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Pricing of hospital services: evidence from a thematic review

Andria J. N. Sirur1 and Rajasekharan Pillai K2

1Department of Commerce, Manipal Academy of Higher Education, Manipal, Karnataka, India and 2Manipal Institute of Management, Manipal Academy of Higher Education, Manipal, Karnataka, India Corresponding author: Andria J. N. Sirur; Email: [email protected]

(Received 25 March 2022; revised 24 November 2023; accepted 15 December 2023; first published online 5 February 2024)

Abstract The management implications of pricing healthcare services, especially hospitals, have received insufficient scholarly attention. Additionally, disciplinary overlaps have led to scattered academic efforts in this domain. This study performs a thematic synthesis of the literature and applies retrospective analysis to hospital service pricing articles to address these issues. The study’s inputs were sourced from well- known online repositories, using a structured search string and PRISMA flow chart to select the pertinent documents. Our thematic analysis of pricing literature encompasses: (a) comprehension of hospital service pricing nature; (b) pricing objectives, strategies and practices differentiation; (c) presentation of factors impacting hospital service pricing. We observe that hospital pricing is an intricate and unclear matter. The terms ‘pricing strategies’ and ‘pricing practices’ are often used interchangeably in academic literature. Hospital service pricing is influenced by costs, demand and supply factors, market structure, pricing regulation and third-party reimbursements. The study’s findings provide policy implications for service pricing in hospitals, in addition to suggesting avenues for future research on hospital pricing.

Keywords: hospital service pricing; pricing practices at hospitals; pricing strategies; thematic synthesis

1. Introduction The pricing of marketised services remains ambiguous due to their unique features. This phenomenon is even more complex and intractable in healthcare services, where an inherent information asymmetry exists in their delivery. Hence, the pricing of hospital services warrants greater attention to ameliorate its structural complexity. However, the lack of consideration for pricing, particularly in hospital services, leads to deceptive and unfounded prices (Brown, 2014). This enigmatic issue of hospital service pricing apparently grants considerable leeway for its perpetuation. Newhouse’s (2002) restatement, ‘healthcare pricing is a conundrum’, reveals the complexity of pricing inherent in the system. The issue of healthcare pricing is complex and discriminatory, with significant variations observed for identical services, leading to a fractured healthcare market (Brown, 2014). According to Thekkekara and Thiagarajan (2019), this problem is multi-faceted and overwhelmingly intricate. Tompkins et al. (2006) and Brown (2014) have indicated that the hospital pricing system is irrational and harmful. Rising costs are likely to hinder healthcare decision-making for both healthcare service providers, who may suffer a dimin- ished reputation as excessively expensive, and patients, who may find services unaffordable. This has led health economics researchers to approach the issue of pricing from a multi-dimensional perspective, as evidenced by numerous studies (Harris, 1979; Benz, 1988; Bonnici, 1992; Krishnan, 2001; Waters and Hussey, 2004; Tompkins et al., 2006; Hsu, 2011; Brown, 2014; Pandey and Raina, 2019; An et al., 2020). Furthermore, the fluctuation of costs for identical

© The Author(s), 2024. Published by Cambridge University Press

Health Economics, Policy and Law (2024), 19, 234–252 doi:10.1017/S1744133123000397

hospital services remains inadequately expounded upon (Park et al., 2015; Cooper et al., 2018). Additionally, scholars have reiterated this pricing ambiguity (Babcock, 2019; Pandey and Raina, 2019). Therefore, a retrospective analysis of individual studies is necessary for knowledge synthesis and to pave the way for future research. The present study is a modest undertaking in relation to this issue.

