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.