Chapter ~7
Strategic Pricing in
Hospital Sector
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Chapter - 7
Strategic Pricing in Hospital Sector
A ccording to one of the leading experts on pricing, m ost service
organizations use a naieve and u n so p h isticated ap p ro ach to pricing
w ith o u t regard to u n d erly in g shifts in d em and, the rate th a t su p p ly can
be expanded, prices of available su b stitu tes, consideration of the pricevolum e relationship, or the availability of fu tu re substitutes. The
hospitals are not exception to this.
7.1 Key ways of customer evaluation of Pricing for Hospital
Service
There are three key differences betw een custom er ev alu atio n of pricing
for services and goods.
1) C ustom ers often have inaccurate or lim ited reference prices for
services.
2) Price is a key signal of quality in services.
3) M onetary price is n o t the only price relev an t to service custom ers.
Service p roviders m u st u n d erstan d how custom ers perceive prices and
price changes and w h at role does price p lay in consum er decisions
about services. Reference price is a price p o in t in m em ory for a good or
service and can consist of the price last p aid , the price m ost frequently
p aid or the average of all prices custom ers have p aid for sim ilar
offerings. You can com pare your reference prices w ith the actual price
of these services from the p ro v id ers in your hom etow n. Because
services are intangible and are n o t created on a factory assem bly line,
service firm s have great flexibility in the configurations of services
they offer. It is very difficult to answ er ab o u t prices for a m edical
check-up. If you are like m ost consum ers, y ou probably w an ted m ore
inform ation before you offered a reference price. You probably w anted
to know w hat type of check u p the physician is providing. Does it
include x-rays and other diagnostic tests? W hat types of tests? H ow
long does it take? If the check u p is u n d ertak en sim ply to get a
signature on a h ealth form or a m arriage certificate, the doctor m ay
take a brief m edical history, listen for a h eartb eat and m easure blood
pressure. If, how ever, the checkup is to m onitor a chronic ailm ent such
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diabetes for high blood pressure, the doctor may be more thorough.
Here the high degree of variability exists across providers of services.
7.2 Difficulty in Pricing of Hospital Services
Not every physician defines a checkup the same way. Many providers are
unable or uncoiling to estimate price in advance. Medical service providers
are rarely willing or even able to estimate a price in advance. The
fundamental reason in many cases is that they do not know themselves what
the services will involve until they have fully examined the patient. Another
factor that results in the inaccuracy of reference prices is that individual
customer needs vary. Perhaps that is why price is not featured in service
advertising. Individual customer needs also vary. Doctor's fees also vary
depending on their experience and expertise. Different categories of hospitals
also charge differently for the same treatment.
7.3 The role of non-monetary costs
In recent years economists have recognized that monetary price is not the
only sacrifice consumers make to obtain services. Non-monetary costs
represent other sources of sacrifice perceived by consumers when buying and
using a service.
Time costs, search costs and psychological costs often enter into the
evaluation of whether to buy or rebuy a service and may at times be more
important concerns than monetary price. Consider the investment you make
to exercise, see a physician. Not only are you paying money to receive these
services; you are also expending time. Time becomes a sacrifice made to
receive service in multiple ways. The average waiting time in physician's
offices is 20.6 minutes, according to the American Medical Association with
22 minutes for family practice doctors and 23 minutes for paediatricians,
orthopedic surgeons and gynaecologists. Waiting time for a service is
virtually always longer and less predictable than waiting time to buy goods.
Customers often have to wait for an available appointment from a doctor.
Virtually all of us have expended waiting time to receive services.
Search costs - the effort invested to identify and select among services you
desire - are also higher for services than for physical goods. Prices for services
are rarely displayed on shelves of service establishments. These prices are
often known only when customer has decided to experience the service. Each
service establishment offers one brand of a service. In medical service a
customer must initiate contact with several different hospitals to get
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information across sellers. Again the medical service cost is compared with
the goodwill & skill of the doctors in that particular hospital.
If you choose physician A you are probably most concerned about monetary
costs you are willing to wait for an appointment and in the waiting room of
the physician's office. If you choose physician B over physician A, your time
and convenience costs are slightly more important than your monetary costs
because you are willing to pay Rs.1000 more to reduce the waiting time. If
you choose physician C, you are much more sensitive to time and
convenience costs, including travel time than to monetary costs - you are
willing to pay three times what you would pay for physician A to avoid the
other non-monetary costs and if you choose physician D, you are someone
who wants to minimize psychological costs as well, in this case fear and pain.
Thus, customers are willing to pay to avoid the other costs.
One of the intriguing aspects of pricing is that buyers are likely to use price as
an indicator of both service costs and service quality. Price is at once an
attraction variable and a repellent. Customer's use of price as an indicator of
quality depends on several factors, one of which is the other information
available to them. Customers may believe that price is the best indicator of
quality. In high risk situations such as medical treatment, the customer will
look to price as a surrogate for quality. Price sets expectations of quality. So
service prices must be determined carefully. Pricing too low can lead to
inaccurate inferences about the quality of the service. Pricing too high can set
expectations that may be difficult to match in service delivery.
7.4 Price Elasticity
For most of the healthcare strategy planners, 'what is the right price for my
product ?' is a common question. The way out is to have a target profitability
and price the product based on the cost estimates sounds easy, but it is
difficult to execute, especially for services like healthcare. First of all accurate
cost estimates are almost impossible. Secondly competition and price
sensitivity of demand varies widely, depending on the kind of services that
are provided.
