Pricing Strategies and Decisions

LEARNING OBJECTIVES
1. How do health care consumers, providers, and companies
process and evaluate prices?
2. What are the different methods and seven steps for setting an
initial price for a product or service?
3. How should prices be adapted to meet varying circumstances
and opportunities?
4. When should an organization initiate a price change?
5. How should an organization respond to a competitors price
change?
6. What influence do government and private payers have on
pricing decisions?

LO1. How do health care consumers,

providers, and companies process and
evaluate prices?

Reference prices
Price-quality inferences
Price cues

LO2. What are the different methods and

seven steps for setting an initial price for a
product or service?

Methods

Markup pricing
Target-return pricing
Value pricing
Going-rate pricing

LO2. What are the different methods and

seven steps for setting an initial price for a
product or service? (cont)
Steps

Selecting the pricing objective

Determining demand
Estimating costs
Analyzing competitors costs, prices, and offers
Deciding whether to use price as a competitive strategy
Selecting a pricing method
Selecting the final price

LO2. What are the different methods and

seven steps for setting an initial price for a
product or service? (cont)
To set prices
Customers demand schedule
Cost function
Competitors prices

Steps
Costs set a floor to the price
Competitors prices and the price of substitutes
provide an orienting point
Customers value assessment of unique features
establishes the price ceiling

LO3. How should prices be adapted to meet

varying circumstances and opportunities?
Geographical pricing - by location
Price discount and allowances - ie. early
payment, volume purchases, and off-season
buying allowances and discounts
Promotional pricing - to stimulate early purchase
Differentiated pricing - to accommodate
differenced in customers, products, and location

LO4. When should an organization initiate a

price change?
Increase price to maintain profits
Overdemand and cannot supply all customers
Reduce to remain market leader

LO5. How should an organization respond to

a competitors price change?

Maintain price and profit margin

Maintain price and add value
Reduce price
Increase price and add brands
Launch a low-price line

LO6. What influence do government and

private payers have on pricing decisions?

Government

Congress sets method of payment and rates change over time

Centers for Medicare and Medicaid Services administer pricing
schemes
Prices set by procedure, product, diagnosis
Coding systems in place

Private payers

Insurance determines medical expense ratio

Consumer is responsible for premium, deductible, co-insurance,
and co-payment

CONCLUSION
Seemingly little logic to health care pricing and
distribution
Task of setting prices differs by who is paying
Pricing is adjusted by additional factors
Government set many prices
Private insurances want to be competitive