Product Pricing Research

In most economical systems, free-market systems are allowed to operate in the healthcare sector, leaving healthcare organizations and medical practitioners to bear the burden of cost determination through price setting. Certain constraints, such as rules and statutes, market fragmentation, entity size, competition, and even demand and supply market forces, are available to keep such an effort in control. Entities in the healthcare sector are guided by goals that must be met when setting prices for the services and goods they offer, including the sustainability of operations (through increased net revenue), affordability of products and services (to help them gain market share), and quality of services offered. In the end however, while the healthcare organizations and medical practitioners set the prices of their products and services, there needs to be an interaction of the demand and revenue in order to ensure not just sustainability of operations but also that the market share is either maintained or expanded. Each of these aspects of price setting by players in the healthcare sector are delved into here-after.

Keywords: Affordability, market forces, price setting, healthcare sector, sustainability, market fragmentation, cost determination, quality

Introduction

In the healthcare industry and the medical services sector, there are a number of factors that inform the pricing of products being availed in the market. The establishment of prices is a multi-step process that incorporates many such factors some of which may be different from those affecting the normal pricing of products while some may intersect with those that affect the price setting of other products. In this essay, a number of these factors are highlighted with emphasis being placed on the constraints to price setting by players in the sector, the pricing objectives of such players, and the demand and revenue considerations that the players in the industry have to keep in mind.

Constraints to Price Setting

Healthcare organizations may face a number of obstacles and constraints in their attempt to set the prices of products and services that they offer. Among the most common constraints to price setting by healthcare organizations and medical practices is the legislations that influence price setting. Such laws and statutes as those linked to the Affordable Care Act (ACA) or Obamacare as well as Medicare and Medicaid tend to give the federal and state governments great power in negotiating with healthcare organizations and hence limits the powers and abilities of such organizations to set the prices of products and services they offer to patients. Legislations also tend to, as Malovecka, Papargyris, Minarikova, Foltan & Jankovska (2015) outline, influence the level of competition in the healthcare industry and hence impact the price setting ability of the organizations operating in the sector. Market fragmentation may also be another factor that constraints the ability of healthcare organizations and medical practitioners to set the prices of their products and services as it reduces their bargaining power. In the view of Cleverley & Cleverley (2017), in markets where the suppliers of a product or service (due to fragmentation) cannot set the prices of the commodities they offer, the prices tend to be dictated by other forces such as the bargaining powers that consumers enjoy (as is the case with the federal government in the instance of Obamacare and Medicare/Medicaid).
Other laws and regulations such as those outlawing discrimination may also be detrimental to the price setting efforts of healthcare organizations and health sector players. In their requirements, these laws may among other things illegalize the discrimination of individuals (patients) in the process of service provision on the basis of such characteristics as may include age, race or socio-economic status, a fact that may lead to difficulties in price setting especially for insurers. Such legislations may also impede the ability of healthcare organizations such as hospitals (especially accident and emergency departments) to set their own prices as they are required to offer the basic first aid services to patients brought into their facilities (Malovecka, Papargyris, Minarikova, Foltan & Jankovska, 2015). In that way, healthcare facilities may be constrained form setting the prices of such services.
Attempts by healthcare organizations to set the prices of the services and products they offer can also be constrained by the size of the entity in question. Cleverley & Cleverley (2017) point out that smaller healthcare organization may face bigger hurdles in setting the prices of their products and services as they may not have the power to negotiate with the purchasers of such services. A case in point is that of small insurer that may lack the ability to operate nationally and therefore will face difficulty in setting the prices of their commodities competitively. Competition can also be another constraint to price setting by healthcare organizations. In a market where free competition is allowed to prevail, organizations tend to set the prices of their commodities (products and services) in tandem with those of their competitors; it would be no use setting prices high in an area where competitors set prices of the same products/services low. Essentially, therefore, the price that one entity, as Cleverley & Cleverley (2017) assert, charges for its services/products will be in relation to those charged by the competition. Prices of products and services also tend to be determined by the market forces of demand and supply of such commodities, especially in a free market healthcare system; and organizations may not change their prices as they wish except in response to the prevailing and/or dominant market forces. Entities may not, for example, set prices high when the demand for the concerned products and services are low.

