Getting Ready for Price Transparency

Transparent pricing is quickly becoming a reality for healthcare providers. Employers are using services like Castlight Health to guide employees to low-cost care. Consumers on high-deductible plans are actively shopping for bargains, and government and private initiatives are providing them with the data to find them.

Healthcare providers, especially hospitals, are in danger of losing volume in some services to low-cost alternatives like clinics and ambulatory surgical centers. To respond, providers need to understand which services are at risk (and which can command a premium), where they need to rationalize cost structure, which service lines they may need to exit—and how pricing can become part of the organization’s overall business strategy.

When Does Price Matter?

In thinking about healthcare pricing, it is crucial to distinguish between what we might call “shoppable” and “non-shoppable” services. There are degrees of shoppability, and different customers will respond differently to issues of price and quality. The chart below shows a typical breakdown of the shoppability of short episodes and hospital services and the amount of revenue produced by each category. We see at least five significant points on the continuum from fully shoppable to non-shoppable.

Shoppability of services and share of hospital revenue

Source: Oliver Wyman analysis

1What’s wrong with the way hospitals currently approach pricing?

For the world they used to work in, their approach was fine. Most patients were protected from pricing by their insurance company. Hospitals didn’t have to worry that they would lose a customer because they charged too much. But now, thanks to high-deductible and consumer-directed health plans, activist employers, and physician-owned ACOs, there’s suddenly a large pool of customers who care intensely about price and value. And in that world, you price strategically, or you lose business.
2What do you mean by strategic pricing?

Think about big retailers. Pricing is a major part of how they compete. They use market research and data analytics to figure out what drives purchasing decisions and how sensitive buyers are to prices, product by product. They model price scenarios to predict what happens to volume, margin, and revenue as prices are adjusted up and down. Hospitals may not need to do all of that, but they need to start doing most of it.
3How many hospital services are at risk?

The real danger comes when outside providers offer good quality at prices that hospitals simply can’t meet. Different markets will vary, but we estimate that at most institutions, 25 to 30 percent of revenue is at risk. That includes revenue from highly commoditized services like MRIs and colonoscopies and revenue from elective services where the standard of care is pretty consistent across providers—things like knee replacements, GI surgery, and basic cardiovascular procedures.