The Strategic Pricing Imperative - BDC Advisors · BOSTON | CHICAGO | HOUSTON | MIAMI | SAN FRANCISCO | WASHINGTON, DC The Strategic Pricing Imperative: New CMS Rules Require Transparency

BOSTON | CHICAGO | HOUSTON | MIAMI | SAN FRANCISCO | WASHINGTON, DC

The Strategic Pricing Imperative:New CMS Rules Require Transparency of Negotiated Rates in 2021: Will You Be Ready?

Draft for Discussion

May 2020

Copyright © 2020 BDC Advisors, LLC. All rights reserved.2

Today’s Discussion

Strategic Pricing

Overview of Price Transparency Rules

The Market Imperative

Developing and Executing a Strategic Pricing Game Plan

The Game Changer


Price transparency will turbo-charge patient consumerism and health plan steerage, putting enormous pressure on health system margins.

New Rules Represent Dramatic Changes

Release of negotiated ratesHospitals to publicly display payer level negotiated rates for each item and service, service packages and 300 shoppable services

Provide cost sharing informationHealth plans to provide cost sharing information to patients, similar to an EOB (essentially adjudicating a claim prior to service rendered)

Launch MLR rebate opportunityHealth plans that encourage consumers to shop for services from low-cost, high-quality providers can include incentive payments to members as medical expense in their MLRs

Providers Will Experience Negative Impacts

Loss of profitable commercial volume due to patient consumerism and health plan steerage

Unit rate compression for services as most movement will be in the form of rate reductions

Increased competition from Centers of Excellence

Increased network exclusions

Bottom Line: Declining financial performance

1

2

3

4

5


Notes: (1) Based on health system priced above market average rates and in competitive market. (2) Assumes annual drop of 5% in commercial volume which reduces operating margin by ~1% YOY..

Health systems with no pricing strategy will see margins collapse and, in a world of COVID-19, we have no margin for error.

The 7 Key Drivers Projected Margin of $2B Health System2

Patient Consumerism

Health Plan Steerage

Unit Rate Deterioration

Network Changes

Payer Mix Deterioration

Reference Pricing

Centers of Excellence

Financial Impact1

$-

$10

$20

$30

$40

$50

$60

$70

Year 1 Year 2 Year 3

Ope

ratin

g M

argi

n ($

M)

Year

Note: Does not include COVID-19 impact


BDC's proven approach to strategic pricing improves health system margins.

BDC’s Proven Approach

Focuses not only on revenue, but also on margin

Aligns pricing with growth and investment

Integrates opportunities to use excess capacity

Mitigates volume losses from pricing and market pressures


Results: $2B health system achieves $35M operating margin improvement by deploying strategic pricing.

CHALLENGE APPROACH RESULTS

An academic health system shifted its enterprise strategy and needed to align its pricing strategy ahead of upcoming contract negotiations

Patient consumerism and health plan steerage were accelerating

Risk-based contracting models were driving volume to lower cost sites of care

Price position by service line was an unknown for the organization

SITUATION

Health system was faced with an increasingly challenging consumer market in key payer segments

The organization needed to merge multiple hospitals onto a single license which required concurrent negotiations for most of its commercial business

Completed market analysis including comprehensive rate benchmarking

Conducted internal financial analysis to understand profit centers and opportunities

Identified opportunities and vulnerabilities of current pricing approach

Developed, deployed pricing strategy including pricing targets and payer level rate actions

Negotiations were successfully completed and pricing strategy improved the organization’s operating margin by $35M

Pricing adjustments resulted in volume growth in high profit, strategically-important services

Leveraging ‘consumer scorecard’ as platform for on-going monitoring and advancing pricing analytics



Strategic Pricing




The Game Changer


Source: CMS Final Hospital Price Transparency Rule and Proposed Transparency in Coverage Rule.