Healthcare services, in general are less price elastic, unless they are of the
preventive nature according to studies. A rich businessman might not think
twice before choosing the most renowned surgeon in town for his dad's
bypass surgery but the same person might compare prices before deciding on
his daughter's vision correction procedure. In cases of emergency, more often
than not, non-price attributes have a major role in deciding the demand for
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healthcare services. However, pricing has to fit into the overall vision and has
to be complementary with the other important aspects like the location of
hospital, nature of the target customers and level of technology offered. All
these factors have to be taken into account by the strategists, before he decides
to go in for a differentiating strategy or a cost leadership strategy or a mixed
one.
Pricing is unquestionably an important part of devising a strategy, as it has a
major influence on the performance of hospitals. Return from the business is
extremely sensitive to the level of pricing. A 10% increase in price leads to a
doubling of operating profit margins, according to a study done by
Healthcare Financial Management Association (HFMA), USA. Pricing has a
greater significance in the Indian Scenario, where the insurance coverage is
minimal, with more than 80% of the expenses being out of pocket.
What determines the costs of healthcare services? Is it cost or competition ?
Healthcare services is one of the vary few industry where the product or
service is at times priced below its cots, according to Dr.P.M.Bhujang, Medical
Director, Sir H.N.Hospital, Mumbai. He says that competition more often
dictates pricing.
The role of competition in pricing depends on how important cost is as a
dealing factor for consumers of healthcare services. Medical care is found to
be less price elastic than clothing, household appliances etc. according to
conventional economics.
COST FACOR
P ric e E le a s tic ity o f V a rio u s C a te g o rie s
□ □
0 .2
H o u s in g
E le c tr ic ity
B re a d
M e d ic a l C a re
C lo th in g
H o u s e h o ld
A p p lia n c e s
M o to r
V e h ic le s
R e s ta u ra n t
M e a ls
Diagram 7.1 (Source: McConnellC. Am i Brue Stanley. Economics 12lh Edition)
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It is fo u n d to h a v e a p ric e e la s tic ity of n e g a tiv e 0-31, m e a n in g th a t
a 10% in crease in p ric e s w o u ld re s u lt in a d eclin e in d e m a n d by
3.1%. H o w ev er s e n s itiv ity to p ric in g o f h e a lth care serv ices co u ld
be h ig h e r in In d ia , as th e m a jo rity of th e p o p u la tio n is u n a b le to
b e a r th e e x p en ses for q u a lity h e a lth c a re .
P rice e la stic ity also v a rie s d e p e n d in g o n th e n a tu re of th e
tre a tm e n t. O u t p a tie n t c h arg es are fo u n d to be m o re s e n sitiv e th a n
in p a tie n t c h arg es, a cc o rd in g to H FM A . F u rth e r p ric e s e n s itiv ity is
fo u n d to be th e h ig h e s t w ith in d e n ta l care a n d so m e w h a t lo w e r in
m e d ic in e c o n su m p tio n an d lo w e st in o p e n h e a lth c a re , a c c o rd in g
to e m p iric a l re s e a rc h d o n e b y th e N a tio n a l B oard of H e a lth a n d
W elfare, S w eden.
7.5 Approaches to Pricing h o sp ita l service
The co st-b ase d an d c o m p e titio n b a se d p ric in g a p p ro a c h e s are
b a se d on the in s titu te a n d its c o m p e tito rs ra th e r th a n on
c u sto m ers. C u sto m e rs m ay lack re fe re n c e p ric e s, m a y be se n sitiv e
to n o n -m o n e ta ry p ric e s an d m ay ju d g e q u a lity o n th e b a sis of
p ric e . A ll of th e se facto rs can a n d s h o u ld be a c c o u n te d fo r in a
c o m p a n y 's p ric in g d e cisio n s. D e m a n d -b a se d p ric in g in v o lv e s
s e ttin g p ric e s c o n sis te n t w ith c u sto m e r p e rc e p tio n s of v a lu e :
p ric e s are b a se d on w h a t c u sto m e rs w ill p a y fo r th e serv ices
p ro v id e d . H ere n o n -m o n e ta ry co sts a n d b e n e fits m u s t be fa c to re d
in to th e c a lc u la tio n of p e rc e iv e d v a lu e to th e c u sto m e r. W hen
serv ices save tim e , in c o n v en ien c e an d p sy c h o lo g ic a l a n d sea rc h
co sts, the c u sto m e r is lik e ly to be w illin g to p a y a h ig h e r m o n e ta ry
p ric e . W hen c u sto m e rs d isc u ss v a lu e , th e y u se th e te rm in m an y
d iffe re n t w ay s a n d ta lk a b o u t m y ria d a ttrib u te s o r c o m p o n en ts.
C u sto m e rs d e fin e v a lu e in fo u r w ay s
(1) value is low price
(2) value is whatever I want in a service or product.
(3) value is the quality I get for the price I pay.
(4) value is w hat I get for what I give.
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Value is low price.
•
•
•
•
Value is everything 1 want in a service.
Discounting
Odd pricing
Synchro-pricing
Penetration pricing
\
[
if IS
Value is the quality 1get for the price
1pay.
• Prestige pricing
• Skimming pricing
Value is all that 1get for all that 1give.
