1. ESTABLISHING DEFENSIBLE PRICING IN TRANSPARENT TIMES Central-Southwest Ohio HFMA Biennial Dual Chapter Fall Conference September 26, 2014 Presented by: Jamie Cleverley, MHA Cleverley + Associates jcleverley@cleverleyassociates.com

2. | 2 | Today’s Objectives 1)WHAT IS DRIVING THE NEED FOR TRANSPARENCY & DEFENSIBILITY? 2)WHAT INFLUENCES HOSPITAL PRICING? 3)HOW DO WE DEFEND PRICES? 4)HOW DO WE CREATE AN APPROPRIATE PRICE STRATEGY?

3. WHAT IS DRIVING THE NEED FOR TRANSPARENCY/DEFENSIBILITY?

4. | 4 | 1 GROWTH IN HOSPITAL COSTS/CHARGES What is driving the need for transparency? National Healthcare Expenditures – Top Five Health Expenditure Categories (Millions) Source: CMS

5. | 5 | Source: CMS 1 GROWTH IN HOSPITAL COSTS/CHARGES What is driving the need for transparency? Annualized Change in National Health Expenditures by Top 10 Areas 1980-19901990-20002000-2010 Home Health18.1%Drug11.6%Net Cost of Hlth Ins8.9% Net Cost of Hlth Ins13.1%Home Health9.9%Home Health8.2% Drug12.8%Public Health8.0%Drug7.8% Physician/Clinical12.8%Other7.5%Hospital7.0% Public Health12.0%Net Cost of Hlth Ins7.3%Public Health6.3% Nursing/Contin Care11.4%Dental7.0%Other6.0% Other11.1%Nursing/Contin Care6.6%Physician/Clinical6.0% Hospital9.6%Physician/Clinical6.2%Dental5.4% Struct & Equip9.4%Struct & Equip5.6%Nursing/Contin Care5.3% Dental9.0%Hospital5.2%Struct & Equip4.9% Total All11.0%Total All6.6%Total All6.6%

6. | 6 | Inflationary Changes by Metric & Year 1 GROWTH IN HOSPITAL COSTS/CHARGES What is driving the need for transparency?

7. | 7 | 6.0% Rate Increase Median Limit Value 5.0% 1 GROWTH IN HOSPITAL COSTS/CHARGES What is driving the need for transparency?

8. | 8 | 1 GROWTH IN HOSPITAL COSTS/CHARGES What is driving the need for transparency? 18% 20% 6% 201020201966

9. | 9 | 2 INCREASED GOVERNMENT/LEGAL/MEDIA ATTENTION What is driving the need for transparency? http://www.healthdatamanagement.com/news/hospital-chargemaster- prices-codes-revenue-cycle-management-46485-1.html FY 2015 Final Rule: In the FY 2015 IPPS/LTCH PPS proposed rule (79 FR 28169), we reminded hospitals of their obligation to comply with the provisions of section 2718(e) of the Public Health Service Act. We appreciate the widespread public support we received for including the reminder in the proposed rule. We reiterate that our guidelines for implementing section 2718(e) of the Public Health Service Act are that hospitals either make public a list of their standard charges (whether that be the chargemaster itself or in another form of their choice), or their policies for allowing the public to view a list of those charges in response to an inquiry. MedPAC suggested that hospitals be required to CMS-1607-F 1205 post the list on the Internet, and while we agree that this would be one approach that would satisfy the guidelines, we believe hospitals are in the best position to determine the exact manner and method by which to make the list public in accordance with the guidelines.

10. | 10 | Growth in HSA/HDHP Plans by Year (thousands) Source: Center for Policy & Research, America’s Health Insurance Plans 3 GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE What is driving the need for transparency?

11. | 11 | 3 GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE What is driving the need for transparency?

12. WHAT INFLUENCES HOSPITAL PRICE?

13. | 13 | What influences hospital pricing? Three spheres of influence on price PRICE

14. | 14 | Who is likely to have the highest charges among hospitals that are: -Urban vs Rural -For-Profit vs Non-Profit -Teaching vs Non-Teaching -Large vs Small -High Market Share vs Low Market Share -High Medicaid/SSI vs Low Medicaid/SSI -High Cost vs Low Cost -High Margin vs Low Margin To what extent will these characteristics be an influencing factor? Testing price variables What influences hospital pricing? $

15. | 15 | Urban/Rural Status by Hospital Charge Index® Quartiles What influences hospital pricing?

