The drumbeat for rational hospital pricing is not going away; it’s getting
louder.

Witness, for example, the recent study From “Soak the Rich” to “Soak the Poor”: Recent Trends in Hospital Pricing by Gerard Anderson, a health economist at the Johns Hopkins Bloomberg School of Public Health, published in the May-June issue of Health Affairs. Using 2004 data, the study found that the prices hospitals charged self-pay patients were two to three times more than what hospitals charged commercial payers and Medicare. The report further noted that this gap had grown significantly since the mid-’80s. The mainstream press quickly picked up on the study, reinforcing the notion that the uninsured billing issue is far from being resolved in the public’s mind.

On June 29, Michael Moore’s new documentary, “Sicko,” will be released nationwide. By all accounts, the film is a moving depiction of people whose lives have been turned inside out because of this country’s incomprehensible approach to healthcare financing.

And looming not far in the background is the federal government’s continued exhortations for transparency, accompanied by the not-so-gentle reminder that if hospitals don’t solve this problem, the government will attempt to do so through legislation.

The pricing problem will continue until hospital prices are linked to some rational basis, such as cost or market prices. The root causes of why illogical pricing exists and why change is so difficult are deep and require political will and broad-based collaboration to address. Hospital leaders must play a role in encouraging the former and participating in the latter.

However, while working toward long-range, multistakeholder solutions, hospital leaders can take steps now to rebase their prices—steps outlined in the Healthcare Financial Management Association’s just-released patient-friendly-billing project report, Reconstructing Hospital Pricing Systems. As the report says, hospitals need to:

• Develop a well-defined, rational and competitive pricing philosophy, strategy and structure to guide policy decisionmaking, redesign and update efforts. Using cost and price data, a hospital can determine a pricing structure that will guide redesign and update efforts. The philosophy should reflect issues such as the organization’s overall strategic and financial objectives.
• Examine approaches that mitigate the impact of pricing changes on Medicare and Medicaid payments and regulations. The CMS provides hospitals with a means to request a different cost-to-charge ratio if a hospital believes that the current ratio is inaccurate.
• Adopt a pricing strategy or discount policy that ensures uninsured patients of limited means are not charged more for the cost of care than is paid by commercial insurers or government programs. Hospitals should provide clear, consistent discount policies for this population. These discount policies must relate to a rational benchmark such as cost and market prices.
• Develop formal, written policies for providing cost estimates—including expected out-of-pocket expense—to patients, and be clear about what the estimates do and do not cover.
• Negotiate with insurers to remove contractual barriers to rational pricing methods. Although it may be difficult, all hospitals can inform payers of overall simplification goals and work toward achieving contracts that are simpler and easier to administer.
• Simplify and standardize the chargemaster throughout your organization. A simplified, clean chargemaster will enhance a hospital’s ability to post prices and provide patients with accurate and timely information on their financial
  obligations.
• Continually improve your facility’s cost-accounting competencies. Cost per encounter or procedure, such as DRG or ambulatory payment classification codes, is critical information for a successful pricing strategy. Therefore, hospitals without the ability to capture and track such information might consider developing and maintaining accurate data on labor, supplies and other expenses.

Obvious and understandable motives for rational pricing include the desire to allay community concerns, media outcry and potential government regulation. In particular, hospital leaders are well-advised to take action themselves before the government legislates some form of pricing and price transparency that will be worse than our current system.

A pricing system based on a clear understanding of the cost and market price of services and with a clear relationship to the organization’s strategic goals will help the organization operate more efficiently in the short term and create a substantial competitive advantage in the long term.

Even more important—and also a strategic benefit—rational pricing will help hospitals continue to build trust in their communities. The current system is almost impossible for the general public to understand, resulting in an erosion of public trust. Our communities deserve to be able to make healthcare decisions based on understandable, comparable price and quality information. It’s the right thing to do.

Enhanced public trust leads to patient loyalty. Patient loyalty leads to organizations that are more financially successful. And financial success means that an organization has more resources to put toward community benefit, particularly by providing unprofitable but important community health services.