Providers, more often than not, treat the development of their Cdms as a necessary evil. Treading the fine balance between competitive pressures, cost compulsions, payer contract considerations, bad recoveries and Charity Write Offs is a tall order for most Hospital executives. Many providers apparently dont even seem to use any rationale in coming up with their CDMs, and in many cases, these CDMs are not even updated to reflect prevailing prices of healthcare services. While a bulk of reimbursements which providers in the US receive, may either be driven by contracts or capitation payments, a significant portion of payments still directly or indirectly use charges as a basis for pricing. For many hospitals this will range between 10 - 25% of their payments. Charge driven payments normally include Self Pay Patients, Payments where the Provider is non Par and in certain cases, Medicare and Medicaid payments. In addition, charges will be critical during rate setting negotiations with insurance companies. Also charges are used for outlier payments in various pricing methodologies - including medicare and medicaid (Ratio of Cost to Charges, also called the RCC, is used in some cases to re-imburse the additional costs involved in outlier cases). In spite of the importance of the CDM, many hospitals don't accurately maintain their CDMs. At many hospitals, the CDMs based on older versions of services codes were still being used. Also upto 70% of the codes defined in CDMs were never actually used.

Development of an up-to-date Charge Description Master will be critical for hospitals in the coming years, with emergence of market trends like price transparency and consumerism and regulatory pressures. There are already certain states which have either put in place or are planning to put in place, regulations for provider charges. For instance, it is mandatory in California, for hospitals to make public a copy of their CDMs. Consumerism is also growing, with many members taking an pro-active role in making their healthcare decisions by evaluating cost vs quality. This trend is definitely accentuated with increasing enrollments in CDH plans. With these trends, hospital CDMs are increasingly coming under the scanner from both regulator as well as the consumer ends. It will definitely become imperative for hospitals to work on their pricing, in order to attract patients, as well as avoid the financial cost of litigation and regulatory penalties.

On the other hand, charges developed based on sound economic principles can be a source of competitive advantage. Hospitals typically suffer from bad ROIs, due to a variety of reasons - poor AR management, below par payments by medicaid and medicare segments, bad revenue cycle management, weak negotiating power for contract negotiations with large payers and so on. With low ROIs, hospitals increasingly are finding it difficult to raise capital for working capital as well as their capital expenditure needs, let alone strategic investments like expansions or mergers and acquisitions. With a diligently developed CDM, hospitals can address many of these issues and work towards a healthy ROI.

The key factors to be considered in hospital pricing, even before ROI considerations would be direct and overhead costs of health-care services rendered, utilization ratios for services, under recoveries and charity write offs, Under payment for services by medicare and medicaid, and in some cases, contractual arrangements with payers. The primary area of focus for hospitals would be to ensure accurate capture of direct and overhead costs - since this will be the primary basis for pricing. These costs should be adjusted to accomodate under utilization of services. Additional adjustments will need to be performed for under recoveries, charity write offs, medicare and medicaid underpayments, as well as losses due to contractual arrangements with payers. It is absolutely necessary for hospitals to invest in systems, that can track all these numbers, integrating across disparate systems where they lie hidden. Ideally this should be done at a service code level (with some kind of a logical basis for overhead allocation), failing which this can be done at slightly aggregated levels and costs ascribed to services based on relative weights.  Once the base price is arrived at, a growth adjustment should be used to arrive at CDM prices. The growth factor should take in to account the increase in cost of capital to maintain business at current levels, as well as provide for a good level of ROI, in order to facilitate investments into strategic areas like organic and in organic expansions, apart from investing in social responsibilities, innovation, education and research. For most hospitals, the growth adjustment will translate into anywhere between 8 - 12%, depending on whether it is based on conservative, most likely or aggressive growth scenarios. Hospitals could also go one step further, and apply price increases selectively on services which yield the maximum ROI, rather than perform an across the board adjustment.

In the real world, pricing may be influenced also by additional compounding factors. The compounding factors which may change the variables may be competitive pricing pressures, quality based contracts, packaged services, regulator pressures (which may create cap price increases), dramatic technology shifts, development of alternative healthcare delivery mechanisms like retail health-care clinics,  Free standing Ambulatory Surgical Centres etc.,

Movement to ICD 10 and CPT 5 - presents providers with a unique opportunity to transform their CDMs. Providers should make use of this opportunity to transform the process of pricing into a source of competitive advantage. while this will be more easier than done, it will neverthless prove to be a wise investment for hospitals to thrive and not just survive in the coming years.

Terms:
Charge Description Master (CDM) - The Charge Description Master (CDM), or chargemaster, is a comprehensive listing of items that could be billed to a patient, payer or healthcare provider.