16. | 16 | What influences hospital pricing? Organization Type by Hospital Charge Index® Quartiles

17. | 17 | What influences hospital pricing? Teaching Status by Hospital Charge Index® Quartiles

18. | 18 | What influences hospital pricing? Median Net Patient Revenue (millions) by Hospital Charge Index® Quartiles

19. | 19 | What influences hospital pricing? Median Market Share Percentage by Hospital Charge Index® Quartiles

20. | 20 | What influences hospital pricing? Median Inpatient Disproportionate Share Percentage by Hospital Charge Index® Quartiles

21. | 21 | What influences hospital pricing? Median Hospital Cost Index® by Hospital Charge Index® Quartiles

22. | 22 | What influences hospital pricing? Median Operating Margin by Hospital Charge Index® Quartiles

23. | 23 | What influences hospital pricing? Median Payer Environment by Hospital Charge Index® Quartiles Payer Environment: Markup Ratio/Deductions %

24. | 24 | Payer Number of Patients Net Payment per Patient Total Payment Total Cost Medicare50$92.50$4,625$5,000 Medicaid10$75.00$750$1,000 Uninsured5$5.00$25$500 Managed Care30$125.00$3,750$3,000 Other5???$500 Totals100$9,150$10,000 less Total Cost$10,000 less Required Profit$500 Balance Remaining($1,350) Average Cost per Patient = $100 Required Payment from Five Remaining Patients = $270 ($1,350/5) ??? Payment is the real key in determining hospital pricing What influences hospital pricing?

25. | 25 | Price = (NI + fixed pay loss) (1 - charge discount) Pricing Model avg cost + charge volume Average cost increases Use this model for price-setting at facility level: Net income requirements increase Losses from fixed pay business increases The percentage of charge paying patients decreases Price must increase when: The discount from charges increases Payment is the real key in determining hospital pricing What influences hospital pricing?

26. | 26 | Avg cost =$100 NI =$4 (4%) FP loss =$0 Charge payers =20% Charge discount =30% Required price =$171.43 Pricing Model – Payer Impact on Pricing Payment is the real key in determining hospital pricing What influences hospital pricing?

27. | 27 | MODEL # 1# 2# 3 Profit margin4% FP loss020 % charge50%20%100% Average discount %15%60%5% Mark-up required127325109 Pricing Model – Pricing Sensitivity Analysis Payment is the real key in determining hospital pricing What influences hospital pricing?

28. HOW DO WE DEFEND HOSPITAL PRICES?

29. | 29 | How do we defend prices? Three approaches to hospital price defense 1 23 ROI Model Peer PositionCost Markup

30. | 30 | (volume x price) - (volume x cost) investment ROI Formula ROI = Relating pricing to ROI: the public-utility approach Public utilities have used a Return on Investment (ROI) model to justify price increases to rate regulatory boards. The approach isolates the price variable from the ROI formula (below) and “tests” the remaining elements. If it can be proved that ROI, Cost, and Investment are not excessive, then price must also not be excessive. In the following pages, we present these tests. Tests 1.Is ROI excessive? 2.Is cost excessive? 3.Is investment excessive? If “no” to all three, price is not excessive. Return on Investment Model How do we defend prices? 1

31. | 31 | Return on Equity OH Median8.3% US Median9.0% Tests Is ROI excessive? Is investment excessive? Is cost excessive? How do we defend prices? Return on Investment Model 1 ROE: Excess of Revenue over Expenses/Net Assets

32. | 32 | Average Age of Plant Fixed Asset Turnover OH Median11.02.51 US Median10.32.49 Tests Is ROI excessive? Is investment excessive? Is cost excessive? How do we defend prices? Return on Investment Model 1 Average Age of Plant: Accumulated Depreciation/Depreciation Expense Fixed Asset Turnover: Total Revenue/Net Fixed Assets

33. | 33 | Facility-level cost measure: Hospital Cost Index ® Outpatient Costs Outpatient Cost Index Formula: Your Medicare Cost per Visit (RW/WI adj) US Median Medicare Cost per Visit (RW/WI adj) Inpatient Costs Inpatient Cost Index Formula: Your Medicare Cost per Discharge (CMI/WI adj) US Median Medicare Cost per Discharge (CMI/WI adj) How do we defend prices? Return on Investment Model 1

