Health care costs are exploding, and hospitals are under pressure to improve their operating margins without increasing prices, a move that can hurt their brand.

But there are ways to change the game and create a better economic environment without depreciating the brand. Increasing operating margins is possible, even in an unstable environment, by such strategies as:

  • differentiating lines of business;
  • improving fidelity;
  • personalizing health care;
  • changing wage systems;
  • changing billing systems;
  • reducing the medical veil between providers and patients.

Differentiating Lines of Business

A major issue for hospitals is getting paid after services have been rendered. To increase their revenue, hospitals have to create two distinct sub-brands of services: the "fast food" type of health service and the "fancy restaurant" type of service.

In the fast food type, hospitals treat the current disease and ensure the wellness of the patient. In the fancy restaurant type, hospitals offer groups of services for which patients receive a higher level of treatment for a higher price.

Usually, the lower level of service is a launching point for the higher one. Some hospitals might also want to subcontract with other hospitals, where they send patients for certain services, depending on treatments and expected billing.

Improving Fidelity

Hospitals offer similar types of services to consumers and usually derive market power through reputation and repeat business. Customers enjoy being part of a club when they grocery shop or bank; hospitals are candidates for such loyalty, too.

More often than not, fidelity is not a selling point for hospitals. Customers have an attachment to a particular hospital because they enjoy its services. A fidelity card for services, or preferential rates for recurring customers, scores high on experiments to entice customers to return.

Personalizing Health Care

One of the underlying assumptions of health care is that patients are different. Unfortunately, patients indicate on surveys that they don't feel their care has been personalized.

The economic future of health care resides in personalizing patient services. It is highly related to the differentiation of the brands. For example, a particular doctor in the hospital might specialize his time by seeing six patients a day. The pricing for those services would be higher, as they are more personalized, but they would generate higher revenue for the hospital. For this high-package health care, patients would be offered a bundle of services, including an online registration service with spots reserved for those patients, and preregistration one hour before their appointments. Consumers value their time as much as the quality of their care.

Changing Wage Systems

Creating a system of physician incentives is critical for the hospital of the future. Hospitals need to share the risk of new strategies with their physicians. Physicians can have a smaller share of their wage as a fixed salary, and the rest can come from a share of the revenue earned by the hospitals.

This system is already in place for multiple hospitals but could be generalized to most institutions. It also would let physicians more effectively allocate their time and make better decisions about their own schedules.

Changing Billing Systems

The billing system has become an impediment to developing long-term revenue enhancement. Hospitals have in place a system of list prices that are very rarely the prices actually paid by the patient or the insurer. Usually prices are negotiated between hospitals and insurance companies, and a fraction of that price is paid by the insurer or the patient. Successful negotiations on those discounts and unpaid fractions will lead to higher margins.

Also, experience shows that patients are frustrated by the complication in service pricing. Transparency would benefit both hospitals and customers: For hospitals it would provide a better idea of the real prices available to them; for the customer it would reveal the prices of the services. An online system of payment could be developed for the high-package health care consumers so they have a better idea of the amount of money they will spend on their services.

Reducing the Medical Veil

A better understanding by patients of the medical care they need also can create an improved economic environment for hospitals. Too often, there is a medical veil between the patient and the doctors. Patients value the knowledge that doctors have but, more often than not, patients hesitate to ask questions or push for answers.

A way to solve this problem is to have coordinators simply explain step-by-step how the case of an individual is different and how the doctor and the hospital will better approach this case compared with other hospitals. A better-informed patient is a return customer!

Sebastien Gay, Ph.D., is a principal at Berkeley Research Group LLC in Chicago. He also serves on the faculty of the University of Chicago's Department of Economics.