•
•
•
•
• Value pricing
• Market segmentation pricing
Price framing
Price bundling
Complementary pricing
Resuits-based pricing
Diagram 7.2 (Source : Zeithamal & Bitner)
In healthcare services also, customers have different perceived values. While
what is received varies across customers, as does what is given, value
represents a trade-off of the give and get components. So give and get
components of value are distributed into manageable pieces that can be useful
in quantifying value. When the customer is concerned with the 'get'
components monetary price is not of primary concern. Some of the corporate
hospitals have luxurious rooms for a particular segment of the societies i.e.
celebrities, politicians and rich businessmen. For them the value is associated
with prestige and status. When the value for the customer is to match quality
level and price level, there are different categories of hospitals catering to
varied segments.
7.6 Indian Scenario
Looking at the Indian scenario, for the low income population in rural areas,
the choice boils down to the government hospitals. A thriving middle class in
semi-urban areas forms a large group. In most of the cases, their decision is
highly influenced by the word of mouth. This group has an expected range
for the cost of their treatment and they work within this budget. Today a
middle level manager with a family of four, spends between Rs.8,000 and
Rs.12,000 a year on healthcare, compared to just Rs.2,000 in the late 80's
according to the report on healthcare by CII. In order to attract this group,
hospitals should understand the expected range, and keep the prices within
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that. However, variations within the range might have lesser impact on the
decision. In times of emergency, the choice of the hospital by the m iddle class
and lower middle class also depends on the extent of help that they can
gather. This help, which most often comes from the close relatives and friends
acts as an informal insurance of India, according to Joe Curian, CEO,
S.L.Raheja Hospital, Mumbai.
Coming to the high-income group in India, price is not a very important
factor as can be seen from the high occupancy rates in the large private
hospitals. Prices in corporate and high-end hospitals are still within the grab
of this group.
A person earning more than Rs.25,000 per month would not have great
difficulty in arranging money for a 6-7 day procedure. Costing Rs.5,000-6,000
per day considering that the high income group forms a small proportion of
the population, it can be concluded that competition has a major role in
determining the pricing in India. Pricing in Indian hospitals is currently
controlled by the demand supply balance and should be decided that way,
according to Joe Curian. He says that the increasing dem and for healthcare
services in India from the middle income group, who have access to health
information and a higher propensity to spend on health needs is bound to
cause a demand - supply imbalance in some areas and push up the prices.
Incentives given by the government to start hospitals at appropriate areas
according to Curian, can remedy the situation.
7.7 The role of cost in deciding Pricing
Costs too, have a part in deciding the prices, bu t play second fiddle to
competition in the Indian Scenario, especially if the hospital is still at the stage
of making a name in the market. In a competition led pricing scenario,
hospitals have little choice but to cut costs in order to make money. This has
been taken up actively even in most trust managed hospitals in India. Hinduja
Hospital has a costing department in order to maintain a strict control on
costs. A high cost structure would more often lead to trouble as the hospital
would fail to match the aggressive pricing followed in the market. A large
hospital which leverages on its scale to achieve cost leadership is in a better
position to control pricing in the market, leaving the inefficient players at a
disadvantage.
There is another pertinent question faced by an entrepreneur setting up a new
hospital. Should he aim at cost leadership, which at times requires scale in the
form of hospital chains or should he try to provide differentiated services
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w ith d if f e r e n tia te d p ric in g ? The a n s w e r d e p e n d s on facto rs like
ty p e of h o s p ita l s p e c ia lity or m u lti s p e c ia lity , a n d th e ta rg e t
g r o u p of p a tie n ts . For a s p e c ia lity h o s p ita l ta r g e tin g th e elite
class, a d if f e r e n tia tin g s tr a te g y w o u l d h e lp to b r e a k e v e n faster.
The e lem en t of d iff e r e n tia tio n , w h ic h is m o st o fte n te c h n o lo g y ,
c o u ld in v o lv e a d d itio n a l in v e s tm e n ts . H o w e v e r c o n s id e rin g the
fact th a t r e p u t a t i o n p la y s th e m o s t im p o r ta n t p a r t in a ttra c tin g
th e elite class in la rg e cities, th e a d d itio n a l i n v e s t m e n t c o u ld give
s u s ta in a b le p ric in g p o w e r.
For th o se h o s p ita ls , w h ic h a d o p t a s tra te g y m id w a y b e tw e e n
d if f e r e n tia tio n a n d cost le a d e r s h ip , in itia l p o s itio n in g b eco m es
e x tre m e ly im p o r ta n t. By p r ic in g th e p r o c e d u r e s at a h ig h level,
th e y expose th e m s e lv e s to th e ris k of c o m p e titio n . As th e
c o m p e titio n in te n s ifie s, th e y w o u ld be fo rce d to c u t prices.
V o lu m e s fail to p ic k u p as th e h o s p ita l c o n tin u e s to h a v e a
r e p u ta tio n as h ig h -p r ic e d a n d as a re s u lt, p r o f its are hit. P ric in g
h ig h sele c tiv e ly b a s e d on th e u n d e r s t a n d i n g of th e p ric e e la s tic ity
of th e d e m a n d for v a rio u s s erv ice s, w o u ld be a b e tte r o p tio n for
s u c h h o s p ita ls . F u rth e r, in itia l p ric e d e cisio n s are a lw a y s b e tte r
m a d e w h e n th e p la n n in g is m o re fo r lo n g te rm r a th e r th a n for
s h o r t- te r m r e tu r n s .
