What consumer doesn’t love a good price war? Savvy shoppers have been the beneficiaries of ferocious pricing wars among airlines, wireless carriers and big box retailers just to name a few examples: consider one-way fares to Maui for $199 or holiday-time iPhones for $45. How about blue jeans for 9 cents? While customers rejoiced, most of the companies engaged likely were licking their wounds. These are typically wars of attrition that make the battles we’re now witnessing in the presidential primaries or even our March Madness brackets look tame.
At a recent retreat I attended, an exasperated health system leader held up a stack of medical bills and asked the group, “Do prices mean anything in this industry? Do we compete on price? Should we?”
Our industry’s recent climate change has created conditions that may be priming us for battle
In health care we wrestle with some unique challenges. Reimbursement is highly regulated. Value is hard to measure. And consumers have historically been shielded from the true cost of care. Yet some of our industry’s recent climate change has created conditions that may be priming us for battle: increased commoditization of the product, lower brand loyalty, growing price sensitivity. Times are changing with the rise of high-deductible health plans, narrow network options, risk-driven contract models and, increasingly, sophisticated price transparency tools.
Despite these trends, head-to-head combat in health care is unlikely anytime soon. It is time, however, for pricing strategy to move up on the management team and board agendas. And there are clear signs this movement has begun.
As one executive who has come at the issue from both the health plan and health system sides said, “The dirty little secret that not all services are priced the same way is slowly becoming known. To suggest any system shouldn’t be leaning toward more strategic pricing is a little foolish.”
The $600 MRI
Those in markets that are have evolved furthest toward value-based care see sure signs it’s time. Maybe it’s ads like the one on a Chicago bus that passed me last week during my commute: “All MRIs $600 Any Day.” Some systems are experiencing a surge in calls for advance pricing information from patients feeling heightened pocketbook pain. Others head into contract negotiations with commercial carriers realizing the table stakes have changed.
Trying to time the market is always a tricky proposition. Several scenarios, however, can suggest a tipping point. Growth of self-insured employers and high deductible health plans may put price in play. Upticks in leakage to freestanding imaging centers or ambulatory surgery centers is a trend to monitor … combined with some secret-shopper forays.
For now, many are wary of a race to the bottom, like one executive we spoke to in a market where the vast majority of insureds have a high deductible health plan. He’s weighing his options. “I currently own the center of gravity,” he said. “If I discount all of a sudden, I move the market.”
He’s right. That’s indeed the making of a price war likely to leave only wounded survivors. A more systematic, analytic approach can help executives avoid giving up margin too early and secure market share while still appealing to payers and patients. Correctly gauging local market conditions and carefully modeling impact of varied price scenarios is imperative.
Correctly gauging local market conditions and carefully modeling impact of varied price scenarios is imperative
Maybe price transparency and big business coalitions are not yet moving your market. Regardless, Sg2 recommends that all leadership teams begin now to think about how their pricing strategy should shape up over the next three to five years.
Begin this process by asking some hard questions:
- Is your current pricing competitive and defensible in your marketplace?
- Are your clinicians referring patients out of your network to find a discount?
- For which specific services can you weather a price cut by wringing out more cost? Is your cost accounting system up to that task?
- For what services are you so indispensable that you can charge a premium? How vulnerable are your current access channels to price competition?
- If you cut your rates to participate in a narrow network, can you be assured of enough net new business to make up the difference?
- Do you have a separate card to play—a strong employer strategy, a voice in payers’ benefit designs, an aggressive move into risk contracting?
Don’t put all the work on your finance and contracting teams. Start a conversation that also includes strategy, marketing and analytics leaders.
- Beef up your cost accounting system to ensure you can pursue pricing with a scalpel rather than the blunt instrument of across-the-board reductions
- Pilot steerage in your employee health plan to get a handle on services most shoppable in your market and who your true competition is
Value-based care means many different things to health care leaders. Our position is that little of that, for now, comes down to an actual price tag. There is hard work that still needs to be done to improve the product, regardless of how any pricing skirmish plays out.
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About the author and Sg2. Bill Woodson is a visionary on the future of health care and serves as a national thought leader for Sg2, a Vizient company. As senior principal, he leads Sg2’s strategic planning research, focusing on developments in health care strategy, policy and growth. Sg2’s analytics-based health care expertise helps hospitals and health systems integrate, prioritize and drive growth and performance across the continuum of care.