Over the past five decades, reviews in this knowledge domain have been sporadic and scant. However, a review conducted three decades ago on issues related to healthcare service pricing suggested that pricing models should incorporate additional factors such as costs, competition and case mix (McKinney, 1990). In their study, Waters and Hussey (2004) analysed costing and pricing methodologies for healthcare services purchased internationally. It is acknowledged that price-setting methods are influenced by provider and purchaser characteristics, payment sys- tems for providers and the available information about costs, service volume and outcomes. A topic of contention among stakeholders and policymakers is the practice of cost-shifting in hospitals, which has been the subject of theoretical and empirical analysis (Frakt, 2011). The review concludes that while cost-shifting is present, it may not be consistent. An analysis by An et al. (2020) has examined the effect of price reform policies on the economic performance of hospitals. Additionally, Pandey and Raina (2019) conducted a systematic literature review on healthcare pricing, which revealed the various stages of evolution in healthcare pricing research.

Pandey and Raina’s (2019) recent review has neglected journal articles from prestigious databases such as Scopus and Web of Science. They focused on pricing for healthcare services that included the hospital, pharmaceutical, medical device, telemedicine and insurance sectors. It is our assertion that obtaining a complete understanding of the nuances of pricing hospital services is difficult when the synthesis of knowledge concerns various services that are structurally and operationally diverse. Therefore, we solely examine the pricing of hospital services in this review. Moreover, we address the consideration of pricing practices, strategies and methods that Pandey and Raina (2019) neglected in their review. Therefore, there is a necessity for a com- prehensive and methodical synthesis of evidence that is exclusively tailored to hospital service pricing. The existing literature is varied and disjointed, leaving a significant gap in knowledge that necessitates a detailed thematic review. Our objective is to address this gap by considering the literature from 1970 to February 2021 and formulating three questions to guide the direction of the review.

(1) How is hospital pricing of services portrayed in the literature? (2) How has the literature addressed pricing objectives, strategies and practices for hospitals? (3) What factors influence the pricing of hospital services?

This review provides several contributions to the literature. Firstly, it organises the varied and diverse results of primary research in this field of knowledge. Secondly, it elucidates the intricate and elusive nature of healthcare pricing. Thirdly, we analyse the pricing strategies and practices presented in the primary studies. We then collate the factors that affect hospital pricing. Finally, we suggest potential areas for further research in this field.

2. Methodology A literature review is a crucial aspect of research that provides current information on a particular topic and justifies future studies of interest (Cronin et al., 2008). This thematic synthesis follows the fivefold systematic review protocol proposed by Denyer and Tranfield (2009).

2.1 Formulation of research questions

We have developed three research enquiries to investigate how the current literature portrays the phenomenon of hospital service pricing and the factors that underpin it.

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2.2 Search strategy

We conducted a literature search using electronic databases, including Scopus, Web of Science, ProQuest, Taylor and Francis Online, PubMed and Google Scholar. Our search terms consisted of ‘Hospital pricing’, ‘Pricing in Hospitals’, ‘Pricing Practices in hospitals’, ‘Price setting in hospitals’, ‘Pricing strategies in hospitals’, ‘Pricing of hospital services’ and ‘Pricing of services in hospitals’.

To avoid false matching, relevant keywords were used in the search process, with the search field limited to ‘Title, Abstract, Keywords’. The literature search was widened to cover from 1970 to 2021 to facilitate a deeper understanding of the thematic findings. The search was conducted in February 2021.

2.3 Selection process

The online database search produced 97 outcomes in Scopus, 57 Web of Science articles, 359 search results in ProQuest, 74 documents on Taylor and Francis Online, 389 PubMed documents and 3,450 Google Scholar documents. The total retrieved publications were 4,426. After screening the titles and abstracts and eliminating duplicates, 432 records were considered. The primary author screened the shortlisted full texts and picked articles that addressed at least one of the research questions. The authors deliberated to create the final list. The full-text screening pro- duced 132 documents. We included 107 articles for this review, excluding dissertations, editorials and policy recommendations. Figure 1 illustrates this process.

All studies on hospital service pricing that met the inclusion criteria were selected for analysis. The review was limited to English-language articles and excluded studies on drug pricing, medical device pricing and pricing by other healthcare providers. Moreover, articles written in languages other than English were excluded. The articles retrieved were categorised based on the different themes identified during the search.