7.8 D isp a rities in Pricing
If th e th o u g h t of b e in g a d m itte d to a h o s p ita l is n o t fo r b id d in g
e n o u g h , fo rk in g o u t m o n e y to p a y th o s e e n d le s s h o s p ita l b ills is a
n ig h tm a r e in itself. R eceiv in g th e b e s t a v a ila b le tr e a tm e n t is no
jo k e c o n s id e rin g th e in co m e le v els of a n a v e ra g e In d ia n . A
C a rd ia c b y p a s s s u r g e r y in a h ig h - e n d h o s p ita l in M u m b a i can cost
a s ta g g e rin g Rs.3 lak h , a n d c o u ld be e v e n m o re d e p e n d in g o n th e
c o m p le x ity a n d sp e c ia lis t s u r g e o n fees. T h o u g h o th e r cities are
c h e a p e r, th e g ap is n o t v e ry w id e . H o w e v e r, h u g e d iffe re n c e s are
s e e n in ra te s for n o n -c a rd ia c p r o c e d u r e s acro ss cities a n d e v e n
in tra -c ity . H e a lth c a re costs are m o re or less in lin e w ith th e cost
of liv in g in d if f e r e n t cities. The g iv e n c h a rt s h o w s th e co sts of
p r o c e d u r e s in m e tro s a n d n o n —m e tro s .
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CITYSCAPE
Cost of Procedures In Metros and Non-Metros
High
Metros
Medium
Low
Highest
NonMetros
Medium
Lowest
Cardiac Bypass
250000
164990
110750
200000
140000
101500
Angioplasty
143000
104993
44300
115000
82500
47000
230000
168400
92500
205000
115000
79500
48500
32790
19500
41250
25000
15876
40500
21550
15140
27650
16575
11000
Normal Delivery
38300
12000
4855
16050
7820
5450
Cesarean Delivery
67100
33500
14100
30000
15795
10500
Hysterectomy
56000
33175
15000
43725
27149
10925
Joint Replacement
158850
142500
121130
160000
102500
82294
Heart Value
Replacement
Laproscopic
Cholecystectomy
Laproscopic
Appendicectomy
Source : ETIG Health care Survey
The charges for the different p ro c e d u re s v a ry form case to case a n d city
to city. T h o u g h s ta n d a r d iz a tio n is long w ay off, relief m ay be at h an d
w ith the possibility of the roof-high rates com ing do w n , especially for
cardiac p ro c e d u re s , acc o rd in g to in d u s tr y officials. C o n su m a b le s form
a h u g e cost c o m p o n e n t in some cardiac p ro c e d u re s a n d high-end
co n su m ab les are largely im p o rted . Large h ospital chains will have
b e tte r b a rg a in in g p o w e r, thus lo w erin g their co n su m ab les and
b en efitin g the consum er. Till that h a p p e n s , the pockets w o u ld em p ty
d e p e n d in g on the city in w h ich one lives in and the h o sp ita l one goes
to.
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METRO BEAT
Overall Healthcare Cost Across Cities
Diagram 7.3 (Source : ET1G Healthcare Survey)
7.9
T h e r isin g cost o f H ea lth ca re
T o d a y life s a v i n g p r o c e d u r e s cos t a b o m b . The r i s i n g cost of
q u a l i t y h e a l t h c a r e p i n c h e s h a r d , e s p e c i a l l y w h e n g i v e n the
g e n e r a l i n c o m e le v e ls in th e c o u n t r y . But it is p r u d e n t to
u n d e r s t a n d th e r e a s o n s for s o m e h o s p i t a l s c h a r g i n g h i g h e r , s o m e
lo w e r , b e f o r e c h o o s i n g w h e r e to g et o n e s e l f t r e a t e d .
S u r g e o n ' s fees a n d c o n s u m a b l e s t o g e t h e r f o r m a l m o s t h a l f of to ta l
cos ts, w h i l e r o o m r e n t s a n d o p e r a t i o n t h e a t r e c h a r g e s t o g e t h e r
fo rm 25% of th e to t a l co s ts a c c o r d i n g to ET H e a l t h c a r e S u r v e y . It
h a s al so b e e n s e e n t h a t m a x i m u m v a r i a t i o n s a c r o s s h o s p i t a l s ar e
for th e c o n s u m a b l e co s ts a n d r o o m r e n t s . T h e p r o p o r t i o n s g i v e n
in th e t a b le ar e th e a v e r a g e s of t h o s e c h a r g e d b y a s a m p l e g r o u p
of h o s p i t a l s f r o m the s u r v e y . For th e C a r d i a c p r o c e d u r e s , th e y
c o n s i d e r e d b y p a s s s u r g e r y a n d a n g i o p l a s t y , w h i l e for t h e n o n ­
cardiac
procedures,
they
have
considered
laparoscopic
cholecystectom y, cesarean delivery and norm al delivery.
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7.10 Money For Everything
Major Cost Components as a Proportion of Total Procedure Cost
35%
32%
32%
'
30%
25%
20%
15%
10%
5%
0%
0 T C h a rg e s
C o n s u m a b le s (In c lu d e s
S u rg e o n /C o n s u lta n ts '
C o s t o f M e d ic in e )
Room Rent
□ O v e r a ll
Diagram 7.4
O th e rs
Fees*
■ C a rd ia c
□ N o n - C a r d ia c
(Source - ETIG Healthcare Survey)
* Does not include visiting consultants fees applicable in Cardiac Procedures.
