Pricing Strategies for HealthCare Services

David Marlowe

Strategic Marketing Concepts

Ellicott City, Maryland

Agenda

• The Role of Pricing in the Strategic Mix

• Is “Pricing” Looming on our horizon?

• Parallel Issue – Marketing Impact of Reimbursement Models– FFS/Discount– Per Diem, Per Case, DRG– Capitation

Agenda

• Current and Potential Pricing Models

• Impact on Health Care Marketing– How “Real” Is This?– Will “Price” trump “Quality”?– Are we prepared?

The Role of Pricing

Price

• The “value” that is paid for a good or service received.– Usually defined by money, but not always.

The Role of Pricing

• To create an “image” for a product or service:– Rolex watches, Rolls Royce cars, etc. Price is

used partially to create the aura of value.– Sometimes too low a price can back-fire and

damage image (4 t-shirts for $12 – just how good can they be??).

The Role of Pricing

• To generate revenues and income:– Pricing tied to sophisticated demand and cost

accounting models.– Prices lowered to near-break even to raise cash

for operations or other opportunities.– Prices raised temporarily to take advantages of

market opportunities (demand) and to increase income

• Flowers on Mother’s Day

The Role of Pricing

• To give customers incentives or disincentives to use a product or a service:– Zero percent financing for cars (incentive)– Higher taxes on cigarettes (price driven dis-

incentive)

The Role of Pricing

• To capture market share or squeeze out a rival:– Coke and Pepsi routinely use pricing to capture

share units in local markets.– Airlines squeezed out People’s Express and

others years ago by matching prices.

Flexibility

• Three of the four key marketing factors are usually not very flexible:– Products/Services often take years to bring to

market.– Distribution channels are often costly and take

time to set up.– Promotion – Can be quick but usually takes

months to create and use.

Flexibility

• Pricing is perhaps the most “flexible” of the 4 key marketing factors.– US Air “E-Saver” – Price created on Thursday

for the coming weekend.– Negotiation for the purchase of a car.– Jewelry sales in a small shop in an ethnic

section of NYC (or other cities).

Methodology

• Some industries use very sophisticated databases and research models to test pricing options and to track the (1) impact of price changes and (2) the need to change prices.

• Others (small, retail) often go by instinct, market knowledge and seat of the pants.

“Strategic” Pricing

• Outside of most segments of the health care field, pricing is a key part of the marketing mix.

• The “strategy” of pricing options (competitive position, price lining, goals of pricing decisions) are key parts of the overall marketing approach.

“Strategic” Pricing

• In other words, pricing is usually a deliberate decision with specific goals in mind (not limited to profit), not just a by-product of years of rate adjustments to a long-ago set base.

Responsibility

• Finance plays a role in the setting of prices in most industry, but often is NOT the key decision maker.– Factory managers for industrial products– Store managers for consumer goods– Even hotel front desk clerks under the right

circumstances!

Legalities (General)

• Collusion/Price-Fixing.

• Pricing below cost/predatory pricing

• Manufacturer-set pricing (Manufacturer’s suggested retail)

Is “Pricing” Coming for Health Care?

Historical

• Price was limited largely to “industrial” purchases:– Cost of insurance premiums to a company– Per Diem negotiation between a hospital and an

insurer.

Historical

• For Consumers “price” was limited to:– Percent of premium they had to pay– Co-Pays and Deductibles (usually small and not

related directly to the price of the service)– “Fringe” services not covered by insurance– Uninsured individuals (usually fell below the

public radar-scope).

Historical

• The one element of the marketing mix traditionally not part of the marketing strategies of provider organizations.

• In most industries, marketing controls pricing, with finance input.– In health care, “price” is usually set by finance

and usually based on years of rate increase and cost allocations – not a specific “strategy”.

Changing Factors/Indicators

• The reduction in traditional HMO model coverage and the shift to PPO, POS and free-choice models.– Driven by consumer desires for choice but also

bring a degree of consumer cost responsibility.

Changing Factors/Indicators

• Changes in technology that allow for more direct to consumer marketing of health services:– Laser eye surgery

– Complementary medicine

– Fast CT scans

• All being aggressively marketed (often on PRICE) in most markets.– One by-product – consumers are getting used to health

services being promoted on a price basis.

Changing Factors/Indicators

• The number of uninsured and under-insured Americans.– 40-45 Million “officially”– But up to 60 or 70 Million at various points in

time.

• These people still need health services – and they shop for it by price to a significant degree.

Changing Factors/Indicators

• An increased employer interest in Defined Contribution models:– Employer pays fixed $ but employee shops for

coverage from approved options.– Employer pays fixed $$ with no insurance

coverage.

• …Or at least in shifting more of the $$ burden to employees (and with it an interest in the price of the service).

Changing Factors/Indicators

• Major employer groups (Leapfrog), insurers and even Medicare are looking at adjusting reimbursement rates based on measured “quality” indicators.– Price allowed tied to perceived “quality”

received.

Changing Factors/Indicators

• Insurance Plans (BCBC Wisconsin, Tufts, PacifiCare, etc.) are offering “tiered” plans.– Lowest cost (co-pay, deductible) to use lower

cost hospitals.– More cost to use higher cost hospitals– Highest cost to go out of network.

Changing Factors/Indicators

• Recent study – Western State:– 11% reported price shopping health care

services in the past year.– OP Surgery, Diagnostic Imaging, Lab Tests,

even (believe it or not) Cardiac Cath.

