Resource Based Pricing

Introduction

Some of the confusion about the US health care system is directly tied to prices. How much does it cost? What will my insurer pay? What will I have to pay? Pricing transparency continues to be a popular topic but confusion remains. Hospitals and health systems establish their charge-masters, but few are ever charged these amounts. Insurers and health plans have negotiated contracts with provider oftentimes with significant discounts. Physicians have their billed charge rate, but again negotiated discounts lower the billed amount to much lower levels.

In this world of discounted health care costs, the remaining question is how low can it go, or what is a reasonable price in light of what it costs to deliver that service. Resource Based Pricing provides useful answers and can be used by both health care providers and health plans in the negotiation process.

Resource Based Pricing provides useful answers and can be used by both health care providers and health plans in the negotiation process.

This document provides a useful example for Ambulatory Surgery Centers (ASCs). It can readily be adapted to both hospital services, both inpatient and outpatient, and also for professional services. It does require a clear understanding of operating costs, something any business should know.

Basic Methodology

There are four basic steps to developing a resource based price for an ambulatory surgery center:

• How much time is needed in the operating room and recovery room?
• What type of anesthesia is being used: Monitored Anesthesia Care (MAC) or General Anesthetic?
• What are the cost of supplies needed to perform the procedure?
• What is the cost of running the ASC on a per hour basis or per case basis?

With the above information it is possible to develop a break-even price per procedure that can be used for multiple purposes: building the charge-master, negotiating with health plans, minimizing loss leaders, improved financial planning, etc. We will prepare an example for Sinus Endoscopy.

Procedure Time

Procedure time can best be determined by reviewing actual performance and also by interviewing surgeons or proceduralists on each of the procedures under consideration. In the case of a sinus endoscopy (CPT Code: 31237), recent data shows that the procedure can be completed within 90 minutes and the patient will need 75 minutes in recover for MAC and 100 minutes for GA for a total facility time of 125 – 170 minutes depending upon the type of anesthesia used.

Cost of Supplies

A review of actual procedures, interviews with physicians, etc., shows that the following supplies are needed to perform a sinus endoscopy:

QTY	Desctription
1	Epinephrine 1:1000 Topic, 30 cc
1	Marcaine .25% + 1/200,000, epi 50 cc
2	Blade #1`5
1	Basic Pack
1	Drape Sheet 3/4
2	Dr./Nurse Attire (shoe covers, cap, mask)
10	Sterile 4 x 4 (single)
1	Iodophor 1″
1	Neurosponges 1 x 3, cottonoids
1	Raytex 4 x 4 (10 pk)
3	Gloves, Surgeons
1	Suction Cautery
1	Pencil Cautery with cord
1	Cautery tip cleaner
2	Grounding plate
1	Basin single
2	Towels
1	Linen (blanket, sheets, towel, etc.)
1	Patient Attire (gown, slippers)
1	Instrument Tray, non disposable
1	Sterile Water 1000 ml
1	Needle (e.g., 18g 1″, 21g 1-1/2″,etc.)
1	Suction Cannister Liner
1	Suction connect Tube 10′
1	Special Equipment – Nasal Endoscopy
1	Micropore 1″
1	Syringe 10 cc

The price for each can be determined based from a price list the ASC with their medical supply vendor. Based upon recent prices available to an ASC, this combination of services was about $225.

In addition to these supplies the cost of anesthesia needs to be considered also.

General Anesthesia
QTY	Desctription
1	ET Tube 6.0 mm
3	Oxygen/5 min
15	N2O/5 min
15	Forane/5 min
1	Kling Gauze 3″ (throat pack)
1	Minimal MAC Setup (including basic pharmacy)

 

MAC
QTY	Desctription
18	Oxygen/5 min
1	Minimal MAC Setup (including basic pharmacy)

The General Anesthetic prices are about $225 and the MAC prices are about $75. The total cost of supplies and anesthesia are about $450 for General and $300 for MAC.

