Differential Pricing Strategies are Impossible if the Customer Can't Determine the Cost of a Service

Part Four/ Can any patient find the advertised final price of any cardiovascular or orthopedic surgery in America?

I remember responding to an opportunity in Michigan to provide clinical laboratory services for non-time critical tests at the very capable ACP accredited Clinigene lab in Bangalore. Even with recruiting the services of an insurance carrier to help decipher the bills, it was literally impossible to determine the price of an individual test. While we were easily able to price our services...we could not determine the savings because the customer could only provide a quarterly billing statements.

Every community seems to have a newsworthy story about a local who ended up with an astronomical full charge bill from the hospital that has turned over the account to an aggressive bill collection agency and is forced to declare bankruptcy.

Of course, if you are Amish, and the elders shell out over $5 million per year for your religious community's health care, you might be able to deal with the local hospital for a discount against these full charges.

The core issue is that the US healthcare consumer is shielded from the price of any procedure, as well as any information on quality that could be used to measure value. The only valid explanation for this in a free capitalistic society is that a monopoly has been created and consumers are either forced or tricked in to buying the service.

This is in stark contrast to the Indian healthcare delivery model that has adopted the practice of price discrimination (differential pricing) to target multiple segments of the Indian population. Tiered pricing allows for the provision of standard services, and also the charging of higher fees for comparable services to higher-income segments of the patient base.

This differential pricing allows the organization to provide services with minimal margins or below full cost (but above variable costs) to about 75% of the patients. There is an explicit focus on limiting fixed costs to achieve budgetary goals while maintaining quality...so price discrimination occurs primarily on capital costs and less on technology and services. Indian patients can choose to pay more to enjoy five star amenities...but the technologies used for procedures are the same for all patients.

The posh rooms allocated to IndUShealth for the international medical tourism patient are a key part of the differential pricing strategy...so every patient in the hospital can access the latest technologies.

So the Indian hospital strategy enables the the hospitals to maintain high volume and low overhead costs. These high volumes also allow healthcare professionals to keep their skills at peak levels.

Meanwhile, US hospitals were busy with $35 billion in construction projects in 2008, generally going towards entirely private rooms, with high end Hill Rom beds. The only selection available to the consumer is the five-star accommodation, and those most able to afford it are given the highest discount on the rates. Those that cant afford (and have no intention of paying for) the service are generally given carte blanche access to the premium services.

And the unlucky minority who have just enough resources to be a target for the hospital's collections agency pay the inflated accounting fiction called "the full charge."

There is simply no financial mechanism available for the US hospital to compete with their Indian counterparts via price discrimination.