Rs. 1.5 lacs)

-BRAND EQUITY OF A HOSPITAL

(CABG at Top 1.8 lacs, At other non corporate hospitals 1.2 lacs)

Other Pricing Strategies

Brand related pricing is averse to

Price Elasticity

Pricing Decisions to Be Made• Pricing strategy

• Volume discounts pricing

• Cash & early payment discounts

• Promotional pricing

• Price flexibility

Practical Pricing Approaches

Total cost of CABG Package Rs.175000/-

Includes

• Cost of Surgery,

• Surgeon Fees,

• Medicine,

• Hospital Stay

• All Consumables

All inclusive package in cardiac surgery –

Semi package in cardiac surgery CABG Basic Package costs Rs.138000

Hospital Charges       Standard Pre operative investigations

      Rooml stay as indicated

       Physiotherapy charges within the stipulated hospital stay       Diet / Dietician counseling

       Operation theatre charges       Intra-operative anesthetic drugs & medicines       Normal consumables,disposables,medicines used during surgery       SICU stay as indicated

       Post-operative visits of treating consultant within the stipulatedhospital stayMedical Team Charges       Surgeon’s fees       Asst. Surgeon fees

       CPB machine charges

       Intensivist fees

       Anesthetist fees

X       Visits of consultants of other specialites

X        All the prescribed medicines can be purchased directlyfrom the pharmacy. You have the option having the medicinessupplied directly to you, on payment of a additional deposit

Extra on Actual

X        Use Of Intra Aortic Balloon Pump /LVAD/Beating Heart X        Any stay beyond package as per actual

X        In case of complications resulting in extra stay/investigations, use of other drugs, store items etc. required fortreatment of other diseases, additional charges will be as per

X        Post operative investigations such as additionalEchocardiography, Stress test, Holter monitoring, Pulmonary X        Additional filters.X        Donor blood screening / cross matching

X        Use of valves /stent/ patches/grafts or prosthetic material

Practical pricing approaches

Definitions of value •Intrinsic value is built into the product or services itself •Extrinsic value is the way you think about the product or service

High Medium Low

High

1 Premium Strategy

2 Penetration

Strategy

3

Superb-Value Strategy

Medium

4 Overcharging

Strategy

5

Average Strategy

6

Good Value Strategy

Low

7

Rip-Off strategy

8

Cream-skimming Strategy

9

Cheap-value Strategy

PRICE STRATEGY MATRIX

VALUE

PRICE

Pricing Steps

1.Define the organization's pricing intent

Defining pricing intent typically involves increasing

revenue. reducing risk, and aligning prices with the

organization's overall competitive strategy and goals.

What Should You Do?

2. Define customer segments

Methods of segmentation

1. By various demographic characteristics

2. By clinical characteristics like treatment or condition

3. By psychographic characteristics like

willingness to pay or lifestyle

What Should You Do?

3. Segment services

Patient price sensitivity and utilization differs not only by customer segment, but also by type of service.

Patients' price sensitivity parameters

Elective or emergency

number of substitutes available

What Should You Do?

4. Establish a competitive fact base

Conduct the competitive pricing and utilization analysis at the payer, procedure, and customer segment levels.

What Should You Do?

5. Understand the pricing alternatives

Several of pricing alternatives can be achieved through traditional mechanisms, such as

•discount off charges

•Rebates

What Should You Do?

6. Calculate a range of prices

The traditional approach to pricing typically considers:

•margin requirements

•cost structure

What Should You Do?

7. Conduct sensitivity and scenario analyses across

contractual portfolios.

Finally, sensitivity analysis should consider the following types of issues:

•How will pricing affect the cash, debt, and margin requirements associated with the current or desired bond rating?

•How will competitors react?

•What additional administrative requirements are necessary to execute the contract?

What Should You Do?

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