The pricing of hospital services
Abstract
Hospitals increase their revenues usually by increasing bed and other service charges with
the assurance that health services are price inelastic. They increase charges across the entire
hospital. Hospital price increase is usually pegged to inflationary pressure and what other
competing hospitals are doing. There is therefore a tendency to wait and see what the
competitors are doing. This wait and see approach implies that the overall tendency is not to
increase prices as there is a fear that increase in prices without competitors doing likewise
will lead to migration of patients (a dominant price reducing strategy), that is, if the hospitals
do not price their services correctly, they lose market share. A high price will cause patients
to move to competitor, too Iowa price will cause financial and developmental targets to go
unmet. Therefore, the hospital must be able to price appropriately. This dissertation looks at
one private hospital that is also a teaching hospital. The policy in this hospital is to increase
price once a year across the entire hospital. This study shows that this strategy is flawed. The
study identified relationship of different departments' bed occupancy and number of
patients admitted with the overall income of the hospital. In effect, the dissertation
determines the price elasticity of the hospital in general, and each department specifically.
In doing so, the study has shown that hospital services are not homogenous. Different
department have different price elasticity and therefore one pricing strategy across the
hospital is inappropriate. Each department's services should be priced independently.