Designing Pricing Strategies

Hospitals have introduced innovative cost pricing strategies over the years

Dr Hari Prasad

As soon as the dust settles from one storm in healthcare, another wind begins to stir. Today, financial transparency has become the talk of the town. It has now almost become mandatory for all healthcare-related conferences and publications to feature cost pricing prominently. Costing and financial optimisation have today evolved into a focus area for all senior healthcare executives.

When one speaks about pricing strategies, quality of care invariably creeps in as the antagonist. We need to evolve from this deadlock and deal with quality as a component of healthcare pricing, where there is no compromise. In the current turbulent healthcare environment, hospitals have argued that the rate of increase in hospital costs is faster than the rate of increase in hospital revenues. This is a genuine concern for hospitals that do not employ a clear pricing strategy.

Healthcare pricing strategy is the most critical component of managing hospitals irrespective of whether they are for-profit or not-for-profit. The long-term progress, and sustenance and growth of any hospital depend on sound pricing strategies. In a maze of intricate process in a hospital, the most flexible component is pricing and leveraging this flexibility is the secret behind financial management of hospitals.

While a variety of factors influence pricing strategies, it is important to keep the process simple and uncomplicated. Costs are relatively fixed, provided there is no compromise in the various components that go into costs and pricing is dependent on a variety of factors like competition, demand for the product in the community, affordability of the community and the need for generation reserve funds. Therefore, the beginning of any pricing process is to understand the cost of the product and the components included in the costs needs to be all inclusive. Often, we tend miss out on allocating indirect costs to a product/service and this has a major impact on profitability.

A variety of innovative concepts are being adopted in pricing healthcare strategies and the most widely used strategies are briefly described here.

Day-care Procedures

These have become extremely popular as they have a favorable impact both on consumers and hospitals. Few of the benefits that cannot be overlooked are:

• Similar existing resources utilised for more surgeries.
• The patient's hospital expense gets reduced as he is not required to stay over at the hospital. This provides an opportunity to have a greater bed turnover and more revenue for the hospital. This is a benefit that all stakeholders like insurance companies, business organisations, surgeons and especially patients greatly appreciate as the costs incurred are lower.
• Apart from cost containment, other benefits include decompression of busy hospital beds, less nosocomial infections and early recovery in home environment with the family. Thus, there is less disruption of personal lives.

Packaging

Pakaging of various services is another trend that is on the rise. With the increase in health insurance packaging, packaging of services will increase further. This has become the mainstay of developed nations working on reimbursement for services, but in India it is still in the evolutionary stage. While packaging brings in some form of uniformity, stability and transparency, there are some who would argue that this is not necessarily the best pricing strategy. While a number of procedures are being offered as packages, overwhelming majority of services are yet to be offered as packages.

Delivering Value

A major component of pricing strategy is delivering value. When one talks about delivering value, there is a paradigm shift in the way pricing strategies are viewed. When value is delivered, the absolute price of a service becomes less important and this is a unique way of working on pricing healthcare strategies. Value is defined as the sum of access, excellence, efficiency and outcome minus the cost.

Traditional pricing formula: Cost + Profit = Price
Delivering value : (Access + excellence + efficiency + outcome) — cost

Hospitals should therefore start looking at delivering value and move away from working on traditional pricing strategies.

The writer is CEO Apollo Hospitals Hyderabad
E-mail: ceohyd@apollohospitals.com