CMS’ new price transparency rules have ushered in a new era of transparency in American healthcare, and they will propel providers and health plans to focus on delivering value.

Price Transparency Rules

HOSPITALSHospital Price Transparency

Rule

(Final Rule)

HEALTH PLANSTransparency In Insurance

Coverage Rule

(Proposed Rule)

These new rules are game-changing, requiring an unprecedented level of transparency of negotiated rates that will have far reaching impacts on the healthcare industry.

Rules go into effect Jan. 1, 2021


Providers will be required to publicly disclose their negotiated rates by service and health plan. Highlights of the Hospital Price Transparency final rule are summarized below.

HOSPITALS / PROVIDERS1,2

Hospital Price Transparency Rule

(Final Rule)

Publicly Disclose All Standard Charges Publicly Display Shoppable Services

• For each item and service as well as service packages

• All Standard charges: gross charges, payer-specific negotiated charges, discounted cash prices, and both minimum and maximum negotiated charges

• Information required: code, description of the service, service setting (i.e. IP vs. OP) and hospital location

•All standard charges (except for gross charges) for 300 shoppable services,

• Including ancillary services provided with the primary shoppable service

•70 of the 300 are specified by CMS and the remaining 230 are chosen by the provider

Compliance • CMS can impose a penalty of up to $300/day for noncompliance• CMS will publicly display a hospital’s noncompliance on CMS website.

LegalChallenge

A group of hospital associations and select hospitals have filed a lawsuit against HHS and requested a summary judgement on the rule.

Notes: (1) Hospitals include any licensed hospital pursuant to State or local law, however, Veterans Affairs, DOD Military Treatment, and Indian Health Service facilities are excluded. Additionally, ASCs, physician offices and other non-hospital sites of care are excluded from the “Hospital” definition. (2) Services include any hospital facility fees (IP and OP), and professional fees from employed physicians or APPs.Source: CMS Final Hospital Price Transparency Rule; The American Hospital Association et al. v. Azar


Notes: (1) Negotiated rate required if it impacts the patient’s cost sharing liabilitySource: CMS Proposed Transparency in Coverage Rule

Health plans will be required to disclose negotiated rates and provide cost information to members in advance of service delivery. Highlights of the proposed Health Plan rule are summarized below.

HEALTH PLANS

Transparency In Insurance Coverage

Rule

(Proposed Rule)

Provide Information To Participants, Beneficiaries and Enrollees

Publicly Disclose Health Insurance Coverage Information

• Cost sharing liability (e.g. deductibles, coinsurance, and copayments)

• Accumulated amounts toward deductible and/or out of pocket limits

• Negotiated rate1

• Out-of-network allowed amount• Items and services content list (for those

subject to a bundled payment)• Notice of prerequisites to coverage (e.g.

concurrent review, prior authorization)• Disclosure notice regarding what out-of-

network providers may bill

•Name or identifier of the health plan•Billing codes•Negotiated in-network rates•Out-of-network allowed amount

CMS expects third-party companies will aggregate and leverage this data

Proposed Amendment to Medical Loss Ratio Program

Health plans that encourage consumers to shop for services from low-cost, high-quality providers can include incentive payments to members as medical expense in their MLRs• Provides motivation to implement patient

incentive programs


The new price transparency rules will have important implications for providers, health plans and patients.

Key Implications Across Stakeholders

• Availability of patient out-of-pocket responsibility represents “a step in the right direction”

• Increased consumerism / steerage as health plans pursue MLR rebate exemption

PATIENTS

• Need to define and communicate value proposition

• Deploy strategic pricing approach• Experience unit rate compression• Prepare for expanded reference

pricing• Shifts in highly profitable

commercial volume and market share

• Develop Centers of Excellence strategies

PROVIDERS

• Employer discontent with price variability

• Deploy strategic pricing approach• Drive patients to alternative sites of

care• MLR rebate exemption opportunity• Opportunity to compress provider

rates• Elevated importance of reference

pricing• Investments in tools and customer

service

HEALTH PLANS

There will be winners and losers…


Proactive steps will be critical to ensuring providers are well positioned to take advantage of this new level of transparency.

