Hospital pricing

index
• What is price
• Considerations while pricing
• Pricing policy/ strategy
• Demand oriented
• Competition oriented and backward pricing system
• Income of hospital
• Pricing of new equipment and hospital
• What is a Price?
• In the narrowest sense, price is the amount
of money charged for a product or a
service.
• More broadly, price is the sum of all the
values that customers give up to gain the
benefits of having or using a product or
service.
• Price is the only element in the marketing
mix that produces revenue; all other
elements represent costs.
• Price is the one element of the marketing
mix that produces revenue – the other
elements produce costs.
• Prices are perhaps the easiest element of
the marketing program to adjust.
• Throughout most of history, prices were set
by negotiation between buyers and sellers.
Bargaining is still a sport in some areas.
 PRICING RATIONALE
• Each possible rate structure has different
implications on gross income, number of patients
making use of services offered and cash flow.
• To finalizing rate structure, the hospital
management should be clear as to what it is trying
to achieve in terms of medicare, social objectives
and financial viability.
• The need to have a rational pricing policy was not
considered important by the healthcare industry till
in the recent past. Those engaged in healthcare
management are coming to accept the need to
do costing of all new services and review the fees
charged to existing services at regular intervals.
 Rate structure
parameters
• The broad parameters are:
1. The rates should generate adequate
2. The rates charged are based on cost
3. The rates are reasonable
4. The rate structure is simple, logical, flexible
and easily understood
5. It facilitates reconciliation(bringing
together)
6. A long-term strategy
 Pricing policy/ strategy
• Pricing Policies constitute the general
framework within which pricing decisions are
made. They provide the guidelines within
which management formulates and carries
out pricing policies.
• A firm does not follow a single price policy,
rather it needs a bundle of price policies to
suit.
 Pricing policy/
strategy(cont..)
Four main pricing policies/ strategies
• Premium Pricing
• Penetration Pricing
• Economy Pricing
• Price Skimming
 Pricing policy/
strategy(cont..)
Other pricing policies and strategies

• Psychological Pricing
• Product Line Pricing
• Optional Product Pricing
• Product Bundle Pricing
• Promotional Pricing
• Geographical Pricing
• Cost-based Pricing
• Competition-based Pricing
• Demand-based Pricing
• Perceived-value Pricing
 Demand oriented pricing
• Definition: Demand Oriented Pricing. Demand oriented
pricing as the name suggests uses the
customer demand to set up the price in the market.
We first determine the customer's willingness to pay for
any good or service.
• the customer demand to set up the price in the
market.
• A high price is charge when the demand is high and a
low price is charge when the demand is low.
 consideration

MARKET AVALAIBILITY AGE ATTITUDE

HOSPITAL STANDARD
POPULATION
SERVICES OF LIVING
• One example of this method is widely used system
of classifying patients in four categories reflecting
economic status of the patients.

CATEGORIES

Those that are

Free Subsidized Full cost able to pay a
premium.
 Competition oriented
• When evolving its rate structure, a hospital is
guided more by what other hospitals are
charging rather than its own cost structure,
• the pricing policy could be said to be market
oriented.
• It is not necessary that they should be identical.
• Quality of nursing home (beds) services is
dependent on
o infrastructure facilities
o availability of trained nursing staff
o provision of emergency services
o and specialized equipment. Doctors’ services
 Competition oriented
(cont..)
• When the environment is highly competitive,
the hospital has to offer its services at the
going rate.
• hospitals tend to categorize themselves in
terms of price zones –
o high price (five/seven stars) hospitals,
o medium price
o Low price (small hospitals.)
 Income of hospital
The first source of revenue to the hospitals is from the
patients admitted to the hospital
The second source of revenue to the hospitals is from
out patient departments (OPDs).
The third major source of revenue for a hospital is from
operations and surgeries.
The fourth major source of revenue is visiting doctors
and experts
The fifth source from selling medicines on their
premises
• The first source of revenue to the hospitals is
from the patients admitted to the hospital
• hospital Approximately, 80% of the revenue
from an admitted patient is earned within the
first 72 hours
• The second source of revenue to the hospitals is
from out patient departments (OPDs).
• a given time period frame, the OPD-patient is likely
to generate more revenue than an impatient.
• The third major source of revenue for a hospital is
from operations and surgeries.
• specialized hospitals even smaller in size (e.g. 100
bedded hospital), and catering to specific diseases
like cardiology, cosmetic surgery, neurology etc earn
as high as a 500 bed general hospital may earn more
than the general room charges.
• The fourth major source of revenue is visiting doctors
and experts
• The visiting doctors pay up a certain percentage
(approx. 15%) of their billings to the hospital
revenues,
• The fifth source from selling medicines on their
premises
• A few hospitals make it mandatory for the patients
to buy medicines from the hospital’s chemist shop
on the ground that the medicines are genuine and
easily available.
• A margin of 15-20% is earned from this source easily.
 Hospital price and their
services
• Hospitals have varying cost structure depending upon
quality of service, technology, equipment and
experience of the medical and management staff, etc.

