Simply stating your value to consumers isn't enough. Children's hospitals should prove value with facts and analysis. Here's how to get started.
By Dan Clarin, Mark E. Grube and Jason O'Riordan
In many areas of the country, the role of the individual in health care is shifting to that of an active consumer. The context is clear: Increasingly unwilling to shoulder risks for rising health care spending, employers are offering health plan options with higher deductibles and narrow or tiered networks. Some employers are also instituting creative incentives to steer employees toward or away from certain providers based on the providers' price for the service.
Benefit changes are designed to shift decision making and a rising share of care costs to insured individuals and families. High-deductible plans are gaining the most traction in the Affordable Care Act's health insurance marketplaces and in employers' private exchanges—environments where the consumer is making the purchasing decision.
Because of this, consumers' cost-conscious decision-making is accelerating as these plans cover a rising proportion of Americans. In addition, transparency tools now available through companies such as Castlight Health, and insurers such as Aetna provide consumers with actionable information that facilitates shopping. Some programs use a travel agent-like approach, offering concierge assistance by phone; other programs give consumers cash rewards for choosing low-cost providers.
Health care pricing in a new era
Physicians, who often are influential in the consumer's choice of facilities, are also becoming value shoppers. New and different incentives give them a share of the savings if they send their patients to a lower-cost care site. Physician willingness to change referral patterns can represent significant risk for some children's hospitals, even those in areas where consumers are not highly activated shoppers.
Shared savings and risk contracts, as well as new delivery models, such as patient-centered medical homes, have increased physician awareness and economic interest in the impact of referral decisions. Evidence from the Alternative Quality Contract in Massachusetts, one of the first value-based contracts in the nation, indicates physicians under these arrangements will shift referrals to lower-cost sites of care for low-acuity services.
Amidst growing efforts to constrain spending, purchasers increasingly are challenging the prices of some children's hospitals. In some areas, payers are using preauthorization interventions and redirecting patients to freestanding sites. Children's hospitals' exclusion from or placement in the high-cost tier of public exchange plans and commercial networks is becoming more common.
What the research shows
Increased competition from lower-priced, non-hospital providers like RadNet, LabCorp and CVS Health that offer care using new delivery models like Teladoc, represent significant potential risk to children's hospitals, particularly with low-intensity, high-margin outpatient services. A Kaufman Hall and Cadent Consulting Group study of 1,100 families in nine major U.S. markets showed consumers are willing to pay more for some services from children's hospitals, but that willingness varies depending on the service and price.
The survey assessed consumers' willingness to pay for services of the leading children's hospital, a preferred community hospital and a freestanding provider in each market. Low-intensity, noninvasive diagnostic services, such as MRI and lab tests and routine invasive procedures (ear tube surgery and tonsillectomy) were included. The study found:
- More than 50 percent of parents feel comfortable shopping for their child's health care.
- On average, parents were willing to pay more for some services at a children's hospital than at a community hospital or freestanding facility, but this was not the case for all services.
- Based on the annual savings they could achieve, 82 percent of families would purchase an insurance plan with a network that did not include the local children's hospital; only 18 percent would insist on inclusion of their local children's hospital.
These findings confirm consumers value the expertise of children's hospitals, but the results also show a limit to consumer willingness to pay higher prices for services they increasingly view as commodities.
A proactive approach to value
As health care consumers become activated shoppers, and as competitors—particularly non-hospital providers—increasingly make low prices part of their value proposition, children's hospitals will need to address the value equation for each customer group: families, physicians, employers and payers. This effort is not centered around revenue maximization but on quantifying the organization's value proposition relative to what each group values and showing the organization can deliver a specific bundle of desired benefits at a fair price that is acceptable to the customer.
Different customers have different value equations with different benefit bundles. Elements of value may vary significantly by service.
For example, value equation elements for families typically include:
- Perception of quality: Facility, physicians, family physician recommendation
- Experience: Wait time, interactions with staff members
- Access: Location, ease of arrival, appointment availability
- Price: Out-of-pocket costs
Access and price could be the most important elements for families when it comes to lab tests, while a physician's recommendation and perception of quality may be most important for elective inpatient surgery. But each of these assumptions can and should be tested. Testing should be done on a market-specific basis because each consideration varies across the country.
Elements of the value equation for physicians include, but are not limited to:
- Price: Driven by family price sensitivity (affordability of the option) or value-based contracts
- Access: Getting the patient in quickly
- Operational ease and experience: User friendliness of facility, consistency and reliability
- Relationships with personnel: Trust and collaboration with hospital-based physicians, nurses and administration
Beyond price, access and perception of quality, employers and payers also value the measurability of quality as defined by government and payer requirements.
The starting point in developing consumer-centric strategies is an assessment of the environment where the hospital operates. Market conditions that influence decision making related to children's services include incentives that have been put in place by employers and payers to encourage shopping; the level of consumer shopping activation; and non-price factors that matter most to local consumers, physicians and other stakeholders.
