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PRICING. Hospital Pricing Terminology and Practices. Hospitals have two sets of prices: List prices: gross charges
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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 Enterprise Low 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
Price As an Indicator of Brand Equity • 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.
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 Price per MRI Rs. 3000/-
Cost – Plus Pricing • STRENGTHS • 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 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
Value – Based Pricing • 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 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 Other Pricing Strategies 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)
Patronage oriented pricing Other Pricing Strategies • 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)
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 All inclusive package in cardiac surgery – • Total cost of CABG Package Rs.175000/- • Includes • Cost of Surgery, • Surgeon Fees, • Medicine, • Hospital Stay • All Consumables
Semi package in cardiac surgery Practical pricing approaches CABG Basic Package costs Rs.138000
PRICE STRATEGY MATRIX PRICE VALUE • 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
What Should You Do? 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?
