Cost-Plus Versus Value-Based Hospital Pricing


There is little or no competition among hospitals in the United States. Consumers generally have absolutely no idea what hospitals will charge them when they seek care. Their perception of health care costs is that costs are high. But consumers really dont care about cost since someone else will be paying the bill for them.

Therefore, when hospitals advertise for customers, they focus on value and outcomes, and do not address cost at all. How many times have you seen a hospital advertise – “Come Here and Have Your Baby Delivered for $1,500″. Or, Special Price in May for Open Heart Surgery – $15,000 All Inclusive”. Or, “Call us today and we will send you our menue of services with pricing, sent directly to your home.”

Cost-plus pricing

This can apply to any business. This method takes  the cost of producing products or services and adds an amount needed to make a profit. This is usually expressed as a percentage of the cost. This seems to make sense. For years realtors have been getting 6% as their “profit”, general building contractors have been getting 25%, group health insurance brokers have been getting 5-10% of premium, mutual fund operators get 1 or 2 basis points, etc.

It is generally more suited to businesses that deal with large volumes (hospitals?) or which operate in markets dominated by competition on price (Competition among hospitals ? – What a novel idea!).

Since there is little or no competition in today’s hospital services market, any attempt to change reimbursement methodology is met with strong resistance by hospitals, and their partners. Those partners include insurance companies and PPO networks whose allegiance and profit margins are driven by lucrative agreements with medical care providers.

Recently,it has been rumored,  a PPO network, upon learning that they were not going to get the business of a local employer (who instead was going to implement a cost-plus program for his self-funded employee health plan), called the local hospital administrator to forwarn them of this impending “disaster.” The hospital then allegedly called the employer and warned that if they were going to move forward to a cost-plus hospital reimbursement approach,  the hospital would stop seeing the employer’s employees and would demand full payment up front for services to be rendered (Where is the 60 Minutes Camera Crew?)

Collusion between a PPO vendor and a hospital is evident here, if true. Could this be the beginning of GodFather Part IV?

Value-based pricing

This focuses on the price you believe customers (PPO Networks, Insurance Companies) are willing to pay, based on the benefits your business offers them (kick backs?). The scheme here is to make behind-the-curtain deals, then advertise value and outcomes to entice customers, to hell with the cost.

Editor’s Note: The purpose of this posting is to get the reader to think and question. What is the truth and what is fiction? Does everyone lie, or does everyone tell the truth?  Money motivates behaviour.