Discussion response with one reference.
As the Chief Financial Officer (CFO), we are in contract negotiations with North Creek, our largest non-governmental insurer, to decide whether to accept a marginal increase in the carrier’s inpatient reimbursement or potentially risk losing the contract. North Creek pays for inpatient care on a Diagnosis Related Group (DRG) basis using the relative weights that the Centers for Medicare and Medicaid Services use with a base payment for a case with a weight of 1.0 is $4800. They are willing to go up 5%, which would bring that payment to $5040 (Toolwire, n.d.).
The hospital’s position is to provide supporting data to address their desired net income, competitive position, and market structure. Healthcare leaders can set prices, but this doesn’t mean it will always work in their favor. Two extremes exist; providers have no power and must accept the marketplace’s reimbursement rates or set any price they desire within reason (Gapenski & Reiter, 2016). In this case, for the hospital to break even, Northcreek must increase its inpatient rate by 22 percent.
Suppose all payers set reimbursement rates based on a marginal cost. In that case, the organization will not recover its total cost and ultimately fail, meaning prices above marginal cost is required for providers to make money (Gapenski & Reiter, 2016). The breakeven analysis provides real data to support the inpatient hospital volumes, which is achievable at a price assumed in their research. Hospitals in a competitive market position are considered price takers because the marketplace’s prices constrain them, and providers with a high market dominance pricing power are price setters (Gapenski & Reiter, 2016).
As it stands, the hospital is not in a position to negotiate a better deal because their system holds only 40% of the market share versus their competitors at 60 percent, giving them more bargaining power when negotiating their rates. The CFO needs to have a process to allow the hospital leadership team to maintain their market margin by proactively reviewing prices to isolate and resolve any potential margin issues before risk to revenue or compliance occurs (Workinger, 2015). Healthcare providers who proactively review their population health and payer needs, update their chargemaster, and the case payer mix are in a better position to negotiate the best rates for their hospital.