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Developing a Strategic Pricing Methodology

This post is based on the webinar "Developing a Strategic Pricing Methodology". Watch the webinar on demand here.

When was the last time you spent quality time with your chargemaster? While this comprehensive price list of your practice’s procedures, products, and services is likely to be pretty influential in your practice, it is often one of the most overlooked areas when a practice is working to create systems that make pricing more transparent and viable.

To remedy this, we’ve put together a list of five areas to consider when evaluating your current pricing structure along with tips that will strengthen your pricing methodology, aid in greater patient transparency, and improve collection rates. 

1. Current Pricing Methodologies 

When considering your current pricing structures there are a number of red flags that might indicate that it’s time to evaluate your chargemaster.

Lesser-of Clause

This clause states that if you bill an insurance payer less than the contracted rate for that code, they are in their right to pay you that rate and do not have to notify you of the money you are leaving on the table.  

Excessive contractual adjustments

Too many write-offs lead to poor gross collection rates (the amount of cash are you collecting relative to your charge price). A normal practice might collect 40-50% or even as low as the 30% range for what they’re collecting relative to their charge price and over half is often a contractual adjustment. 

Poor transparency for patients

Patients are becoming consumers and want an accurate estimate of what they should expect to pay upfront. However, current pricing methodologies in many practices make it difficult to assist patients in this way.

Current charges are based on outdated reimbursement structures

Many practices still use a % of a charge or other non-defensible/rational pricing structure that is now outdated and ineffective.

% of Medicare

Many practices evolved into setting their chargemaster as a % of Medicare, but this is one of the lowest fee schedules as a baseline, often resulting in large contractual adjustments and a poor cash-to-gross collection rate. 

Cost-Based Charges

This method can create highly volatile pricing for high cost items such as drugs.

2. Evaluating your pricing opportunity

Once you have identified any outdated or ineffective pricing methodologies within your current pricing structure it’s time to develop a mechanism to see what you should be getting paid. This can be done by evaluating fee schedules or by running through a yield report. And while there is almost no commercial payer who will pay 100% of charges, you can look at remittance payments as a percentage and if your charge price is the insurance allowable it is likely that you are losing money. 

What is that residual impact? 

Next, compare your CPT codes with the payer fee schedule/current contracted rate to determine if you are underpriced and are leaving cash on the table. Then, have a mechanism that shows “what is my charged price” and “what is my contracted rate?” as well as the number of times you are billing that code with that specific contracted rate. This practice will help you evaluate what your pricing opportunity is when creating a new chargemaster. 

3. Establishing a baseline

Begin by exporting your current chargemaster to help you see what your charged prices are. (Usually this is a pretty easy export from EHR or your practice management system.) Then, evaluate your fee schedules. Payer contracts and fee schedules help you to comprehensively understand your contracted rates. If you do not have a copy of a payer’s current fee schedule on hand, request them from your payer [For more tips on how to gather payer contracts and fee schedules, visit our article here]. Having copies of your contracts and fee schedules and being aware of what they entail will have a huge ripple effect that will help you determine the financial health of your practice. 

Next, understand your rates to increase revenue. Once you know what your contracted rates are, you can evaluate where your current charge price is and see where the upper-bound is for your allowables (i.e. If a payer is allowing 100% of your charges but you don’t know how much more you should charge, having a fee schedule will let you know what they allow and will alert you to where you should be charging more.) Once you have all of your contracted rates, you can use those to increase revenue through setting your prices intelligently. 


4. Setting a defensible chargemaster

To set a defensible chargemaster, we recommend implementing the following simple methodology that can create a dramatic impact:

  1. Take your entire list of HCPC codes and find the highest contracted rate that any insurance company with pay for that code. 
  2. Do a modest markup on top of that rate (20-30%) to cover any small changes in allowables as well as hard costs such as supplies, equipment, drug charges etc. 

Caveats to this strategic and defensible structure:

First, if you have providers that are compensated at a percentage of your overall collection rate (gross collection rate is factor into provider compensation) you will have to do a bit of realignment and communicate that you are working to improve your ratio of collecting, not simply charge 30% more. 

Second, if you are underpriced by decision, such as using specific underpriced procedures as a marketing tool, that’s ok! Just ensure that you are underpriced for a specific reason and you are quantifying what you are losing. 

Third, if your prices are structured well, but are still high relative to the market, you either have amazing contracts (good job!), or might consider bumping against lesser-of if you have a specific growth plan for specialties or patient marketing.


5. Using these new charges for transparency 

Although challenges remain when attempting to effectively communicate costs for healthcare, working to be transparent in your pricing interactions with patients can reap benefits in the following ways for your practice: 

  1. Setting a defensible chargemaster enables you to trust your pricing structure and be confident when you give estimates to patients. 
  2. Adopting a methodology for transparent pricing will allow your practice to be early adopters as executive legislation enforces the posting of charge prices. 
  3. Financial transparency results in a better patient experience overall and higher patient satisfaction. 
  4. When patients feel empowered by knowing what they should expect to pay, collection rates improve.

For more tips on ways to strengthen systems within your practice that will aid in the improvement of pricing structures and bring greater transparency overall, visit the following articles: 

Don't Wait for a Price Transparency Mandate
Strategic Payer Contracting
Listen to full webinar