August 2018
Spotlight: Rethinking Strategy Amidst Growing Price Transparency
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The Consumer Shopping Activation score (“CSA”) represents the percent of consumers in a market who are responsible for the cost of a procedure and actively compare the prices before making a decision. In other words, CSA is the percent of consumers who actively shop for a service based on price. Based on Kaufman Hall’s National Consumer Research, the national CSA is 5% with some markets and services experiencing a CSA up to 12%.

As price transparency increases, so will the CSA, making it even more important to have a well-developed market-based pricing strategy.
Hospitals have traditionally viewed “pricing strategy” as synonymous with “charge master optimization” Although active, in-depth management of payer contracts and charges will continue to be very important, it is no longer sufficient for an effective consumer-driven pricing strategy. Going forward, hospitals and healthcare systems will need to understand what different consumer segments value in their market when selecting a service provider (reputation, convenient location, etc.), the competitive choices that are available, and the price trade-offs consumers are willing to make to obtain that desired service. Last month’s Spotlight (here) outlined Kaufman Hall’s proprietary four-step approach to developing a consumer-driven pricing strategy. This month we will narrow the focus to provide a more detailed look at Step 2: Marketplace Trends and Dynamics. To accomplish this, hospitals and health systems need to answer three key questions:

  1. How does price compare to other factors in your market when consumers decide where to obtain service?
  2. What is the Consumer Shopping Activation (CSA) in my market?
  3. What level of “brand premium” do consumes associate with our services?
How Should Hospitals Approach Pricing Strategy?
Figure A: Example Market – Consumer Decision Criteria Importance
Source: Kaufman, Hall & Associates, LLC
Figure B: Example Market – CSA by Service
Source: Kaufman, Hall & Associates, LLC
Although the price of a service has become an important factor for a growing number of consumers, it is only one of many considerations in making a purchase decision. Convenience (e.g., hours that fit my schedule, ease of scheduling, nearby locations, etc.), doctor recommendations, and perceived quality are all part of the decision process as shown in the chart below. Understanding how price is involved in the consumer decision process at a service level is critical.
How Does Price Compare to Other Decision Criteria?
What is the Consumer Shopping Activation (CSA) in My Market?
What is the value of my brand?
As one healthcare executive stated during an interview: “If we move to a consumer pricing model, we will cut our revenue in half with no way to make that up”. However, hospitals do not need to drop their rates to match freestanding sites to effectively compete in a market as very few consumers shop on price alone. In fact, many consumers place a premium on receiving care from a hospital rather than an independent, freestanding clinic. This price premium can be determined using well-established market research techniques, including consumer choice modeling (e.g., conjoint analysis). This analysis examines how a reduction in price would impact consumer preference and quantifies how much more consumers are willing to pay for a service at your hospital.
Figure C: Example Market – Brand Premium over Freestanding Alternatives
Source: Kaufman, Hall & Associates, LLC
Gathering insight about how cost factors into a consumer’s decision, determining the CSA in your market, and quantifying your brand premium will provide hospitals and health systems with the information needed to begin developing a sound, market-driven pricing strategy that capitalizes on their reputation for quality and medical excellence where it is most meaningful to the consumers.
Kaufman Hall’s Consumer Strategy Expertise
Kaufman Hall has a proven track record of helping health systems through this in-depth process and enabling them to effectively position their organizations for success. If you are interested in learning more about our approach to pricing strategy, please visit our thought leadership materials here or contact our Consumer Strategy team (consumer@kaufmanhall.com).
In last month’s Spotlight, we noted that hospital margins are under mounting pressure as employers, payers, and non-hospital competitors take aim at non-emergent, outpatient “shoppable services.” Such services include imaging, lab tests, and certain elective surgeries, which can contribute as much as 25 percent of a health system’s contribution margin. This month we demonstrate how these marketplace pressures have impacted pricing and volumes for these services, the implications for hospitals, and how to compete effectively going forward.
Rising Pressure
Impact of Price Transparency
Approach to Pricing Strategy
Rising Pressure
Increasing Pricing Transparency Means Volume Decline for Hospitals
A growing number of states are adopting price transparency regulations that provide consumers with easy access to meaningful price information by both provider and procedure. States with a higher transparency rating according to the “Price Transparency & Physician Quality Report Card 2017” (here), (e.g., states that passed and implemented consumer-friendly price transparency regulations) experienced a 0.5% decline in shoppable service prices while states with a lower transparency rating have seen prices increase by 1.8% over the last three years. This 2.3% difference in price is compounded by a 10% difference in volume growth over the same time period. In other words, a hypothetical provider offering 3,000 MRIs a year at a price of $1,500 would experience a MRI revenue drop of $0.5M ($4.5M to $4.0M) with the implementation of meaningful price transparency regulations.
Simply stated, when consumers become price aware with the aid of price transparency rules, they often choose a lower cost option for select services which meaningfully impacts the bottom line. This trend is only expected to accelerate as states improve their price transparency requirements and CMS finalizes its own price transparency rules. The clear implication is that hospitals will come under increased pressure to justify their prices in the eyes of consumers.
As this trend continues, more organizations will need to actively compete for consumers, with price being an important part of the consumer’s decision process. Hospitals and health systems need to proactively study their market to understand both how their prices compare to competitors and how consumers will react to these differences.
Impact of Price Transparency
Approach to Pricing Strategy
Rising Pressure
©2018 Kaufman, Hall & Associates, LLC
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