One conclusion is that the proportion varies significantly with the procedure,
since surgeon charges and consumable costs are different. In the case of
cardiac procedures, consumables assume substantial proportions, especially
in case of angioplasty where it accounts for more than 40$ of the costs. This is
mainly because of costly balloons, catheters and injections to remove clots,
used in the process. These are mostly imported and are expensive. For
example a balloon costs anywhere between Rs.30,000 and Rs.70,000.
Costs of consumables vary widely across the hospitals too. The cost of
operation theatre, consumables for angioplasty in Holy Family Hospital,
Mumbai is Rs. 70,000, while that in Woodlands Hospital, Kolkatta is
Rs.25,000.
The variations in consumable costs are mainly due to the varying preferences
of doctors. Within a single hospital itself there could be a lot of heterogeneity
in the preferences of doctors. This is due to the varying degrees of confidence
that doctors excludes charges of the visiting surgeons, which is substantial in
the case of cardiac procedures, especially bypass surgery. Even in case of in-
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house surgeon's fees, there are big differences across hospitals. Wockhardt
Hospital and Heart Institute, Bangalore charge Rs.12,000 as Surgeon's charges
for cardiac bypass surgery, while hospitals like W oodlands in Kolkata and
Lilawati Hospital in Mumbai charge more than have in various brands. He
also adds that there is a difference in perception between imported brands
and indigenous ones. Another explanation for the asymmetry in consumable
costs is the policy of some hospitals to use reusable balloons while others use
disposable ones.
The second largest cost component, surgeon's fees, is understandably large in
all procedures. It is a huge variable element, depending on the location,
surgeon's skills and demand. This is applicable in both cardiac and non­
cardiac procedures. It should be noted that the surgeon's fee here double that
amount. The cost of procedures is much higher in Mumbai, mainly due to the
high doctor's fees. Unlike consumables and surgeon's fees which are specific
to each procedure, room rent is used as the universal parameter to measure
how expensive a hospital is. The survey shows that room rent is not the best
parameter to decide which hospital to get operated in, as room rents on an
average form just 12.6% of the cost of the procedure.
For most of the surgical procedures, it can be seen that operation theatre charges
and ICU charges are as significant as the rcom rents. Operation theatre charges
in general range from Rs.1,500 to Rs.3,000 per hour, depending on the hospitals.
ICU charges too are significant. In general, the patient spends 1.5 - 2 times what
he or she spends as room rent for the stay in ICU. Major hospitals are taking
various steps to minimize the stay in ICU.
Hospitals have been trying to keep this cost low and do this by reducing the
average length of study. Certain protocols followed in diagnosis, use of highend technology like non-invasive, surgical methods and strict focus on value
addition during the patient's stay are various steps taken by hospitals to
reduce the average length of stay (ALOS). Major hospitals are already aware
of the advantages of reducing ALOS as illustrated in the table.
Average length of stay (ALOS)
Across H ospitals in India
ALOS
5.3
9.0
5.0
5.0
5.5
6.0
Hinduja
Bombay Hospital
Breach Candy
Wockhardt, Bangalore
Ruby H all, Pune
Apollo Hospitals
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In case of hospitals running at low occupancies, the first priority of the
management would be to increase it. ALOS varies widely across sepcialities
and techniques. The basic premise is the focus on value addition. Value
addition in the form of various treatments is w hat brings profits to hospitals.
So pricing in healthcare services depends c n various parameters.
Apart from the major components mentioned above, there are m any other
miscellaneous cost heads, which hospitals end up incurring as a part of all the
procedures. Laboratory costs, anaesthesiologist's fees and admission charges
are some of them. Hospitals can try to minimize the laboratory charges by
outsourcing but in India most of the major hospitals are integrated leading to
higher overheads. It is further important to take a note of the surcharges,
which are high in case of the trust managed hospital. To compensate for the
charity treatments, offered to 20% of the patients, the government has allowed
trust managed hospitals to charge a surcharge upto 20% on the patient's bill,
excluding consumables. This surcharge also varies from hospital to hospital.
7.11 Strategic Levers
There is_an interesting article by Kimes and Chase (1998), titled, "the strategic
levers of yield Management" in which they have argued that yield is
dependent primarily on the price and the duration that a customer uses the
service for. By manipulating these two strategic levers, the yield from any
service business can be controlled. The first strategic lever is price. The second
lever is duration.
In healthcare context, this is defined in terms of time spent at the service
location. The service efficiency can affect the time spent. If there is an
untrained and unmotivated service provider, he could delay service and
lower the yield that is otherwise possible w ith a given capacity. However the
authors argue that if you can predict the duration, and at the same time
maintain the flexibility to increase or decrease prices, you can increase yields
from a given service business.
Quadrant - 1
Movies
Quadrant - 2
Airlines
Quadrant - 3
Restaurants
Quadrant - 4
Hospitals
Diagram 7.5 (Source: Services Marketing by R.Nargundkar)
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7.12 Cost Containment In Hospitals
"This hospital is really costly" is the commonest complaint voiced by a patient
when he avails the services of a hospital. The expression has been taken quite
seriously in various countries and efforts are being made to control the cost of
healthcare delivery by implementation of cost containment measures or
standardization of price through the interventions of TPAs, HMOs and health
insurance companies in the West.
In our country, the interest of corporate players in the private healthcare
delivery model is on the surge and more and more private spend on the
healthcare infrastructure has been projected.