ASC Operating Costs

As with most businesses the actual operating cost to perform a procedure depends upon how efficiently the facility is operated and whether or not it is operating at full capacity. Under-utilized facilities have to charge more to avoid financial loss. Inefficient facilities inherently cost more and usually lead to higher than average charges. We have developed a simple comparator for both a 2 and 4 operating room model. This could be done for a tenant ASC or an owner ASC. Our example is for a tenant ASC.

As the following table shows, the cost in a highly efficient two room facility is $811/case or $685 per hour. A highly efficient four room facility is $706/case or $597 per hour. This is a break-even cost without margin.

	Two Operating Rooms								Four OR Facility
Cases per day per room	2.5	3	3.5	4	4.5	5	5.5		3.5	5
Total Cases per year	1250	1500	1750	2000	2250	2500	2750		3500	5000

 

Expense Category	Projected Operating Costs As A Tenant (in $1,000s)
Staff	$678	$678	$803	$803	$849	$868	$868		$1,067	$1,290
Payroll Taxes	$79	$79	$92	$92	$98	$100	$100		$125	$149
Benefits	$187	$187	$219	$219	$234	$240	$240		$293	$354
Temporary Staff	$61	$61	$73	$73	$77	$79	$79		$96	$117
Non-medical Supplies	$24	$29	$33	$38	$43	$48	$52		$67	$95
Rent	$403	$403	$403	$403	$403	$403	$403		$686	$686
Liability Insurance	$43	$53	$60	$70	$79	$87	$96		$122	$175
Depreciation	$271	$271	$271	$271	$271	$271	$271		$479	$479
Telephone/Office	$5	$5	$5	$5	$6	$6	$6		$7	$8
Professional Fees	$53	$57	$6	$66	$70	$74	$79		$91	$117
Other	$20	$22	$25	$28	$31	$34	$37		$45	$62
Total	$1,824	$1,844	$1,990	$2,068	$2,159	$2,209	$2,230		$3,077	$3,532
Cost/Case	$1,459	$1,230	$1,137	$1,034	$960	$883	$811		$879	$706
Cost/Hour	$1,233	$1,039	$961	$874	$811	$747	$685		$743	$597

 

Total Resource Based Price for Sinus Endoscopy

Based upon the information summarized in this report the resource based price for a sinus endoscopy would be:

• Operating Room Time:
  • 1.5 hours @ $597 = $896
• Recovery Time:
  • MAC: 1.25 hours @ $100 = $125
  • GA: 1.67 hours @ $100 = $167
• Total Facility Cost
  • MAC: $1,021
  • GA: $1,063
• Supply Cost
  • MAC: $450
  • GA: $300
• Total Cost
  • MAC: $1,471
  • GA: $1,363

These values should be adjusted for the cost of living in the specific geographic region.

Comparison to Actual Price Information

A quick analysis of current actual ASC negotiated prices for sinus endoscopy shows negotiated allowed costs in the range of $1,470 – $1,700. This shows that in some cases the health plan has negotiated prices at operating cost levels. From an ASC’s perspective they need to carefully negotiate a price that provides them a reasonable return. Building of resource based pricing will help them protect their margins. From a carrier’s perspective this will help them negotiate as favorable of costs as possible.

A cursory analysis of the above costs shows that a significant portion of the cost is associated with operating room time. The charge for this is heavily dependent upon the productivity of the ASC. With required turnover time to ready the operating room for the next case it is challenging to do more than 5 or 6 cases a day per operating room without running long hours. This raises personnel costs but some additional efficiencies can be achieved. About one-third of the cost is associated with supplies. Continual monitoring of these costs will also help maintain a favorable cost profile.

Summary

Resource based pricing is a useful tool to help an organization understand their costs and how they should charge for services. Much like the above example for an ASC, this can be readily applied to hospital services, both inpatient and outpatient and also to medical groups and clinic operations. The key is a good understanding of the costs of doing business. This is one approach than can create valid charge-master prices. Prices that are based upon a realistic cost of doing business plus a planned margin or mark-up. Not an arbitrary increase in prior charge-master prices that is continually discounted without understanding where the “floor” is.

David Axene, FSA, FCA, CERA, MAAA, is the President and Founding Partner of Axene Health Partners, LLC and is based in AHP’s Temecula, CA office.