Need to define and communicate patient value proposition

• Health plans (and news media) may portray providers as the cause of price differentials

• High-priced providers will now be required justify price premiums (similar to other industries)

Deploy strategic pricing approach• Competition from lower cost sites of care will impact price and revenue• Providers that successfully re-calibrate prices can capture volume and shift market

share

Potential for unit rate compression

• High priced providers may face rate compression• Select providers with below market average rates could renegotiate price increases

Prepare for expanded use of reference pricing

• Shifts in the business cycle and increasing unemployment rates will motivate employers to pursue reference pricing

Shifts in highly profitable commercial volume and market share

• Shifts in commercial volume from higher to lower priced health systems may deteriorate financial performance

Consider Center of Excellence (COE) strategies

• Publicly available pricing data will accelerate the development and adoption of COE programs as a strategy to secure commercial volume.

Implications For Providers


Employer discontent with price variability

• Price differentials will galvanize employers to action and require a rational pricing structure• Need to renegotiate prices with providers to rationalize across services

Deploy strategic pricing approach • Identify which services to push for lower rates on and which to pay a premium for

Drive patients to alternative sites of care • Direct patients to alternative sites of care through benefit design and patient incentives

MLR rebate exemption opportunity

• Rule would allow health plans to count patient incentive payments provided for low-cost, high-value providers against their MLR

• Standard charge disclosures coupled with quality information and patient incentives would enable patients to identify and access high-value providers

Opportunity to compress provider rates

• Renegotiate rates with providers to reasonable bands reflective of market prices• Health plans with low rates (favorable) may experience upward pressure on rates

Elevated importance of reference pricing

• When the business cycle turns and employers grow more receptive to reference pricing, health plans are more likely to pursue reference pricing initiatives

• Offer higher rates in short term on services likely to be reference priced in future

Investments in tools and customer service

• Requires investment in tools and infrastructure to ensure compliance with CMS regulations • Prepare for higher volume of customer service inquiries

Implications For Health Plans

Similarly, proactive steps will be critical to ensuring health plans are well positioned to take advantage of new level of transparency.


Availability of patient out-of-pocket responsibility represents “a step in the right direction”

• Hospital rule does not provide patient out-of-pocket information, but the health plan rule does provide patient out-of-pocket expense which will have some impact

• For patients to identify and access high-value providers and care, health plans will need to provide patients not only with pricing information but also with relevant quality information

Increased consumerism / steerage as health plans pursue MLR rebate exemption

• Once the relevant price and quality information are available, employers and health plans can strengthen a patient’s ability to access high value care through patient incentive programs and reference pricing strategies.

• The MLR rebate provision is designed to support health plans in pursuing this type of strategy by including patient incentive payments as part of a health plan’s MLR.

Implications For Patients

The new rules represent a win for members and patients, however, additional ‘assembly’ will be required to enable patients to easily access high quality care.



Strategic Pricing




The Game Changer


Whether or not these price transparency rules go into effect in 2021, underlying market forces are driving the need for health systems and health plans to approach pricing more strategically.

Key Market Drivers for Strategic Pricing

Employer Benefit

Design Trends

High Performance

Networks

Shift to Value Based

Payment

Innovation in Care Delivery

Copyright © 2020 BDC Advisors, LLC. All rights reserved.

Source: American Hospital Association Trend Watch 2018. Urgent Care Association, "Urgent Care Industry White Paper," November 2019; Accenture, "US Retail Health Clinics Expected to Surge by 2017 According to Accenture Analysis," August 2015; Forbes, "Doctors' Virtual Consults With Patients To Double By 2020," August 2015; Health Care Advisory Board interviews and analysis.