The increase in spend has resulted In better hospitals in terms of
infrastructure, technology and treatment of tertiary and quaternary ailments
in the country. Unfortunately, the private spend has shown regionalization
and this has resulted in rise in competition in the tertiary and quaternary care
segment.
Even if the corporate don't look forward to the returns on the investment,
they want their hospitals to be financially self-sustainable models. Due to
rapid changes in the technology and pressure to acquire these technologies,
hospitals need patients and patients in turn want a very cost-effective
hospital.
For a hospital to increase the throughput, it is very important that it provides
quality healthcare at a very affordable price and that is possible, only if the
cost containment mechanism is in place and the strict compliance with the
cost containment protocols is practiced.
Any hospital's cost containment protocol can be evolved in the under
mentioned:
1) Formation of the cost containment team
The cost containment team should be very carefully constituted. The
chairman of the team should be Chief Executive Officer supported by the
head of administration and head of accounts with representatives of each
department. The main role of the team should be critical evaluation of the
organization and to do a cost benefit analysis for each activity.
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2) Implementation of strategic service unit
Total productivity management views a hospital as a group of strategic
service unit (SSU), each SSU with individual resource input, methods of
productivity assessment, measures to enhance productivity in terms of
volumetric turnover and control mechanism for quality improvement and
maintenance. If the strategic service unit concept is applied to each
department, then it is very easy to track down resource utilization for each
department and the cost factor associated with each resource.
3) Identification of department
Once the hospital is broken down into SSUs, it is very easy for the finance
department to identify the department with maximum utilization of a
particular resource, link it to the departmental productivity and identify the
department with a discrepancy in the resource cash inflow and service cash
outflow.
4) Study of the activity chain
A study of the activity chain has to be carried out and the operation research
tools and techniques can be applied to diagnose the sequence of the events. If
each department has well dominated standard operating procedure (SOP),
then it is very easy to analyse the activity chain. The focus should be on
identifying the resources and the quantum required to complete each activity
in the chain.
7.13 Application of business process re-engineering
Business process re-engineering (BPR) is a problem solving approach that
emphasizes radical redesign of business process to achieve dramatic
improvements in critical contemporary measures of performance such as cost,
quality, service and speed. Application of BPR will help in realignment of the
activity chain, thereby helping in the elimination of the wasteful activities and
reduction of the cost.
The bigger issue in the use of BPR technique is compromised with the
seamless environment, customer convenience and medical operations. Any
cost containment exercise should not affect the clinical outcome.
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7.14 Cost Containment measures
1. Human resource interventions
(a) Activity linked recruitment
Hospitals should evaluate the quantum of patient flow to the various
departments and adhere to the activity linked recruitment and development.
The occupancy level of the wards and utilization pattern of the OT should be
critically scrutinized to find the optim um staff levels. It is always advisable to
pay more salary to the staff and get the optim um level of w ork done
rath er th an over staffing the hospital. The ideal b ed to staff ratio is 1:4.
O rganisations w ith a ratio of less then 1:4 are ideally staffed b u t
hospitals w ith bed to staff ratio m ore than 1:4 n eed to u n d ertak e rig h t
sizing exercise.
(b) Automation of HR functions
A utom ation of HR functions m ay ap p ear to be a costly and tim e taking
m easure, b u t in the long term it h elp s trem en d o u sly in cutting cost. For
exam ple, if a hospital has a p ro v isio n of com puterized ap plication
bank, then huge am ount of data can be stored an d applications can be
retrieved on need basis and m oney can be saved as n u m b er of
advertisem ent released w ill reduce.
(c) Training & development interventions
H osp ital's train in g program m e sh o u ld be focused aro u n d "train the
train er" concept, w herein the HR d ep artm en t should identify line
m anagers w ho can effectively im p a rt train in g and tra in them in
conducting in-house program m e. This helps in cutting the cost of the
external train in g program m e and also the effect w ill be m uch m ore as
line m angers w ill be using live exam ples to train the staff.
(d) Multi-tasking of the sta ff
HR d ep artm en t sh ould carry o u t th o ro u g h job analysis and w rite
detailed job responsibilities. This w ill help in elim inating the
duplication of job activities and h elp in cutting the cost of HR. Also
opportunities to m erge job responsibilities should be id en tified to
im plem ent the concept of m ultitask in g . For exam ple, p o in t liftm an cum
security g u ard cum d riv er for h o sp ita l security. The job train in g should
be im plem ented to execute m ulti-tasking.
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(e) Reassessment o f the employee benefits
In many hospitals, employees are given certain benefits like free
hospitalization, medicines, subsidized food, free beverages etc. in order
to cut cost. Hospitals can set the limits and systems wherein every
employee benefit is accounted. For example, free medicine to the
employee can be given on hospital doctor's prescriptions only. Setting
up limits, like medicine worth a fixed amount will be given per annum
per employee will help tremendously in cost containment.
2. Material management interventions
(a) Collective procurement
Hospitals with a common interest of cost containment can come together to
form a collective procurement group. There are many items from medicine to
stationary which are required commonly by all hospitals. If such items can be
identified and hospitals can define average consumption per item per month,
then it is quite possible to negotiate with the vendors and get huge quantity
discounts. This type of model can be very well utilized with mutual trust, ~
faith and confidence even by the competing hospitals.
