Several years of pricing adjustments under traditional techniques often result in losing the original reasonable basis of individual CDM prices. It is possible to take an incremental, multi-year approach to correcting prices and bringing them in line with new pricing policies.
An incremental approach requires less analysis time for each pricing cycle and minimizes departmental issues and the possible financial uncertainty created by numerous and dramatic price changes in the CDM. Of course, the downside of the incremental approach is that it will take longer to bring all CDM prices into the hospital's pricing policies.
Key Factors
Healthcare prices (and peer prices) are generally rising annually due to inflationary pressures. This factor allows you to gradually adjust price levels compared to your market by changing prices less (or more) than the inflationary average. Compounded over several years, this can have a substantial total impact while muting the changes each year.
The second factor is the essential need to have a detailed working model of net revenue (percent-of-charge component only). This model needs to be capable of taking a new, proposed CDM price list and estimating the impact of the price changes on percent-of-charge payments. Much, if not most, of the hospital's total realized revenue is received from prospective-payment, fee-scheduled or negotiated-rate based payors. CDM price changes only have secondary effects on such revenue; for example, departmental cost/charge ratio changes, outlier/stop-loss payments, disproportionate share or formula-driven payment add-ons.
Therefore, the important first level impact analysis of any price change is simply
Key Benchmarks
All price setting and policies are against a benchmark, whether that be an external benchmark (peer/market prices, industry-wide cost measures) or internal (your actual cost of delivering the service).
The Medicare APC payment or Fee Schedule payment for services is simple and easy-to-get. What makes this a valuable benchmark is that the APC/Fee Schedules are built from RVU and cost-derived aggregate data. This makes it a proxy for a "standard" cost – not your cost for the service, but useful as a yardstick.
Peer and market comparative data is also available. Peer data usually comes from a small number of competitive hospitals and is generally a simple average of peer prices for individual services. Market data is from a larger set of hospitals, perhaps an MSA or a whole state, and is available as average prices or "quintile" ranges of prices for individual services. Local or national standalone laboratory or radiology service providers might also be considered competitive and their prices should be included if available. You may also want to have a different peer group for different services or departments to reflect the nature of the market competition; that can make analysis more accurate, but it also makes it more time consuming, so use it only for significant differences in services.
Cost information for each CDM service from a cost accounting system will provide a benchmark of prices against your actual costs. This is not essential for the analysis, but it adds another dimension to improve the results. Simply "imputing" the cost by applying a simple departmental cost-to-charge ratio to each CDM item won't help here.
Methodology
Compare your CDM prices against the benchmarks developed above from the following:
For each of these, compute the ratio of your CDM price over the benchmark price. For example, if your CDM price for a CBC is $24.00 and the Fee Schedule is $8.00, then that ratio is 3.0. Now, within each department rank order CDM service items by each ratio. We want to do this analysis within a department because ratios tend to cluster by department and the ratios for items in one department may not be directly comparable to those in another department.
Having done this, look at the items at the top and bottom of the list.
These will be the ones where the ratios are significantly different than the clustered average ratio in the middle of the list. Typically, there might 10 to 50 items per department at the ends of the list.
Review each of these CDM items. Look for miscoded items (HCPCS/CPT4 code not matching the actual service) and where the price listed in the CDM is not actually what appears on the final bill. This often happens with CDM items that have a different "unit of measure" in the CDM than dictated by the HCPCS code as the billing system may be automatically adjusting the price/units on the final bill to reflect the proper UB/HCPCS reporting.
The prices of the CDM items that are still significantly different from the clustered average for the department should be manually adjusted to be closer to the average.
Since there are multiple benchmarks being used, the ratio differences for each CDM item will differ. But you have enough data at this point to set a price that better matches the average ratios and satisfies any market or competitive situations particular to this CDM item.
Each CDM price should be above the applicable fee schedule amounts (highest of Medicare or negotiated fees) to avoid tripping the "lesser of charges or fee schedule" payment contractual provisions. While this is no longer a Medicare issue due to Inpatient and Outpatient PPS, it is often present in negotiated payor contracts.
Now, if the clustered average ratio for the department seems too high or too low, make an incremental correction by varying the annual across-the-board (ATB) up or down for the department as needed. For example, if you were applying a 6 percent ATB for the hospital but Radiology prices seemed on average to be too high, apply a lower percentage ATB to Radiology. Consistently applying this technique will tend to bring these prices as a group more into line with the benchmark, without dramatic price changes.
When you have a new set of proposed individual prices and department ATB percentage overrides, put them into your net revenue model and verify that the net revenue impact of the change set will be acceptable. You probably have to repeat this process several times until you are satisfied with the new prices.
Conclusion
With this methodology, you may need a dramatic change to a relatively few prices in your CDM that appear to be set far beyond the benchmarks. But the bulk of CDM prices will change gradually. The key is to make each set of gradual changes go in the proper direction every year so that the cumulative effect yields a CDM price set that meets the hospital's pricing policies.
Steven Z. Harris, Division President, CODING FOCUS Division
To learn how you can establish defensible yet optimum prices, visit Accuro Pricing.
