Healthcare pricing is a topic I understand so well. It was the cornerstone of my research back in the late 1990s. So when I saw that pricing failure was on second place on the list, I chuckled. No longer am I the heretic, I guess. I’ve been validated!
No matter what type of product you sell, the price you charge your customers or clients will have a direct effect on the success of your business. Healthcare pricing strategies are complex, loaded with messy regulations, conflicting rules and cross subsidization, but the basic rules of pricing – much like gravity – are pretty straightforward:
- Your prices must cover costs + profits if not, your business will die.
- The best way to lower prices is to lower costs – but if you don’t know how low to go and when to stop – your business will die.
- Maintaining current numbers on costs of labor, supplies and overheads is critical to assure that they reflect the dynamics of cost, market demand, response to the competition, and profit objectives – and your business will die.
- If your price isn’t affordable, you can’t guarantee sales – or in U.S. healthcare, you end up with runaway bad debt – and your business will die.
- If you sell too cheaply to Medicare or a managed care plan and they fill your capacity with low-paying patients, you can’t fill the capacity with people willing to pay more – and your business will die.
- Reference-based pricing that bases a number on something unrelated and irrelevant is a silly way to evaluate pricing – if Medicare prices don’t cover the costs to treat Medicare beneficiaries, and you are offered 130% of something that is undercompensated, what makes 130% right – or wrong? Agree to too many sales at the wrong price – and your business will die. Remember, this isn’t pasta. You can’t toss it at the wall and when it sticks call it good.
If you don’t know the cost to run your business you risk working really hard but your cash flow will be cumulatively negative. You’ll exhaust your financial resources – and your business will die. If you contract with insurers and health plans for prices that don’t cover the cost to participate in their network and treat their patients, your business will die.
That means know what it cost to open the doors, hire staff, operate the business, and the costs associated with billing and collections. If you don’t know this information, how can you, in good faith, accept an offer of a discounted compensation for services rendered? To determine how much it costs to run your business, include fixed expenses: property and/or equipment leases, loan repayments, stock, utilities, financial costs, and salaries/wages/commissions. Variable expenses include: seasonal fluctuations, the costs of markdowns, shortages, damaged merchandise, employee discounts and cost of goods sold. Most important is to add profit in your calculation of costs. Treat profit as a fixed cost, like a loan payment or payroll – you are not in business just to break even – even if the managed care plans and government payors believe that you should be “happy” to accept break-even. Health plans return profits to investors, why not you? I have health plan provider relations negotiators brazenly face me at the negotiation table for clients all the time and tell me that they’ve calculated their offer to ensure my client hits breakeven. Hey really? Don’t let the door hit ya … where the good Lord split ya!
Don’t be overly concerned with what competitors charge. Unless you want to position yourself as a commodity seller, take your differentiation into account. You may deliver additional value, higher quality, better convenience, better location, additional service or your greater expertise. It’s not always necessary to match or undercut your competitors.
Articulate your value proposition clearly. Price for a product or service should rest on one thing – the value that a product or service provides to your ideal customer. Not the masses, not the world. Answer this: How much would a rational patient of average means be willing to pay for your product, assuming the consumer had a perfect understanding of its actual worth? How much would they pay without losing gratitude that your business exists? What price would you accept without feeling exploited?
U.S. patients want to feel that they are getting their “money’s worth” and most are unwilling to purchase from a seller they believe to have less value… especially in a foreign country. So don’t worry about what Mexican hospitals and Indian hospitals and Thai hospitals advertise. If you cannot lower the price further, and don’t want to break banking regulations as an unauthorized and unregulated credit grantor or lender, then arrange for patients to have access to zero-interest financing options. Choose a lender such as CarePayUSA
that is non-recourse and accepts 97% of applicants and sets payments at monthly or biweekly for 9-12 months.
Many patients budget against their take-home pay. That’s how they justify $1000 cell phones and 60″ TV screens from the local buy-here-pay-here and rent-to-own outlets. A $2000 balance due after adjudication of a high-deductible claim is so demoralizing people often feel so depressed they don’t even try to dig out from the hole and ignore your bills. But if you say “pay us $500 down and $38 bi-weekly”, they can cut out their stop at the barista, make coffee at home for a few months and the bill gets paid.