July 2018
Spotlight: Developing an Effective Pricing Strategy for Shoppable Services
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Once price elasticity is quantified, that data can be combined with an internal volume/price tradeoff analysis to determine projected financial impacts. This analysis measures the incremental margin impacts of various market evolution scenarios and pricing strategies on the organization. Figure 3 is a blinded scenario analysis conducted for a hospital that had 794 encounters of the shoppable service at current rates. The chart visualizes the incremental margin loss/gain for the organization at different levels of volume and rate reduction.   

When tied to financial data and payer contracts, these analyses provide a granular understanding of consumer price-value decision making that enables healthcare leaders to adjust their pricing strategies in accordance with shifting consumer demands in a financially sustainable manner.
Taking a reactive response to pricing can have negative short-term financial consequences and constrain an organization’s future pricing flexibility. To avoid these pitfalls, hospital and health system leaders need to understand their current market position, and the likely pace of change in their service area. A comprehensive pricing strategy involves more than a charge master reconfiguration; it requires careful analysis of an organization’s value proposition, and the value that consumers associate with a provider’s brand and offerings. Four steps for developing a rigorous pricing strategy are outlined in Figure 1.
A Four-Step Approach to Pricing Strategy
Figure 1. A Four-Step Process for Pricing Strategy
Source: Kaufman, Hall & Associates, LLC
A critical part of the process is determining preference for a health system’s shoppable services, which can be analyzed using consumer choice modeling (e.g. conjoint analysis) to build price elasticity curves for key services. For example, Figure 2 is an elasticity curve for a blinded shoppable service that demonstrates how the share of consumer preference increases as a hospital increases the discount from its current rates. This analysis demonstrates that not all services are valued the same in the minds of consumers and payers, and not all services share the same levels of competitive risk.
Figure 2. Price Elasticity Curve for a Blinded Shoppable Service
Source: Kaufman, Hall & Associates, LLC
Figure 3. Financial Scenario Analysis for a Blinded Shoppable Service
Source: Kaufman, Hall & Associates, LLC
Recent analyses of shoppable services at several children’s hospitals, for example, found that certain basic imaging services (e.g. x-rays) and standard diagnostics (e.g., basic lab tests) are relatively commoditized, with consumers more likely to take price as a strong consideration in selecting a provider. More advanced procedures proved relatively immune to outside price pressures by comparison, as consumers are more likely to consider the hospital’s brand reputation and provider expertise in making decisions on where to go for care.
Stay Tuned
Learn more about pricing strategy for shoppable services in next month’s Spotlight. Going forward, Kaufman Hall will monitor the performance of hospitals on shoppable services using real-time data in the Axiom database. Findings will be reported in future editions of the National Hospital Flash Report. To learn more about Kaufman Hall’s approach to pricing strategy, please visit our website here or contact our Consumer Strategy team (consumer@kaufmanhall.com).
Hospital and health system 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.
Faced with growing out-of-pocket costs with the rise of high-deductible health plans, more healthcare consumers are comparing their options for these services based on access, experience, and price, before deciding where to obtain care. At the same time, employers and payers are pushing legacy healthcare providers to move shoppable services from high-cost inpatient facilities to lower-cost outpatient settings.
Hospital and health system leaders should be proactive in developing market-driven pricing strategies for shoppable services that help them achieve their long-term strategic and financial objectives, and stem losses from decreasing payment rates and increasing competition. This article outlines a four-step process that healthcare leaders can use in developing an optimal pricing strategy.
Cost Pressures Rising
Pricing Strategy
Cost Pressures Rising
In 2017, Anthem Blue Cross Blue Shield announced that it would no longer pay for ambulatory MRIs and CT scans performed in hospitals without preauthorization of medical necessity. Anthem rolled out the new policy in nine states last year, and expanded it to four more states in 2018. This is just one example of how payers, employers, and others are steering patients and providers away from hospital-based sites for shoppable services. Interest in pricing strategy is rising, as more healthcare leaders recognize the contribution of shoppable services to the overall bottom line, and the advantages of being proactive in managing cost pressures and competitive forces. However, results of Kaufman Hall’s 2018 State of Consumerism in Healthcare report indicate that few organizations have the capabilities or the focus required to meet these challenges head-on. Only 5 percent of more than 200 organizations surveyed for the report rated as high performers for aggressively pursuing pricing strategies, while an overwhelming 74 percent rated as low performers in this area.
Cost Pressures Rising
Pricing Strategy
©2018 Kaufman, Hall & Associates, LLC
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