Changing Factors/Indicators

• “Haggling for Healthcare”– Recent Harris Online Survey – 2,118 adults– 13% negotiated with MD’s (54% success)– 17% negotiated with Pharmacists (48%

success)– 12% negotiated with Dentist (47% success)– 10% negotiated with Hospital (45% success)

Marketing Impact – Reimbursement Models

Fee For Service/Discounting

• Marketing Motivation – Drive Volume!!– The “traditional” marketing driver

• Additional Incentive – reduce the cost of delivery per unit.

Fixed Price Models

• Per Diem, Per Case, DRG’s• Marketing Motivation – Drive “Units of Service”

(Days or Cases as appropriate).– Marketing Challenge – Driving the right unit

• Additional Incentives:– Reduce the number of units of delivery (test, etc.)

– Reduce the costs of units of delivery

Pre-Paid Models

• Capitation and Percent of Premium

• Seems to be fading in many markets but…

• …our industry goes in cycles. It could come back!

• Marketing Motivation – Secure enrollment and assigned lives.

Pre-Paid Models

• Additional Incentives:– Reduce number of units of treatment

(admissions, visits, tests, etc.)– Reduce operating costs per unit of service– Keep members healthy– Target low intensity users for re-enrollment

Pricing Strategies (Healthcare)

Comparative Pricing

• Maintaining a relative position compared to competitors.– Always 10% higher than the competition based

on perceived value in the market.– Used in managed care (per diem) negotiations.

• Problem – You need to know their prices.• Problem – You need to make sure it does

not look like collusion.

Discount Pricing

• For volume, for cash on the spot, etc.

• $199 each for Heart, Chest and Abdominal CT’s – but $30 off if you take all three together. (Bundled package)

High End/Image Pricing

• Rolex, Jaguar

• Health Care??? (Exclusive Spas? High End Dental Practices?)

Introductory Offers

• $$ off for the first 100 users of …..– A real offer from a Cosmetic Surgery practice.

Incentive Pricing

• Reduced per diem to direct employees to a specific network.

• Reduced prices to use services off hours.– Diagnostic Imaging.– Lab Tests– Phase 4 Cardiac Rehab

• “Two for One” – Contact lenses, massage therapy visits

Loss Leader

• Optical shops (Lower price exam if you get glasses).

• Dental practices (Low price cleaning to get other services).

• Free or low price health screenings???– Yes, this is a public service but it is also a loss

leader.

Market Share Capture Pricing

• Using deep pockets to buy share with a low price. – Use lower prices in managed care negotiations

to keep a competitor out of the network.– Use lower prices to be in the “low cost” tier to

capture volume.

Pricing on the Margin

• Pricing at the direct cost of the next unit in the door.

• A desperation strategy to capture share or generate cash.

Price Lining

• Chevy, Pontiac, Buick, Oldsmobile, Cadillac

• 4 Levels of Health Club membership?

• Different levels of insurance coverage?– Low tier, middle tier, out of network

Skim Pricing

• Take advantage of cutting edge newness or exclusivity to skim off a quick profit– Play Station 2– First Fast CT in town– First PET scanner in the market.

Spot Pricing

• An “industrial” model (steel, aircraft engines, etc.).

• Bidding on high ticket cases (transplants, specialized long-term stays)

Year-End Cafeteria

• Unique to health care (so far)

• Use up pre-tax cafeteria benefits before the end of the year.– Resulting in lots of elective-service advertising

in December.

Access Pricing

• Paying a “seat license” for the right to buy a block of tickets to a pro team.

• Paying $X per year for access to a boutique medical group (e.g. - $3,000 for a family gets immediate access).

• Variation - $25 per month “administration” fee (Seattle-based PCP’s).

Barter

• Okay, a bit odd … but a few have been approached.

• Trade health services for other services (health care in return for electrical power???).

How “Real” Is This?

How Real Is This?

• Hard to say for sure.

• The trend is growing, albeit slowly.

• It might just level off and stay a fringe element…

• … or it might explode into the next “BIG” issue for providers.

Limiting Factors

• Medicare and Medicaid restrictions

• “Most Favored Nation” clauses with some insurance carriers (Blue Cross in many markets).

Provider Preparedness

• MOST providers are not thinking of price as a deliberate strategy.– Related to attracting specific segments of

business– Related to the image of the organization– Related to coordination with other marketing

elements.

Provider Preparedness

• MOST providers are woefully unprepared for public inquiries about the price of their services.– Exception – Elective services providers who

are closely tied to the price of their service.

Provider Preparedness

• What happens when someone calls your hospital, practice, agency, etc. and asks “how much do you charge for _____?– Right now, probably not much or nothing very

organized or customer friendly.

Provider Preparedness

• What should Marketing do today?– Measure the price shopping levels in your own

market (survey).– Find out where the calls to your shop are going

now (and how many, for what services and how they are handled).

– What is the “pricing” strategy (if any) of your organization?

Quality vs. Price

• Ideally, people should select providers based on the perceived “quality” of the experience – both clinical and “personal interaction”.– Some payers are even moving to adjusting

reimbursement based on set quality outcomes.

Quality vs. Price

• But this operates largely in a “price vacuum” for average consumers.

• If price for health services becomes a key factor, will it drive “quality” out the door?– Too soon to tell, but price has impacted the

“brands” of other industries – airlines, telephone service, etc.