34. | 34 | Hospital Cost Index® OH Median100.0 US Median100.7 Tests Is ROI excessive? Is investment excessive? Is cost excessive? How do we defend prices? Return on Investment Model 1

35. | 35 | CPT® is a registered trademark of the American Medical Association. All rights reserved. Level of ComparisonMetric FACILITYHospital Charge Index® Medicare Charge per Discharge (CMI/WI adj) Medicare Charge per Visit (RW/WI adj) DEPARTMENTBETOS Analysis INPATIENT CASECharge by MS-DRG OUTPATIENT CASECharge by APC PROCEDUREPrice by CPT®/HCPCS Code Bundling Level of Detail Peer Position Model 2 Comparing your pricing to pricing at peer facilities How do we defend prices?

36. | 36 | Facility-level charge measure: Hospital Charge Index ® Outpatient Charges Outpatient Charge Index Formula: Your Medicare Charge per Visit (RW/WI adj) US Median Medicare Charge per Visit (RW/WI adj) Inpatient Charges Inpatient Charge Index Formula: Your Medicare Charge per Discharge (CMI/WI adj) US Median Medicare Charge per Discharge (CMI/WI adj) Inpatient Charge Index Outpatient Charge Index Hospital Charge Index® Sample Hospital136.1119.4128.9 Peer Average96.665.985.2 How do we defend prices? Peer Position Model: Facility-level comparison 2

37. | 37 | Hospital Charge Index® OH Median95.8 US Median103.6 How do we defend prices? Peer Position Model: Facility-level comparison 2

38. | 38 | Medicare Charge per Discharge (CMI and WI adj) OH Median$19,741 US Median$21,698 How do we defend prices? Peer Position Model: Facility-level comparison 2

39. | 39 | Medicare Charge per Visit (RW and WI adj) OH Median$349 US Median$367 How do we defend prices? Peer Position Model: Facility-level comparison 2

40. | 40 | Inpatient Disproportionate Share % OH Median7.7 US Median10.2 How do we defend prices? Peer Position Model: Facility-level comparison 2

41. | 41 | Sample Hospital Peer Average % of Peer Average Evaluation & Management – selected detail Office Visits 126.58111.74113.28% Emergency Room 406.53323.20125.78% Evaluation & Management Total 298.09213.27139.77% Procedures – selected detail Major Procedures – Cardiovascular 193.56113.00171.30% Eye Procedures - Cataract/Lens 130.76196.9366.40% Procedures Total 287.50185.65154.86% Imaging – selected detail Standard Imaging - Nuclear Medicine 230.29281.8681.70% Advanced Imaging - CT/CTA Scan Brain/Head/Neck 569.35396.29143.67% Imaging Total 467.71343.16136.29% Tests – selected detail Lab tests - Pathology358.81368.3897.40% Lab tests - Routine venipuncture1,854.80705.90262.76% Tests Total 495.30297.09166.72% CPT®Description 87075Culture specimen, bacteria 87076Bacteria identification 87077Culture Aerobic Identify CPT® is a registered trademark of the American Medical Association. All rights reserved. Department/Family Analysis “Lab Tests – Microbiology” How do we defend prices? Peer Position Model: Department-level comparison 2

42. | 42 | DRGDescription Sample Hospital Volume Sample Hospital Average Charge Peer Average Charge 470 Major joint replacement or reattachment of lower extremity w/o MCC 79552,24645,870 652Kidney transplant55183,983147,994 871Septicemia w/o MV 96+ hours w MCC16254,71431,379 460Spinal fusion except cervical w/o MCC54128,55992,961 468Revision of hip or knee replacement w/o CC/MCC7273,39155,107 APCDescription Sample Hospital Volume Sample Hospital Average Charge Peer Average Charge 0301Level II Radiation Therapy8,6801,4811,146 0412IMRT Treatment Delivery2,6354,6422,820 0310 Level III Therapeutic Radiation Treatment Preparation 36724,95511,648 0615Level 4 Emergency Visits2,6982,9882,102 0616Level 5 Emergency Visits1,2655,2104,272 CPT®Description Sample Hospital Volume Sample Hospital Average Charge Peer Average Charge 77418Intensity modulated treatment deliver2,6523,3542,213 77414Radiation treatment delivery4,981991851 77334Radiation treatment aid(s)2,9541,6501,026 99284Emergency dept visit2,9451,3311,027 77413Radiation treatment delivery3,896991808 CPT® is a registered trademark of the American Medical Association. All rights reserved. How do we defend prices? Peer Position Model: IP/OP/Procedure-level comparison 2