2.4 Data extraction, analysis and synthesis

The relevant data were extracted and recorded from selected articles in a pre-designed MS Excel template by the first author. The second author then cross-checked the data to ensure consistency and minimise potential loss (please refer to online supplementary file). The collected data were arranged in a custom table, which included the authors with their publication year, study title, study objectives/purpose, methodology, study location, key findings, inference and conclusion. The systematic extraction of data enabled the research team to analyse the crucial evidence from the literature. Both team members deliberated and moderated the obtained evidence in real-time. The extracted evidence was then reviewed again following thematic categorisation to improve accuracy in knowledge synthesis.

2.5 Reporting of results

The research adopted an interpretive and explanatory methodology in reviewing the main litera- ture (Denyer and Tranfield, 2009), to present the evidence and insights. A concise framework is provided in Table 1 to demonstrate the evidence synthesis in the subsequent section. The outcomes are presented in line with the guiding research inquiries.

3. Findings This section presents the review’s findings, which are included in the study (please refer to the online supplementary file for details). The hospital service pricing issue has been scrutinised from various perspectives in academic literature. For example, Harris (1979), Brown (2014) and McKinney (1990) note the elusiveness of hospital pricing. Meanwhile, Benz (1988) and Krentz and Jennings (1986) analyse the pricing goals of hospitals. Horowitz and Kleiman

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(1994) and Audibert et al. (2007) provide an objective explanation of the pricing strategies employed by hospitals. Bonnici (1992) and Kleimenhagen et al. (1994) discuss commonly observed pricing practices in hospitals. Oostenbrink and Rutten (2006), Hsu (2011), Raulinajtys- Grzybek (2014), Bahuguna et al. (2020) and Llewellyn et al. (2020) investigate the precision of cost- ing tools and methodologies utilised in price-setting by hospitals. Connor et al. (1998), Krishnan (2001), Ciliberto and Dranove (2006), Tenn (2011), Haas-Wilson and Garmon (2011), Baker et al. (2014) and Gowrisankaran et al. (2015) have reflected upon the impact of organisational restructuring on pricing. Dranove et al. (1993), Propper (1996), Propper and Söderlund (1998), Melnick et al. (1999), Moriya et al. (2010) and Wang and Chen (2017) provide insights into com- petition and concentration effects on hospital pricing. Harris (1979), Freisner and Rosenman (2009), Melnick and Fonkych (2008) and Moriya et al. examine related factors. Frakt (2011), Robinson (2011), Woodworth et al. (2017), Wang and Chen (2017) and Cooper et al. (2018) have examined third-party reimbursements for hospital pricing practices, while Bai (2015) and Liu et al. (2000) have considered the regulatory implications of hospital pricing. Sheiner and Cutler (1999) and Zuckerman et al. (2010) discuss demand factors affecting hospital pricing, while Guerin-Calvert and Israilevich (2011) and Baker et al. (2014) examine supply factors. A sum- mary of the themes found in the manuscripts analysed as part of this study is presented in Table 1.

The research synthesis presents its findings in three sub-sections, organised by the guiding research questions. Section 3.1 addresses the elusive and intricate nature of hospital pricing.

Figure 1. PRISMA 2020 flow chart. Source: Current study.

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Section 3.2 examines the various pricing methods, practices and strategies deployed in hospital pricing. Lastly, section 3.3 explores the factors that impact the pricing of hospital services.

