Bundled pricing — providing a flat rate for an entire episode of care — is gaining momentum as a solution to the health care system's many problems. For patients, bundled pricing means more certainty about treatment costs and more transparency in services provided. For payers, the lure is less cost variability and excess utilization. For providers, the attraction rests in possibly significant profits from operational efficiencies. But like most medical interventions, bundled pricing is not without risks.
In the short term, provider organizations that are prepared to offer bundled pricing will reap financial benefits by virtue of being a first mover. Over the long term, however, more providers will develop bundled pricing, those prices will trend toward equivalence, and commoditization will become a growing threat. At that point, it's essential that providers be able to differentiate themselves from others in the market. Those providers able to demonstrate economic and clinical value will gain a competitive advantage and reap the financial benefits. Commoditization is a potential side effect of bundled pricing — and ECV is the antidote.
The Case for Economic and Clinical Value
ECV is the narrative that illustrates the value an organization provides to key stakeholders, including patients, employers and payers. ECV provides a rationale to payers for contracting with one provider organization over another, to providers for using one facility over another, and to patients for choosing one hospital over another. ECV also serves as the justification for any difference in price between otherwise comparable organizations.
Although many provider organizations have relied on morbidity and mortality statistics to describe the value of their services, these variables, while necessary, are not sufficient to make an ECV case. As regulators and the public increasingly demand better quality at lower cost, a more sophisticated narrative that integrates clinical outcomes and economic value will be required. That is what an ECV case does: It links clinical and financial outcomes to support the organization's value proposition.
Building an ECV Case
To build an ECV case, each provider organization first must determine the factors that have economic or clinical value for its target audiences. Next, the organization must develop claims for each of these factors based on the organization's understanding of its competitive advantages, competitors and target audiences. Finally, the organization must evaluate the claims it develops to select those claims for each audience that will present the most compelling ECV case. This process can be further broken down into several steps.
Determine factors of economic and clinical value to target audiences. The provider organization must look through the lens of its target audiences to determine what each one values. Employers, for example, may value a provider organization for its cost structure, for the quality and variety of physicians and services available, and for the efficiency with which it conducts its administrative activities.
Provider organizations should conduct additional research using focus groups or one-on-one interviews with members of the target audience to validate these assessments as well as to identify any previously unrecognized values. As the market becomes more sophisticated, and the competitive landscape changes, it is likely that a particular target audience may have values not previously identified or immediately obvious.
Develop claims for each value. Once the values have been determined, the organization must develop claims to address each one. The provider organization needs to determine the factors that differentiate it within the marketplace and develop claims concerning those factors. Let's say cost of care is a value. An organization that does an excellent job coordinating care resulting in lower utilization for patients could argue that secondary costs (e.g., emergency department costs) for patients will be lower than those of competitors. The organization's objective is to develop as many claims as possible within the value identified for the target audiences.
Evaluate claims within each value. Organizations also should assess the claim's value to each target audience. In certain cases, the value of a particular claim may be high for all audiences (as is often the case with claims involving costs). In other cases, the value of a claim may be high only for one particular audience.
The competitive landscape also must be taken into account. Organizations should evaluate each claim in terms of its use by competitors. Before making any investment to substantiate a claim, it is important to identify market gaps: What are our competitors not saying? Can our organization fill that need? Can we make a stronger argument?
Assessing the Competition
Provider organizations also need a firm understanding of the barriers for other organizations wishing to develop similar claims. Claims that can be developed easily by competing organizations are relatively weak. Claims for which competing organizations would have to reorganize processes or that would require significant research on the part of competitors to justify are significantly stronger.
Organizations need to evaluate claims in terms of the research needed by the provider organization for justification. Can data be obtained directly from the electronic medical record, or will a survey be needed? If the claim involves contrasting the provider organization with a competitor, how will that competitor's data be obtained? Research costs involve both time and money. Claims that are more expensive and take more time to complete may be deferred in favor of claims that are less expensive and take less time to justify.
Making the ECV Case Now
The health care industry is demanding better care, lower costs and more transparency. Building an ECV case forces an organization to address all three concerns. Those providers that are considering bundled pricing, as well as organizations seeking to anticipate future changes in the health care market, would be well advised to consider building their ECV case now. Two reasons are particularly important:
- Although bundled pricing is just beginning to appear in the market place, the point at which pricing for certain bundled services moves toward equivalency could happen faster than expected, which means that organizations will need to have their ECV case ready if they want to maintain a competitive advantage.
- Additional research often is needed to justify ECV claims, which may involve a significant investment in time and resources, and the organization must prepare for it.
Provider organizations that want to remain market leaders can't afford to take a wait-and-see attitude in the current health care environment. Building an ECV case is a critical task, and the time to act is now.
Michael Abrams, M.A., is a managing partner and Simone Cummings, Ph.D., is a research analyst at Numerof & Associates, Inc., a strategic management consulting firm in St. Louis.