Cost shifting but smarter

Strategic pricing isn’t a new idea. There’s just a much better way of doing it that leads to much better net revenue results. 

That was the consensus of revenue cycle leaders from several major health systems who came together at Kodiak’s invitation-only Revenue Circle conference held Jan. 26-28 in Scottsdale, Arizona. Strategic pricing was one of many hot topics discussed at the event. Other topics included denials management, revenue integrity, and automation. 

So, what is strategic pricing? A good place to start is to explain what it isn’t.  

One thing strategic pricing isn’t is an across-the-board increase in prices where everything goes up by the same percentage. That’s not strategic because, although gross revenue will go up by that amount, net revenue won’t because many payors, including big public payors like Medicare and Medicaid, pay fixed prices to providers. For those payors, raising prices across the board by any amount won’t matter much in terms of net revenue gains.  

The same is true of raising prices by a specific percentage department by department or service line by service line. That’s not strategic for the same reason—fixed prices paid by big public payors—and because costs vary significantly within a department or service line, depending on who’s providing the patient care. Raising prices for a cost-inefficient service or care provided by a cost-inefficient clinician again may increase gross revenue but do little to push net revenue in the right direction. 

What is strategic is knowing what charges for individual line items generate the highest contribution margin, and what charges for individual line items generate the lowest contribution margin. With that information, a hospital or health system can raise prices on the high-margin items by a certain percentage and lower prices on the low-margin items by the same percentage. The impact on gross revenue is zero. It’s the same. But the impact on net revenue can be substantial as in more. Much more. 

Now that’s strategic. 

Smart cost shifting … with a proven methodology and an assist from technology 

To be strategic, hospitals and health systems need to know the prices they charge for all the line items in their charge description master, which everyone used to call their charge master.  There are likely more than 15,000 line items in a typical hospital or health system CDM. 

Further, a hospital or health system often contracts with dozens if not hundreds of different payor types and individual health plans.  

Hospitals and health systems also need to know whether their payor types and individual health plans pay them on a fixed or percentage of charge basis. Most commercial payors and commercial health plans pay providers on a percentage of charge basis. Most public payors and health plans, as mentioned, pay providers on a fixed basis. 

That’s a lot of data to know and master. No one said being strategic was going to be easy. 

This is where technology-driven automation comes in. Technology can ingest everything in a hospital or health system CDM and, using proprietary software, determine what high-margin line items should go up and by what percentage and what low-margin line items should go down and by what percentage—all by payor type and individual health plan—to reach the target net revenue increase without an increase in gross revenue. 

Kodiak has developed such technology and can build a strategic pricing model for a hospital or health system in as little as 10 weeks. Based on our engagements and market experience to date, it’s not uncommon to see 0.5% to 0.75% of gross revenue fall to the bottom line. 

It’s cost shifting—the practice of charging more to private payors to compensate for payment shortfalls from public payors—but a whole lot smarter. 

Aside from the obvious increase in net revenue, using a proven methodology with an automated, tech-driven strategic pricing model accomplishes four other objectives: 

• First, it eliminates the risk of pricing a hospital or health system out of a market by multiple-year, across-the-board increases. The model makes the hospital or health system more competitive. 
• Second, hospitals and health systems can customize the model to individual hospitals or deploy it enterprise wide to standardize pricing across hospitals within a system. 
• Third, the model can react quickly to changes in the competitive dynamics in a market, including external events like new market entrants, mergers, acquisitions, and ownership changes.  
• Fourth, the model positions a hospital or health system to improve compliance with existing and new price transparency requirements from state and federal governments.  

Hospitals and health systems already have the data in their CDMs to do strategic pricing. They just need a proven strategic pricing methodology and tech-driving automation to build a new strategic pricing model to make it happen and change the future of their net revenue performance. 

Read more insights from the Kodiak Revenue Circle: 

• “11 priorities facing healthcare revenue cycle leaders in 2025” 
• “7 payor do’s and don’ts from your provider peers.”