• Standardization will kill innovation and entrepreneurship.

Medical personnel would like to work in an environment
akin to the best in the world. The charges in such
hospitals would not be competitive.
• Once sickness is diagnosed, a patient’s immediate
anxiety is how much the whole treatment will cost
and how the required funds could be sourced.
• But according to the survey, 90% of the time, the
actual billed amount is higher than the original
estimate.
• Unfortunately, the total cost is spread over several
items.
 Medicines,

Special
Recovering
Expenses Nursing
care

Hospital
service
Conveyance Cost Doctor’s
fees

Cost of
Post
Diagnostic
Treatment
tests
• hospital beds, which is one of the important
source of hospital income is often
subdivided under several heads
o Admission fee
o Bed charges
o Linen charges
o Resident doctors’ fees, etc.
• Predetermined rates will force the hospitals to be
efficient and economic institutions.
• The patient also comes know beforehand the cost
of sickness and will be prepared for it.
 Pricing of new equipment
and hospital(rate revision)
• Rates for hospital services receive its management’s attention
twice:
o once, when a new product is introduced
o At the end of the financial year

• When a new service is introduced, its cost should be

estimated considering:
 Direct variable cost
 indirect operating cost, and
 Other costs.

• During initial years, the rates will be what other hospitals

are charging. Over a period all expenses should be
covered.
• The revenues and costs should be closely monitored
since the demand is likely to be price elastic.
 Pricing of a new product
• What rate you would recommend for a ventilator
during the first year given the financial projections
as detailed below.
• The rate currently charged by other nursing homes
in the locality is Rs.2000 per diem
Charitable hospital
• Free (or charity) care refers to “free or discounted
health services provided to persons who meet a
[health care] organization’s criteria for financial
assistance and are thereby deemed unable to pay
for all or a portion of services.
• ” Non-profit hospitals have a special obligation to
provide charity care because, as charitable
institutions, they receive valuable federal, state and
local tax exemptions. In exchange they are
expected to provide community benefits, including
free or discounted care for patients in need.
• Charitable hospitals have come to accept that they
cannot afford to offer free and cheap medical services on
continuing basis unless funded from other sources

• They have to adopt financial and managerial accounting

system and professionalize their administrative set up. Their
managements can then take prompt decisions on price
proposals based on reliable and up-to-date information.

• In their costing structure, they have to accept

depreciation as an item of cost and provide it even on
donated equipment, perhaps on replacement cost basis.

• One cannot ignore the concept of free and charitable

service if their founders desired to provide from their
munificence.
• The rationale behind pricing policy would be the
same whosoever owns and manages the hospital.
Financial resources permitting, a management may
decide not to charge fees to certain class of
patients.
• However, not charging any fees or charging only a
nominal sum to those who can afford appears
illogical.
• Many of the hospitals funded by local authorities
provide excellent medical facilities. Therefore,
patients come to these hospitals even from distant
areas not covered by local authority, not because
their services are free but, because of the quality of
service. All of these cost money.
• Even in case of charitable hospitals, the persons
responsible for establishing
• rates for hospital service should be familiar with class
of people resident