Health systems have shifted revenues (and margin) to outpatient services, which have experienced tremendous growth in the past decade, but are now in jeopardy with the growth of alternative sites of care.

Projected

National Distribution of Inpatient vs Outpatient Gross Patient Revenue Trended

Key Inpatient Gross Revenue Outpatient Gross Revenue

17

Urgent Care Locations

34%Increase

6,9469,279

2015 2018

Retail Clinic Locations

47%Increase

1,914

2,805

2014 2017 E

Virtual Consults

62%Increase

16.6M

26.9M

2015 2020

Increase in U.S. Outpatient Sites of Service


Purchasers in the individual and commercial ‘price sensitive’ segments are more inclined to trade broad provider network access for lower monthly premiums.

Commercial Market SegmentsMarket

SegmentComm. Individual

ExchangeCommercial Price

SensitiveCommercial Innovative

Commercial Traditional Group

DescriptionIndividuals and

employers purchasing coverage on exchange.

Often includes small (<99 employees) and some

mid-size (100-500 employees) employers focused on affordability.

Employers interested in and able to implement

innovative models. Often with a more sophisticated HR

function.

Employers who are less willing to innovate given

traditional benefit offerings and large

employee base.

Interest in Innovative Models

Large percentage willing to trade price for

more limited / tiered network options.

Often willing to trade price for network.

Highly interested in capabilities to

implement innovative models.

Low interest potentially due to high switching

costs, employee distribution, lower sophistication, etc.

Buying Criteria Premium price & cost share, brand, network

Premium price, followed by network

Broad network, network discounts, admin

simplicity

Premium price, brand, network (inclusion of

existing MDs), access


Source: Avalere Health analysis, Change in Availability of Broad Network 2014-2019.

High performance narrow networks are continuing to expand at the expense of broad networks and provider prices drive network inclusion decisions.

Change in Availability of Broad Networks, 2014 – 2019

In addition to net expansion, the average premium differential between broad and narrow networks for comparable benefits has averaged 15-19% between 2014 and 2019, indicating that narrow networks will likely continue to grow.

>15%

Legend> 15% reduction in broad networks

1-15% reduction in broad networks

0-14% increase in broad networks



> 45% increase in broad networks

Data unavailable


Employers have influenced pricing dynamics through increased penetration of high deductible health plans, which increase consumer responsibility for healthcare costs.

Note: Small firms have 3-199 workers, larger firms have 200+ workers. These estimates include workers enrolled in HDHP/SOs and other plan times. Source: The Kaiser Family Foundation Employee Health Benefits Survey 2018-2019.

Percentage of Covered Workers Enrolled in a Plan with a General Annual Deductible of $2,000 or More for Single Coverage, by Firm Size (2009-2019)

Patients are learning to shop for routine outpatient services and are choosing lower price, convenient options.


With the ongoing labor market shift from COVID-19, reference pricing could take off as an attractive strategy to push care towards lower cost providers and settings.

Example of Reference Pricing Impacts on CalPERS and Safeway Population

16.8M people lost their jobs in three weeks—nearly double the job losses during the Great Recession

Reduction in prices paid by CalPERS and Safeway employees as a result of reference pricing programs2-6

Unemployment has Skyrocketed

Footnotes: (1) Reference pricing services from CalPERS include: Joint Replacement, Arthroscopy of the knee, Arthroscopy of the shoulder, Cataract removal, Colonoscopy. Reference pricing services from Safeway include: Laboratory tests, CT scans, and MRI procedures.Sources: New York Times, Business Insider, Health Affairs, New England Journal of Medicine, Kaiser Family Foundation, Health Care Cost Institute, CMS.