(b) Effective inventory control
Inventory control programme of hospital should be focused on the extent of
probable use, storage cost, obsolescence, transport cost, investment cost, cost
to purchase, market condition and price trends, time required for delivery,
availability of a substitute, cash flow and substitutes available. Every hospital
should try and reduce the inventory levels and see that unnecessary
inventories are avoided. Probably in case of operation theaters, we can have
three day inventory management for planned cases and a week's inventory
pattern for emergency cases.
3. Energy saving interventions
Hospital management should publicise the objective of energy conservation
in a very aggressive manner. Hospitals can put posters in cafeteria, employee
mess, change rooms, clean utility, and dirty utility to educate people on
energy conservation. Employees as well as patients should be sensitized to
the fact that conserving energy in a small, individual way adds up to
significant saving when multiplied with all users. If hospital is under
construction or on an expansion drive, then the design should cater for
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maximum use of sunlight. Light harvesting is a costly option but can he tried
to reduce the cost in long term.
In short, if these few interventions are practiced it is quite possible to reduce
the cost of service delivery and then the onus lies on the finance team to do
costing and price the services in such a way that healthcare and the hospital
becomes affordable to all.
The objective of cost containment cannot be achieved only through planning.
Execution needs an organization culture which has to cascade from the top.
The cost-containment philosophy should be drilled down to the lowest level
hierarchy. The major challenge lies in bringing a behavioural change in the
employees guided by appropriate leadership which motivates the change.
7.15 Price Mix
In the I n d i a n s e t t i n g w h e r e a n u m b e r of p e r s o n s a r e f o u n d b e l o w
th e p o v e r t y line, it is a c h a l l e n g i n g ta sk to f o r m u l a t e s u c h a
p r i c i n g s t r a t e g y w h i c h is f o u n d s u c c e s s f u l in s u b s e r v i n g the
soc ial i n t e r e s t s . Of late, th e h o s p i t a l s n e e d to i n v e s t a lot on the
s o p h i s t i c a t e d e q u i p m e n t a n d t e c h n o l o g i e s to i m p r o v e the q u a l i t y
of m e d i c a l aid. I n c r e a s i n g co s t o n i n p u t s is f o u n d a g g r a v a t i n g the
t a s k of s e t t i n g a fee s t r u c t u r e w h i c h m a k e s p o s s i b l e a fair
s y n c h r o n i z a t i o n of u s e r s ' a n d h o s p i t a l s ' i n t e r e s t s . P a r a d o x i c a l l y
in a w e l f a r e s t a t e , e v e n the a f f l u e n t s e c t i o n s of th e s o c i e t y e x p e c t s
lo w co st s e r v i c e s f r o m so cia l i n s t i t u t i o n s in g e n e r a l a n d h o s p i t a l s
in p a r t i c u l a r . T h i s is f o u n d c o m p l i c a t i n g the t a s k of i n n o v a t i n g
th e s e r v i c e s in t u n e w i t h th e l a t e s t d e v e l o p m e n t s in the field of
m e d i c a l s ci en c es . It is a g a i n s t th is b a c k g r o u n d t h a t w e find
a l m o s t all th e h o s p i t a l s , s p e c i a l l y m a n a g e d by g o v e r n m e n t in a
d e p l e t e d c o n d i t i o n . T h e e x c h e q u e r f i n d s it d i f f i c u l t to f in a n c e
h o s p i t a l s a n d f u r t h e r the g o v e r n m e n t a l r e g u l a t i o n s al so cl ose
d o o r s for the g e n e r a t i o n of f i n a n c e f r o m the i n t e r n a l s o u r c e s . The
u l t i m a t e s u f f e r e r s a r e th e s o c i e t y a n d s p e c i a l l y th e p o o r e r
s e c t i o n s s in ce th e a f f l u e n t s e c t i o n s h a v e a n o p t i o n to av ai l the
e x p e n s i v e m e d i c a l s e r v i c e s m a d e a v a i l a b l e b y th e p r i v a t e
h o s p i t a l s . The s o c i e t a l m a r k e t i n g p r i n c i p l e s m a k e a n a d v o c a c y in
f a v o u r of p r o t e c t i n g th e p u b l i c i n t e r e s t s b u t it is n o t m e a n t th a t
th e h o s p i t a l s h a v e a u n i f o r m p r i c i n g / f e e s t r u c t u r e for all th e
u s e r s . It is r i g h t to m e n t i o n t h a t th e s o c ia l m a r k e t i n g p r i n c i p l e s
al so f o c u s o n i n c r e a s i n g th e o r g a n i z a t i o n a l ef f ic ac y to d e l i v e r y
th e b es t. The m o t i v e is to i m p r o v e th e q u a l i t y a n d this
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necessitates a big budget for innovation. A gainst this
background, the hospitals are supposed to adopt such a
p ricin g /fee strategy w hich opens doors for the developm ent of
hospitals.
The fee structure for hospitals thus should be in p ro p o rtio n to the
incomes of users w hich w ould engineer a sound foundation for
qualitative or quantitative im provem ents. In the follow ing figure,
the p ricin g /fee strategy for a hospital focuses on incom e-based
fee.
