Price transparency begins at home.

WHEN IT COMES to reforming their price structure, it is to be hoped that hospitals will do the right thing for the wrong reason. They certainly show no signs of doing the right thing for the right reason. The right thing is to develop a coherent strategy for setting a structure of prices that combines an external, market-facing perspective on the value of particular services to particular customers with an internal, organization-facing perspective on the cost of offering those services to those customers. The right thing means leaving behind the framework of cost-based pricing and moving to value-based pricing. It requires the pricing of a meaningful unit of service-the same unit that is meaningful from a clinical, operational, and marketing perspective. The right thing means acknowledging that some services cannot be sold at the prices that the market is willing to pay, and so should not be produced unless they are explicitly designated as charitable or otherwise mission related. The right reason to do the right thing is that developing a coherent pricing strategy supports all the hospital's goals, including its financial survival, organizational growth, community contribution, and quality enhancement goals. A coherent pricing strategy not only provides the hospital with the greatest possible revenue from its services (revenue that can be used to finance charity care, clinical research, and other worthwhile projects) but, of greater importance, helps the institution decide which services it should be offering, where, when, and to whom. The contemporary confusion in pricing mirrors a larger confusion in organizational strategy, with almost all hospitals trying to be almost all things to almost all people and then shrinking in fear of specialty facilities, ambulatory surgical and diagnostic chains, and the technologyenabled offices of their own medical staff. The wrong reason to do the right thing in hospital pricing is to act because the contemporary pricing incoherence is garnering unfavorable publicity and creating financial liabilities. Billing uninsured patients full chargemaster-based retail prices is not only unethical, it exposes the mindlessness of chargemasters that confuse internal cost-accounting functions with external revenue-generating functions. Using charges to calculate when particular patients have tripped past contractual (stop-loss) thresholds invites markups to maximize outlier payments from Medicare and the reversing of private payments from per diem to discounted fee-for-service. Offering patients who face deductible and coinsurance provisions a menu with tens of thousands of prices is an insult to the principles of consumer-driven healthcare, which, when last checked, had the support of the employers, the insurers, and the president of the United States. PRINCIPLES OF VALUE-BASED PRICING Hospitals are multiproduct, multimarket, multichannel firms. They offer numerous distinct services in distinct facilities in distinct communities to distinct sets of payers and patients. The wrong way to develop a structure of prices across all these contexts is to measure the cost of each service and then set price equal to that cost, plus a uniform percentage markup. Cost-based pricing of this sort ignores what the payers are willing to pay (i.e., more than cost plus markup in some contexts, less in others). It leaves the firms with unsold services in contexts where the price exceeds the customers' willingness to pay and constitutes a charitable donation (i.e., to the shareholders of a for-profit insurer) in contexts where price falls below willingness to pay. Good information on costs, by service, facility, market, and customer, is an essential component of pricing strategy (and of organizational strategy more broadly), but it is only one component. Cost information provides the minimum rate at which a particular service should be priced, while the customer's willingness to pay provides the maximum rate. …