Developing Pricing for Integrated Care and Community-Based Services Featuring: Erin Westphal, Program Officer Karen Scheboth, Director of Grants Administration Eric Thai, Director of Finance

Webinar Agenda About The SCAN Foundation New Opportunities for CBOs Pricing Methodology Pricing Guide Overview Types of Costs Example Walkthrough Q&A

Mission: To advance the development of a sustainable continuum of quality care for seniors. Our Mission and Vision Vision: A society where seniors receive medical treatment and human services that are integrated in the setting most appropriate to their needs and with the greatest likelihood of a healthy, independent life.

New Opportunities for CBOs Why Pricing Matters Now Changes in the organization, financing, and delivery of health care provide new opportunities (& challenges)  Duals Integration Pilots & Managed Long-term Services and Supports  Health Plans responsible for organizing community-based LTSS  Limited experience  Buy it or build it option  Hospital Readmissions Reduction Programs  Care Transition Programs  Integrated Care Models  Accountable Care Organizations, Health Homes

Pricing is an Art and a Science 1.Determine your Pricing Structure 2.Estimate your Value 3.Calculate your Cost 4.Analyze your Competitors 5.Set a Price

Pricing Guide Contents Section 1: Pricing Structures Section 2: Setting a Price Section 3: Other Pricing Strategies Appendix of Additional Resources Includes examples based on CBOs

Section 1: Pricing Structures

Section 1: Payment Models

Fixed vs. Variable Costs Fixed costs are not affected by the volume of services or goods produced. – Examples include: Supervisor salaries Additional office space Additional equipment Variable costs will increase or decrease with changes in volume. – Examples include: Hourly wages of nurses or case managers Supplies used in performing services Fuel for transportation vans Supplies needed to prepare home-delivered meals

Fee For Service Model $ Volume of Services Total Revenues $ Volume of Services Total Costs Break-even Q $ Volume of Services Total Costs Break-even Q RevenuesHigher Fixed CostsLower Fixed Costs Total revenues increase as volume increases. With higher fixed costs, a higher quantity is needed to become profitable Lower fixed costs will yield profits with lower quantities Profit Loss Total Revenues Profit Loss

Capitation Model $ Volume of Services Total Revenues $ Volume of Services Total Revenues Total Costs Break- even Q $ Volume of Services Total Revenues Total Costs Break- even Q RevenuesHigher Fixed CostsLower Fixed Costs Total revenues are constant as volume increases. With higher fixed costs and lower variable costs, profits are sustained for larger quantities Higher variable costs and lower fixed costs will result in losses with lower utilization Profit Loss Profit Loss

Section 2: Setting a Price

Determining Value Reference Values can be: -Competitor prices -Customer’s cost of doing it themselves Sources of Differentiation Value include: -Cost savings -Convenience and time savings -Brand recognition -Reliability -Customer service -Performance -Quality

Determining Costs Categories of Costs: 1.Fixed or Variable 2.Direct or Indirect 3.Relevant or Sunk DirectIndirect Fixed Relevant Sunk VariableRelevant

Direct vs. Indirect Expenses Indirect Expenses apply to multiple projects so it is harder to quantify and trace them to individual projects. Examples: - Rent - Utilities - Finance staff - IT Key Difference is Ease of Allocation Indirect Cost Rate is an inaccurate shortcut Direct Expenses apply to a specific project and can be easily traced to the project.

Relevant vs. Sunk Costs Another categorization of expenses Sunk Costs are “existing” expenses that will be incurred regardless of whether or not the service is offered. Examples: - Existing rent - CEO salary - Finance staff - Human resources DO NOT INCLUDE SUNK COSTS IN FINANCIAL PLANNING Relevant Costs are “future” expenses that will be incurred only if the service line is offered.

Section 2: Setting a Price Sunk Costs Fallacy & Full Cost Recovery

Section 2: Setting a Price Sunk Costs Fallacy & Full Cost Recovery

Calculating Cost Pricing Guide includes a Cost per Unit calculation tool 1)Determine Relevant vs. Sunk Costs 2)Exclude Sunk Costs 3)Determine Fixed vs. Variable Costs 4)Allocate Direct and Indirect expenses 5)Estimate quantity 6)Calculate cost per unit

Putting it All Together to Set a Price

Bilateral negotiation In-person visits Requires 10 additional care managers Individuals receiving care management are healthier and require less hospitalizations Example – Care Managers A CBO is offering care management services to a health plan

EXPENSE Office space Care managers Supplies Mileage Supervisors Training Human Resources Finance Tracking System (IT) Example – Determine Relevant vs. Sunk Costs SUNK? Relevant Sunk

Example – Determine Fixed vs. Variable Costs EXPENSE Office space Care managers Supplies Mileage Supervisors Training TYPE Fixed Variable Fixed Variable

Example – Allocate Project Costs EXPENSETYPE Office spaceFixed Care managersVariable SuppliesVariable MileageVariable SupervisorsFixed TrainingVariable ALLOCATION $20,000 per year $30 per hour $500 per care manager per year $10 per visit 1.5 supervisors = $90,000 per year $500 per care manager per year

Example – Estimate Quantity and Calculate Cost per Unit FFS payment model 1.5 hours per visit (including travel and reporting) 1,000 members with monthly visits 12,000 visits per year 10 care managers EXPENSETOTAL COSTSCalculationCOST PER VISIT $65.00 Office space$20,000 per year / 12,000 visits$1.66 Care managers$30 per hourX 1.5 hours$45.00 Supplies$500 per mgr/yrX 10 / 12,000 visits$0.42 Mileage$10 per visitX 1 visit$10.00 Supervisors$90,000 per year / 12,000 visits$7.50 Training$500 per mgr/yrX 10 / 12,000 visits$0.42

Reference Value – Telephonic care management = $60 per call Differentiation Value – In-person care management reduces hospital admissions by 5% over telephonic Average hospital admission costs $10,000 Total cost savings per year = $500,000 (1,000 members X 5% X $10,000) Differentiation Value per visit = $41.67 ($500,000 / 12,000 visits) Value = $ Example – Estimate Your Value

Example – Set a Price $ $65.00

Questions

On Our Website

Sign up to receive alerts at Follow us on Find us on Facebook The SCAN Foundation For More Information