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Maximize Value December 17, 2015

Quotable: HealthLeaders Interviews Tomas Mikuckis on Price Transparency

Partner, Health and Life Sciences, Oliver Wyman

The December 2015 issue of HealthLeaders Magazine spotlights some of the big ideas being put into practice in the healthcare industry today. One of those big ideas centers around healthcare price transparency. In a feature article on the topic - “Healthcare Price Transparency: Patients and Payers Versus Providers?” - Senior Editor Philip Betbeze asks Oliver Wyman’s Tomas Mikuckis whether leaders at hospitals and health systems need to worry about price transparency on a strategic level. An excerpt:

Does top leadership at hospitals and health systems need to worry about price transparency on a strategic level? In a word, yes, says Tomas Mikuckis, a principal in the health and life sciences division of consulting firm Oliver Wyman.

He says those who pay for patient care—patients themselves, employers, and the government—are moving quickly toward price and quality comparisons for services that are easily comparable, such as certain orthopedic procedures, colonoscopies, and, of course, imaging, to name a few. He calls those services highly transactional, and their prices are heading down.

Another, less-recognized factor propelling the transparency trend is that as physician organizations and ACOs of all stripes enter into risk arrangements with payers—where the provider of care is responsible for the total cost of that care, and where the provider takes risk on performance—the cost of the service becomes much more important to the primary care physician.

“If, as a physician, I have three hospitals to choose from and one is more expensive than others but of similar quality, that is one lever I can use to manage the health of that patient I’m at risk for,” Mikuckis says. “Consumer tools may take a while to catch on, but the physician angle is important. Whoever is at risk will shift referral patterns, especially with the growth of products and networks that are more at risk for referral management.”

The perils of price disintermediation

The point is, many services in the healthcare universe are shoppable. As patients become more like consumers and begin shopping around, prices for profitable services—many of which hospital executives have previously counted upon to subsidize money-losing specialty programs—will rapidly ratchet down.

The ability of certain high-margin procedures “to support your business going forward is very much in jeopardy,” Mikuckis contends.

He says up to two-thirds of healthcare services will become price-sensitive in the next decade. Therefore, he says, providers need to work quickly to get a true handle on what it costs them to provide each of an array of services, so that prices are based on the foundation of cost. This requires providers to become much more sophisticated on the cost to deliver from a basic allocation game, he says.

For instance: What does an incremental MRI cost? The answer depends on a lot of factors, but some organizations have been able to better allocate the fixed cost of an MRI machine, for example, by charging less for people who agree to come in at off-peak times when the machine would otherwise not be used at all.

“If you have a true understanding of the cost to deliver a service, you can get more sophisticated on what you charge,” Mikuckis says.

A possible bright side for providers may be that some services are underpriced, too. Again, that’s where knowing what it costs to provide the service is invaluable information.

In addition to services that are able to be commoditized, which Mikuckis estimates at 40% of all healthcare services, there are services that are not as easy to commoditize: services provided at centers of excellence for certain types of care, organ transplants, and treatments for certain cancers, where quality and outcomes may trump price quite a bit, he says.

Some providers may be undercharging for those complex services and overcharging for the basic services, he says. An academic medical center, perhaps, shouldn’t be charging $2,000 for a radiology service to support charging $30,000 for “service X.” Maybe you should cut the price of radiology and charge $50,000 for service X.

“There will be evening out of simple stuff, but if you are a leader in certain complex areas, you should be charging based on the actual cost,” says Mikuckis. “And there is a broader piece of it. If you have a better understanding of the cost to deliver and what the market will pay, you can make strategic decisions on what to get out of or grow based on core capabilities you already have in place. Pricing rigor internally can provide valuable input for those broader strategic decisions.”

Read the full article here.

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