Pricing Objectives

Healthcare organizations and medical practitioners, in setting the prices of their products and services, are influenced by several objectives. For one, each organization or practitioner is driven by the need to have sustainable operations, and as a result reflects such an objective in the prices set for products and services. In the findings of Adekambi & Mamane (2013), players in the healthcare sector, mainly service and product providers, in setting the prices they charges for services and products, aim to achieve two important goals; generation of income for the entity and covering the costs incurred in the provision of the service in question or the production of such good. In support of that premise, Cleverley & Cleverley (2017) makes mention of the fact that hospitals and healthcare entities often set the prices of their services and products with the goal of increasing net revenue rather than maximizing the profits attributable from the sale of such services/products. In the end, the goal for healthcare organizations and medical practitioners in setting prices is to enable the entity sustain its operations going forward.
Affordability also forms part of the main objectives that entities in the healthcare sector seek to achieve while setting the prices of the products and services they offer. The charges levied on services and products need to be within the reach of the customers that the organization targets. By placing the said charges within the reach of the customer base, the players in the healthcare sector will in effect incentivize the customers to partake of the said products and services. Customers, for instance, would be more willing to consult and visit entities that charge fair rather than dear prices for products and services. Other times, Adekambi & Mamane (2013) avow, healthcare organizations and medical practitioners may set their prices with the objective of gaining market share. Such an objective entails the concerned practitioner/entity setting prices with the intention of undercutting competitors and gaining more market share. This can be seen in an instance where a new practitioner in an area seeks to maximize their customer base and as such has to set prices that would help attract customers from the other already established practices in the area.
Quality can also be considered another objective that players in the healthcare sector consider while setting the prices of products and services. In this regard therefore, prices of products and services may be set in a manner that aids the entity concerned in the improvement of the performance of services offered. Price setting can also be done with the aim, as Herzlinger (2012) posits, of increasing the scope and magnitude of the products and services offered by a healthcare organization or entity; where for example an entity that only offers x-ray services seeks to offer MRI and CT scan service, they may tailor their charges to help them achieve such an end. Such price may also be set, as Okike & Bozic (2014) with the objective of complying with the regulations and laws governing healthcare such as the Affordable Care Act (Obamacare) which requires organizations providing services and products in the healthcare sector to be open and transparent about the pricing policies and disclose any charges.

Demand & Revenue

For healthcare organizations, price setting takes into account the demand for the services/products on offer as well as the targeted revenue. Whilst setting the prices of products/services, healthcare organizations need to account for the demand among the customers, and as such needs to set the prices in a way that does not constrain demand for the products. In setting the prices however, due caution also needs to be taken to ensure that the facility in question still earns adequate revenues. Essentially, as Hsia, Kothari, Srebotnjak & Maselli (2012) advance, prices should be set where the demand for products/service and the revenues from the provision of such intersect. It would be of no use, for instance to set the prices low and risk missing out on revenue where the demand for a particular product/service is concerned as would also be the case in setting prices too high in the case of low demand and risk losing revenues that would have been earned otherwise.

References

Adekambi, F., & Mamane, S. (2012). Health Care Insurance Pricing using Alternating Renewal Processes. Asia-Pacific Journal of Risk and Insurance, 7(1).
Cleverley, W. O., & Cleverley, J. O. (2017). Essentials of Health Care Finance. Jones & Bartlett Learning.
Herzlinger, R. E. (2012). Consumer-Driven Health Care: Conquering Health Care Cost and Quality Demons. Accountability and Responsibility in Health Care: Issues in Addressing an Emerging Global Challenge, 1, 463.
Hsia, R. Y., Kothari, A. H., Srebotnjak, T., & Maselli, J. (2012). Health Care as a “Market Good”? Appendicitis as a Case Study. Archives of Internal Medicine, 172(10), 818-819.
Malovecka, I., Papargyris, K., Minarikova, D., Foltan, V., & Jankovska, A. (2015). Impact of New Healthcare Legislation and Price Policy on Healthcare Services Provider at the Time of Financial Crisis. A 10 Years Study. Farmeconomia, Health Economics and Therapeutic Pathways, 16(1), 15-24.
Okike, K., & Bozic, K. J. (2014). Orthopaedic Healthcare Worldwide: The Transparent Pricing Revolution in Healthcare. Clinical Orthopaedics and Related Research®, 472(8), 2325-2328.