Hospital Pricing – Who Knew? (about prices)

Peter Waldman published an article “Why Baby Costs Less Down the Road in Silicon Valley” describing how different hospitals charge significantly different rates for the exact same procedures.

The point of the article was to discuss monopoly pricing or market power by large hospital conglomerates, but let’s learn a different lesson.

Health care is a service that we all need.  It’s an industry where much is written on lowering costs, where major insurance companies have incentives to drive down prices.  And yet, we see such a difference in pricing between hospitals.  Even in an industry with such strong pressure on costs and prices, we do not see prices driven to commodity levels or even to parity.

What makes it possible to have this pricing disparity?  Let’s answer with a question.  When was the last time you used price to decide where you were going to have a medical procedure done?  When was the last time you even knew the price of the service before going in?

OK, we don’t know prices because our insurance covers the cost … but not really.  Don’t we have co-pays?  Even a 10% co-pay on $1,000 is $100.  Isn’t it worth $100 to find the best deal for a procedure?  So most of us have financial incentives to shop around for price, but we don’t.  Hmmmm.

There’s the lesson.  Many customers do not shop around for price.  Think carefully about your industry.  Of course you have customers who haggle on price and blatantly compare your price to your competitor’s.  But how many customers do you have that don’t even shop around for price?  Is it possible that you can make more money by focusing on the customers who don’t shop for price and foregoing the price buyers?  Can you put programs in place that allow the “price-buyers” to get a discount, while those that aren’t worried so much about price do not?

Action:  Which of your customers are price-buyers?  Can you describe a common characteristic?  More importantly, can you describe the characteristics of a customer that doesn’t even know the price but still buys?