No Income
Group
§•
,5>p 5
■KQ"
a
Cost + Surplus
to make up the
losses, from 4
►wIncome
Group
>5 n
Cost + Losses
from 3
Middle Income
Group
to
iu
igh Income
Group
Middle Income
Group
Low Income Group
No Income Groups
*
Hospitals
Public/
Private Fee/
Charge
Discriminatory
Pricing/ Fee
Diagram 7.b
For a social institution like hospital, we rind a discriminatory fee structure
suitable since it provides even weaker sections of the society an opportunity
to avail the quality medical services. Besides, the hospitals are also in a
position to innovate the services to keep pace with the latest development in
the medical sciences. Of course, the sections used to avail free of charge
services would not welcome it but we have no option since the dying
hospitals cannot be healthy or at least be recovered unless we allow them an
opportunity to generate finance from the internal sources.
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4
= N o income g r o u p . H e / s h e is n o t in a p o s i t i o n to earn
s o m e t h i n g a n d so free of claarge services.
3
= Low income g r o u p . H e / s h e e a r n s s o m e t h i n g a nd so
s h o u l d c o n t r i b u t e a p o r t i o n of cost.
2
= M id d le inc ome g r oup. H e / s h e e a r n s mo re th a n low
income g r o u p and so s h o u l d m a k e up the losses on
ac c o u n t of low income g r o u p , c a te g o ry 3.
1
= H ig h income g r o u p . H e / s h e e a r n s m o re a nd so s h o u ld
m a k e up the losses on a c c o u n t of c a te g o ry 4.
Such a fee s t r u c t u r e w o u l d be a p p li c a b le for n o r m a l cases but
w h e n we find t h r u s t a reas, the
hospitals
can
bring
some
i m p r o v e m e n t s b u t the m o tiv e " s u r p l u s g e n e r a t i o n " s h o u l d not
e st a b li s h an ed ge over the m o tiv e " p u b l i c in te re st s. "
7,16 P u b l i c / Private H ea lt h c a r e in I n d i a
The h e a l t h care sector in India, esp ec iall y the p r i m a r y h e a l t h care
s ys te m, has been m a n a g e d la rgely by s o m e small g o v e r n m e n t
in it ia ti v e s a n d the p ublic h e a lt h care s yste m. But the d e m a n d for
he al t h care is m u c h la r g e r a nd m a n y of the c u r r e n t in iti a tiv e do
not p e r c o l a t e to the gra s sr o o t s. The m a i n re a so ns are high
m e di c al costs, lack of i n f r a s t r u c t u r e a nd a w a r e n e s s , a n d p a uci ty
of g o v e r n m e n t ' s in it ia ti v e s in this area. It is qu it e e v i d e n t from
the table '111 H e a lt h ' , th a t the g o v e r n m e n t e x p e n d i t u r e on he al t h
care as a p e r c e n t a g e of total e x p e n d i t u r e has be en d e c li n in g year
on year. F u r th e r , the table ' O u t Of P o c k e t' sh o w s the in c re a s in g
e x p e n d i t u r e from i n d i v i d u a l s ' sav ings.
It is b e y o n d d o u b t t h a t the p u b l i c h e a l t h c ar e s y s t e m in I n d i a
c a n n o t live u p t o th e h u g e d e m a n d for h e a l t h c ar e s e r v i c e s . The
p r i v a t e s e c t o r n e e d s to s t e p in a n d ta k e c h a r g e . But h e r e the
i m p e d i m e n t is the c o s t of t h e s e s e r v i c e s a n d the a b i l i t y of the
p o p u l a t i o n to a f f o r d t h e m . H e a l t h c ar e s e r v i c e s in I n d i a a re no
d o u b t e x p e n s i v e a n d m o r e t h a n a n y t h i n g , it is the c o s t t h a t acts
as a d e t e r r e n t for the l a r g e p o p u l a t i o n .
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ILL HEALTH
D eclining Trend of E xpenditure on H ealth O utlay in India
First Plan (1951-56)
65.2
3.3
Second Plan (1956-61)
140.8
3
Third Plan (1961-66)
225.9
2.6
A nnual Plans (1966-69)
140.2
2.1
Fourth Plan (1969-74)
335.5
2.1
Fifth Plan (1974-79)
760.8
1.9
Annual Plan (1979-80)
223.1
1.8
Sixth Plan (1980-85)
1821.1
1.9
Seventh Plan (1985-90)
3392.9
1.9
A nnual Plans (1990-92)
1965.6
1.6
Eight Plan (1992-97)
7575.9
1.7
Source : 15th report of pricing & availability of drugs
There is an increasing need to bridge the gap betw een the cost to the patient
and his affordability. Once the patient knows that he need not w orry about
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the cost of medical procedures, he will ensure that he goes in for the best
medical service. The best solution here is health insurance - a community
insurance where the insurer covers a diverse risk portfolio and at the same
time, patients are provided relief from high and medical costs.
Out of Pocket
:
Sources of Expenditure on Healthcare
Public Sector
C e n tre
5 54
6.6
2.1
0.1
S ta te s
4981
59.3
18.6
1.1
M u n ic ip a litie s
126
1.5
0.5
<0.1
E xte rn a l A id
118
1.4
0.5
<0.1
S u b -T o ta l
5779
68.8
2 1 .5
1.3
O u t of P o c k e t
20160
240
7 5 .2
4.5
P riva te E m p lo y e rs
3 19
3.8
1.2
0.1
E S IS C o n trib u tio n s
2 02
2.4
0.8
<0.1
O th e r S o u rc e s
361
4.3
1.4
0.1
S u b -T o ta l
21042
2 5 0 .5
7 8 .5
4.7
Total
26821
319.3
100
6
Private Sector
(Source : Peter Berman 1996)
X-X=X=X=X-X~X-X-X
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