0

0.2

0.4

0.6

0.8

1

1.2

Joint Replacement(CalPERS)

Colonoscopy(CalPERS)

Lab Tests(Safeway)

MRI Procedures(Safeway)R

elat

ive

Pric

e (1

.0 =

Bas

elin

e R

elat

ive

Pric

e)

Select Services by Organization

No Reference Pricing Reference Pricing Implemented

-19.8% -21% -32% -10.5%

Avg. reference pricing of the same services implemented by CalPERS and Safeway applied to the total commercial market would save 2.5-3% in TME1

1.0


Source: AMGA Projected Reimbursement Trends, “Taking risk, 3.0; Medical Groups Are Moving to Risk…Is Anyone Else?”

As both federal and commercial payers shift away from fee-for-service payment models, physicians will become increasingly focused on the price and efficiency of downstream providers.

2017 2017


Source: News Articles

These market forces are already creating challenges for health systems nationwide.

Organization Challenges

• Narrow network products increasingly prevalent in market

• Newer products excluded organization• Resulted in almost double digit decrease in

commercial volume over two-year period

• Movement toward higher deductibles and high out-of-pocket costs driving patients to go elsewhere

• Insurance products excluded organization due to high prices

• Resulted in a decrease in patient revenue

• Excluded from networks of national payer with large commercial and MA membership (~400K members) because of high prices

Commercial volumelosses

Network exclusions

Aggressive patient steerage by risk-based providers and health plans

Issues Causing Health System Challenges

Southeastern Health System

Southern Academic

Health System

Midwestern Academic

Health System



Strategic Pricing




The Game Changer


The current environment encourages providers to move beyond the historic model of managing prices at the chargemaster level.

Avoiding ‘Lesser of Charge’ Issues

Rationale for Significant Spread Between Allowed Amounts and Charges

$25 $50

$75 $100

$0

$50

$100

$150

$200

$250

Note: Assumes same volume mix in out of network scenarios.Note: Assumes same volume mix in out of network scenarios.

Revenue from Payer Partner ($M) Chargemaster

Code Description Charges Allowed Amount

301100011 202 MICU $10,000 $9,012

302100012 206 Intermediate Care $7,075 $6,025

301100550 OP Observation Unit $200 $250

303000011 121 Med / Surg Acute $3,601 $4,024

Due to lessor of provisions in contracts past clients have experienced significant payment

losses (e.g. tens of millions of dollars)In Network Allowed Amount

Charges at 125%

Allowed

Charges at 150%

Allowed

Charges at 175%

Allowed

Charges at 200%

AllowedOut-of-Network

Improving the BATNA

Health systems still need to maintain a strong spread between charges and allowed amounts. However, setting the right allowed amounts is growing in strategic importance.


To win and succeed in this new era of price transparency and consumerism, providers and health plans will need to develop a thoughtful and comprehensive approach to strategic pricing.

FACTORS PROVIDER PERSPECTIVE HEALTH PLAN PERSPECTIVE

Size Value of the service to the provider in terms of revenue and margin Impact of service on medical cost

Growth Expected growth of service for market and provider

Expected growth of service for market and provider

Price Elasticity & Patient Steerage

Price elasticity based on service ‘shop-ability’ and provider’s distinctiveness

Ability to steer patients to high quality, cost-effective providers for service

Price Position Provider price position relative to market averages and key competitors

Provider price position relative to competitors and alternative sites of care

Strategic Pricing Factors


Successful strategic pricing initiatives reflect the organization’s market position, financial and operational objectives.

Profile health plan trends including premium prices, network design, patient benefit design, patient incentive programs, reference pricing initiatives and financial performance

Evaluate provider trends including volume growth by segment and payer, market share trends by segment and payer, impact of new entrants and financial performance

Assess price elasticity / patient steerability by service and location Identify, prioritize consumer-driven market opportunities and threats

Perform Market

Analysis

For providers, understand service and site level financial data including revenue, cost (variable and fixed) and margin

For health plans, determine financial opportunity from alternative sites of care initiatives and reallocation of pricing services