43. | 43 | Relating pricing to cost: Sources of Cost Data  Hospital cost-accounting system Direct Cost Fully allocated cost  RCCs How do we defend prices? Cost/Markup Model 3

44. | 44 | 1.Reduced net patient revenue, e.g., $5.1 million vs. $9.6 million in ATB 2.Major pricing changes, e.g., -99% to 3,580% Relating pricing to cost: Two Usual Outcomes How do we defend prices? Cost/Markup Model 3

45. CREATING AN APPROPRIATE PRICING STRATEGY

46. | 46 | Understand your goal – does the organization want to be transparent & defensible? Creating appropriate prices September, 2014 hfm Cover Story: How hospitals approach price transparency

47. | 47 | Understand how prices are being communicated and received Creating appropriate prices September, 2014 hfm Cover Story: How hospitals approach price transparency

48. | 48 | Secondary/Tertiary Hospital Market Understand your market position Creating appropriate prices Core Hospital Market Non- Hospital Market WHO?? SERVICES?? PRICE PRESSURE??

49. | 49 | Develop clear internal and external pricing policies Creating appropriate prices 1 2 External Policy Internal Policy o Public facing document for patients to view o Meets or exceeds national and state requirements (as applicable) o Goals for future release of pricing and payment information to the community o Guiding principles on how strategic pricing and pricing transparency will be developed and evaluated

50. | 50 | Understand and manage payment Creating appropriate prices September, 2014 hfm Cover Story: How hospitals approach price transparency

51. | 51 | * 80 comparison plans Payer Z Average Value* Sample Hospital All services % of Billed Charges81% DRG Base Rate$6,125$4,806 Per-Diem Rates Medical$1,659 Surgical$1,921 TCU/Telemtry$2,036 ICU/CCU$3,314 PTCA$4,091 Psych$711$485 Alcohol/ Chemical Dependency$637$485 Rehab$1,293 Payment terms – Inpatient (payer Z & hospital) Understand and manage payment Creating appropriate prices

52. | 52 | * 80 comparison plans Payer Z Average Value* Sample Hospital All services % of Billed Charges72% Radiology (% BC)75% 38.6% (except case rates for SPECT, MRI/MRA, & CT Scan) Laboratory (% BC)76%Fee Schedule Emergency Department (% BC)73%38.6% Level 1$93 Level 2$141 Level 3$339 Level 4$600 Level 5$1,212 Payment terms – Outpatient (payer Z & hospital) Understand and manage payment Creating appropriate prices

53. | 53 |  Set net revenue expectations  Establish initial rate-change limits and parameters  Integrate internal strategic pricing objectives  Use the right data to estimate rate-increase impact  Model your contract terms completely  Assess fee-schedule pricing  Correct issues of pricing relativity  Incorporate cost data  Examine competitive pricing comparisons  Review pharmacy / medical-supply issues  Evaluate impact by case categories  Evaluate impact by payer  Adjust parameters as necessary and implement final CDM changes  Create patient pricing communication documents Critical steps in a hospital’s rate-setting strategy Execute the strategy Creating appropriate prices

54. | 54 | Meet net income expectations? Maintain or enhance competitive position? Maintain or correct related pricing relationships? Establish equitable distribution to case categories? Establish equitable distribution to payers? Meet transparency/defensibility objectives? Evaluating the rate strategy Creating appropriate prices Does the strategy:

55. | 55 | Summary The need for transparency and defensibility regarding hospital pricing is likely to increase Hospital pricing is impacted by various demographic and operating factors – among them, payment is critical in rate establishment Price comparison can change significantly based on the level of comparison Defensibility and required net revenue objectives can be attained through creating a strategic pricing plan and executing/evaluating the plan through effective modeling and monitoring

56. | 56 | Jamie Cleverley President Cleverley + Associates Email: jcleverley@cleverleyassociates.com Phone: (614) 543-7777 Thank you. Questions?