What can we learn from healthcare pricing strategies

When I broke my elbow in late 2012, I had no clue how expensive health care was to the average consumer. I had insurance through my employer, but never thought to investigate what a major orthopedic surgery would cost me with my medical benefits. I quickly realized as the bills rolled in that the pain of post-surgery rehabilitation was nothing compared to the hurt the hospital was going to put on my bank account. My meager health plan only covered 70% of the cost of the emergency room visit, surgery, and other medical expenses, and just the facilities bill alone for my fairly typical procedure was over $14,000 dollars.

We don’t need to tell you that 30% of 14,000 bucks is a lot of cash. The total sum of the numerous medical bills I received decimated my savings, and I’m still chipping away at that facilities bill close to a year later. However, the healthcare system in the U.S. is not immune to a consumer-driven market. The Surgery Center of Oklahoma City is attempting to revolutionize the health care industry by posting their all-inclusive surgery prices online, and most of the prices they’re publishing for elective surgeries are a fraction of the price of major hospitals. For example, a knee surgery such as a patella tendon repair can cost as much as $30,000 dollars, but the same surgery (potentially with the same surgeon) at the Surgery Center is only $5,700, one fifth of that price.

How Does Healthcare Pricing Work?

The healthcare pricing business model and lower prices are supported by a streamlined system of operations with minimal administrative overhead, and every employee is directly involved with patient care. In addition, the Surgery Center doesn’t accept Medicare or Medicaid services, allowing them to avoid government regulation that would prohibit them from displaying their deeply discounted prices. The introduction of consumer driven competition has already started a price war, and some hospitals are giving in to patients who demand they match the Surgery Center’s prices.

3 Takeaways From Hospital Pricing

The lesson learned from this is one we’re constantly driving home here at Price Intelligently. No other aspect of your business has as much impact as your pricing, and no industry, even health care, is immune to the fact that customers care how much value they’re receiving at a particular price. The apparent success of the Surgery Center’s business model is proof of this, and even when the value metric is as crucial as a joint on one of your limbs, customers will look for emerging competitors to get a better deal and avoid inflated rates. As such, let’s examine some of the key takeaways that can be drawn from the Surgery Center’s impact on the healthcare system and see how they apply to your business.

1. Competition Will Lower Prices

Seems obvious, right? It’s no secret that as competitors enter a market, prices will inevitably drop. Customers are always looking for the best value for the money, and it only takes one competitor like the Surgery Center to drive prices down. However, the structure of the healthcare industry has lead most hospitals to implement careless, complex pricing schemes and inflated rates for common procedures. Of course health care is expensive, but should a knee surgery really cost a patient $30,000 without insurance? Most patients of major hospitals don’t monitor or question the prices of their elective surgeries because a 3rd party HMO or PPO is the one paying for everything upfront, but the pricing transparency offered by the Surgery Center has already created consumer awareness that translates into concrete reference prices the customers can use to empower themselves. Compared to the all-inclusive, published prices of the Surgery Center, the prices of major hospitals look downright unethical.

The bottom line: You still need to be cautious if it appears you don’t have any competitors for your product or service, because eventually another company will crash the party. Be wary of charging bloated rates as well as additional fees, and effectively communicate your prices to your customers to ensure your business is more prepared for the long haul.

2. Price Transparency is Crucial to Communicating Value

Major hospitals aren’t clear about what you’re being charged for unless you press the issue, and even then it can be incredibly difficult to decipher whether you’re compensating for administrative overhead or the actual operation. The Surgery Center in Oklahoma City capitalized on this by publishing prices for fairly predictive surgeries online, and the customers came flooding in from all over the country. Granted the Surgery Center’s more efficient system for conducting operations created an opportunity for deep discounts, but hospitals wouldn’t be able to charge an arm and a leg for the same surgeries or conceal their costs if they followed a market-based, consumer-driven business model.

Being transparent with their prices helped the Center increase their customer base on a national scale and essentially started a bidding war. While the majority of hospitals can’t publish their prices due to government regulation, it would be surprising if more private companies didn’t enter the market and follow in the footsteps of the Surgery Center to attract customers.

The bottom line: Displaying your prices is one of the best ways to communicate value to your customers and increase consumer confidence. I’ve said this before in our Secret Pricing Strategy post, but a lack of price transparency can lead to lower conversion rates and missed sales. If your potential customers can’t easily find your pricing information, then most likely they will assume what you’re selling is too expensive and look to your competition for an affordable alternative.

3. Your Value Proposition Must Justify Your Prices

As I already mentioned, the value metric for the healthcare industry is your actual health and well being, and it’s hard to put a price on that. But what if the price placed on putting an elbow back together is completely out of reach of the typical consumer? If I didn’t have insurance when I broke my arm, I’m quite sure I would have taken those medical bills with me to the grave. Despite the fact that money should be of no object with regard to such operations, customers are buying plane tickets to Oklahoma City just to receive a fair price on critical surgeries. It should be fairly easy for hospitals to use this value proposition to justify their prices, but when prices escalate beyond a consumer’s means and the charges aren’t communicated properly, the value of the service becomes irrelevant.

The bottom line: Whether you charge higher or lower prices than your competitors, you must have a value proposition that justifies those prices. Everyone in your organization must understand the value of your offering so it can be effectively communicated to the customers, and if you do charge rates that are significantly higher than your competitors, it becomes even more necessary to leverage the product features and services that separate your business from the pack. If you can’t substantiate your value proposition with your offering, whether it’s a surgery or a software product, competitors will emerge and customers will look to those alternatives.

In Summary: Don’t Overlook Value and How it Relates to Your Pricing Strategy

Clearly, the healthcare industry needs to change it’s pricing methods if competitors like the Surgery Center are going to emerge. The economics of the industry are far from simple, but for the customers it’s still all about the value they receive at a particular price. Major hospitals can’t expect the current system to sustain itself for long as more low cost healthcare services develop, especially with high administrative overhead and inefficient operations.

Most of us aren’t involved in the healthcare industry, but the Surgery Center shows us that a great service supported by transparent pricing will instill confidence in the consumer and help you win out over the competition. Charging prices that generate revenue without triggering consumer outrage is dependent upon the understanding of your value proposition, both for you and your customers. In order to avoid being susceptible to competitors, your prices need to be communicated effectively so the product or service is perceived as the right value at the right price.

To learn more about pricing, check out our Pricing Strategy ebook, or reach out and request a free pricing audit.