Local and regional markets vary, so national trends can inform strategies but should not overly influence them. For example, outpatient surgery typically contributes significant margin to children's hospitals, and the physician value shopper is a key variable. In some areas, value-based programs for physicians and reference pricing and reward programs employers offer are prevalent; in other areas, value-based programs may not be developing as rapidly, and more aggressive efforts to activate consumers may not be as common.
Assessment of service line-specific risks for a hospital includes study of the competitive landscape, physician alignment and involvement, volume trends, cost-sharing regulation, health plan benefit thresholds, and comparative analysis of current hospital-negotiated rates with competitors' rates. Combined with an analysis of consumer exposure to deductibles and other out-of-pocket payments, benchmarking indicates the level of a hospital's risk exposure to price differentials. Analysis can be used to estimate the price differentials consumers are willing to pay for certain services from certain providers.
Trying to match competitor prices in all services is not likely feasible. But hospitals should understand the differential between their prices and those of their competitors, and the price or volume trade-offs along the continuum of services. An evaluation of consumer and physician-specific risk for each service based on service competitiveness, specialization—the level of differentiation of the particular service—and other customer-specific factors is recommended.
Hospitals can use a variety of analytics to measure price exposure, adoption of incentives, behavior change and other variables. These include volume trends for shoppable services, episode analysis (the proportion of specific services occurring in isolation as opposed to being tied to broader episodes of care), frontline staff surveys about the proportion of patients who require preauthorization for services and the percentage of those who cancel appointments, and consumer surveys.
By aggregating services with similar levels of risk, hospitals can develop a discrete number of value-driven strategies across service lines. Services within particular categories often share similar price elasticity, competitive risks, consumer need states and downstream financial impact. Beyond the hospital, retail pharmacies often use "category thinking" to organize their recommended strategies, identifying traffic generators, convenience and other product categories.
Similarly, children's hospitals can identify those services, such as cardiothoracic surgery, that fall into a more differentiated high-end category, and those services that are more commodity-like, such as MRIs or lab tests. Hospitals can then develop a rational strategy for each, updating it regularly over time as the local market evolves.
Look at the numbers
An analysis that involves mapping the financial "indifference curve" for volume and price is key to developing a sound strategy for services. For example, currently performing 794 MRIs per year, a hospital would lose $428,000 with a commercial rate reduction of 20 percent if its volumes remained constant. If such a discount resulted in a volume increase to 1,094, margin would increase by $121,000 relative to current levels. If the hospital did not change its rates but volumes declined to 494, it would lose $711,000.
Analyzing this indifference curve alongside its estimates of likely market responsiveness to price allowed one hospital to make pricing decisions across a number of services. Because this curve and market responsiveness to price will vary by market, children's hospitals should analyze their own markets and financial indifference curves to make sound pricing decisions.
What it all means
Children's hospitals must proactively identify and understand the value equations for various customers, including families, physicians and other purchasers, and develop a value proposition to the market accordingly. Simply stating the organization's value to the market may not be enough to convince customers who are offered increasingly larger incentives and more options.
Children's hospitals should start early to prove value to customers through facts and analysis. For example, higher per-unit prices do not, and must not necessarily equate to a higher total cost of care. Care for an asthmatic child in a children's hospital might actually be less expensive end-to-end due to care quality and efficiency. In addition, if higher-than-average unit prices are the reality, it will be important to identify the other areas, such as patient experience and access, where the children's hospital can excel in the consumers' eyes.
Pricing strategy is about more than price; it's about adopting a customer-focused approach to positioning services. Exploration of issues such as costs, access, patient and family experience, provable quality performance, communication and consumer education is relevant.
A clear understanding of underlying costs by service is imperative to any value discussion, and will be more so as payment moves to episodes of care or bundled payment arrangements. Teaching and research conducted in children's hospitals carry significant costs that limit pricing flexibility. There may be some services where partnerships with other providers will be needed to make the economics work. And, there may be services where the hospital just cannot compete. Data from a robust cost accounting system must inform these decisions.
In most cases, gains in efficiency across the organization will enhance its flexibility when competing for individual services or an overall basket of services. Consideration of the hospital's existing facilities is very important. Are the right freestanding assets in place to provide services at lower-cost, preferred sites? Infrastructure change can take years to implement, so assess service distribution thoroughly.
Differentiation of a value-benefit bundle developed and supported by a children's hospital is critical. There's no one-size-fits-all approach. Experience, convenience, outcomes, brand strength and other factors join price as part of the consumer value equation. In this highly competitive, cost-conscious environment, each hospital must determine the value-benefit bundle it can offer patients and families, physicians, employers and payers. Then each hospital should develop and implement tailored strategies to deliver those benefit bundles to ensure a consumer-centric value proposition.
Dan Clarin and Jason O'Riordan are senior vice presidents, and Mark E. Grube is managing director and national strategy leader at Kaufman, Hall & Associates in Skokie, Ill. Send questions or comments to email@example.com.