Conduct Financial Analysis

Develop guiding principles for pricing strategy Align pricing strategy with organizational goals Socialize pricing strategy and P&L specific budget impacts with key internal stakeholders Define approach to reallocate revenues / medical expense based on assessment Define payer / provider specific rate actions

Develop Pricing

Strategy

Conduct negotiations with major payers / providers Align chargemaster to be in sync with updates to payment rates and market tactics Revisit P&L specific budget impacts based on expected vs. actual negotiation outcomes

Conduct Negotiations

BDC’s Approach To Pricing Strategy

1

2

3

4


Providers need a comprehensive understanding of reimbursement, patient revenue, expense and margin when developing their pricing strategy.

Above market average Below market average

A revenue-focused perspective in managed care often leads health systems to focus on increasing rates below market.

• A margin-focused perspective in managed care enables health system to optimize margin and leverage underutilized capacity.

• Further, health systems can increase margin and create value for health plans by strategically shifting certain cases from one facility to another to take advantage of contribution margin differentials.

Average Reimbursement Gap To Market (%) Key Hospital Occupancy & Margin Statistics

Community 5

Community 3

Community 2

Regional 2

Regional 1

Community 4

AMC

Community 1

68%

57%

44%

67%

76%

76%

86%

71%

45%

52%

44%

47%

48%

51%

43%

46%

Inpatient Occupancy %

Contribution Margin %

62

42

31

75

32

-24

A

B

C

D

E-5

6

1

Payer AMC Regional Community

-13

6

-7

9

11

3


For providers, service level insights on the potential to protect price are used to inform payer-specific pricing actions.

Typically performed by client teams internally

Key Elements of Strategic Pricing Strategy


When approaching a strategic pricing effort, several best practices should be kept in mind for providers.

• Recommendations should be tailored by facility to reflect their respective market realities• Any pricing adjustments should:

• Protect strategically important services that are distinctive and/or growing• Calibrate pricing for shoppable services• Optimize market positioning

• Costs should be understood at the service line and sub-service line levels and prices reflective of that knowledge

• Integration and communication with finance, budgeting process and P&L ownership is essential to socialize changes

Best Practices


When done right, pricing strategies position provider organizations to drive growth, revenue and overall margin.

Case Study

Market Context

Actions Taken

Results

• Payers excluded health system from preferred list of outpatient services • Meanwhile, physicians in the market began opening their own Ambulatory Surgery and Imaging

Centers

• A large western health system had made significant investment in their ambulatory footprint to shift revenue to outpatient services but was not seeing a return on investment or hitting outpatient visits targets

Problem

• Health system implemented pricing strategy focused on aligning pricing with market trend: lowering prices for shoppable services and increasing prices for select hospital-based services

• Volumes increased with uptake in physician and payer referrals • Overall revenue and margin increased due to the redistribution of prices across services, even

with concessions made


• Nationally known managed care and population health management expert

• Executive payer and provider experience at Cleveland Clinic, Trinity Health, Intermountain HC, Coventry & Centene Corp.

• Member of Health Care Transformation Task Force and National Business Group on Health

• Recent project work includes managed care diagnostic on large health system in Southeast

KEVIN SEARSDirector, BDC Advisors

[email protected]

CHRIS SUKENIKPrincipal, BDC Advisors

[email protected]

• Proven consulting leader and trusted advisor to senior healthcare executives with a focus on provider and payer healthcare markets

• Extensive experience in enterprise strategy, payer contracting strategy and value-based contracting initiatives

• Recent project work includes a managed care organization diagnostic and improvement effort, the development of a payer strategy for a market leading health system and multiple payer-provider contract negotiations

• Former Consultant at Navigant

Background on BDC Advisors Team

Documents

The Strategic Pricing Imperative - BDC Advisors · BOSTON | CHICAGO | HOUSTON | MIAMI | SAN FRANCISCO | WASHINGTON, DC The Strategic Pricing Imperative: New CMS Rules Require Transparency