3.1 Elusiveness and complexity of hospital pricing

Hospital prices have been found to be illogical (Tompkins et al., 2006; Brown, 2014), challenging to comprehend (Tengilimoglu and Dziegielewski, 2000) and intricate (Babcock, 2019; Pandey and Raina, 2019; Thekkekara and Thiagarajan, 2019). Harris (1979) hinted towards the lack of trans- parency on the criteria employed by hospitals for pricing, causing perilous and inadequately functioning price structures. Irrational hospital prices result in significant financial and health-related damages, and escalate costs excessively (Brown, 2014). Hospital prices that do not correspond to the actual costs of providing healthcare services are opaque and exhibit signifi- cant inconsistencies (Brown, 2014). McKinney (1990) argues that service cost determination complexity is the main factor behind intricate pricing. Pricing can become laborious without suf- ficient information. Our views align with Krentz and Jennings (1986) in terms of the necessity to simplify pricing policies. In healthcare, price is considered as the fourth aspect of marketing,

Table 1. A snapshot of the thematic summary of the relevant manuscripts

Research question Themes Sources

Depiction of hospital services’ pricing

Hospital pricing is complex, elusive and irrational

Leven (1984); Brown (2014); Tengilimoglu and Dziegielewski (2000); McKinney (1990); Thekkekara and Thiagarajan (2019)

Scholarly insights on the objectives, strategies and practices of the pricing of hospital services

Hospital service pricing objectives, strategies and practices

Krentz and Jennings (1986); Benz (1988); Bonnici (1992); Horowitz and Kleiman (1994); Audibert et al. (2007); Sutherland (2015); Thekkekara and Thiagarajan (2019)

Factors influencing hospital pricing decisions

Institutional factors Connor et al. (1998); Krishnan (2001); Ciliberto and Dranove (2006); Tenn (2011); Haas-Wilson and Garmon (2011); Afendulis and Kessler (2011); Baker et al. (2014); Gowrisankaran et al. (2015)

Cost factors Oostenbrink and Rutten (2006); Hsu (2011); Raulinajtys-Grzybek (2014); Amiri and Khmidi (2019); Bahuguna et al. (2020); Llewellyn et al. (2020)

Demand-driven factors Sheiner and Cutler (1999)

Supply-driven factors Bodenheimer (2005); Guerin-Calvert and Israilevich (2011); Baker et al. (2014)

Market structure Thomson (1994): Dranove et al. (1993); Propper (1996); Propper and Söderlund (1998); Melnick et al. (1999); Moriya et al. (2010); Wang and Chen (2017)

Third-party re-imbursements

Harris (1979); Freisner and Rosenman (2009); Melnick and Fonkych (2008); Moriya et al. (2010); Frakt (2011); Robinson (2011); Woodworth et al. (2017); Wang and Chen (2017); Cooper et al. (2018)

Regulation Bai (2015); Liu et al. (2000); McClintock et al. (2019)

Source: Current study. Kindly change the year as 2017 instead of 2015 Kindly delete the in-text citation Eggleston et al. 2004

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which serves as an offer to consumers (Leven, 1984), representing the income and level of mon- etary reimbursement for the firm (McKinney, 1990; Tengilimoglu and Dziegielewski, 2000).

3.2 Hospital service pricing objectives, strategies and pricing practices

3.2.1 Pricing objective The pricing strategy of hospitals varies depending on their purposes and objectives (Krentz and Jennings, 1986). Krentz and Jennings (1986) identified several commonly used pricing objectives including profit maximisation, increasing market share, market skimming, maximising current revenues, target profit and promotional pricing. Establishing pricing objectives is a crucial and initial stage in the process of price development, regardless of the distinctive needs and resources available in hospitals (Benz, 1988; Bonnici, 1992). In the case of non-profit hospitals, the pricing objectives that financial managers aim to achieve are a reflection of their ambition to maximise net revenue, break even, generate target revenue and provide care for all patients requiring med- ical attention (Bauerschmidt and Jacobs, 1985). Benz’s (1988) study acknowledges that an orga- nisation’s pricing objectives should align with its mission and goals and precede the pricing strategies of a hospital.

3.2.2 Pricing strategies The importance of pricing indicates that pricing strategies are now a crucial element of any ser- vice delivery (Moore, 1995). Increasing consumer price awareness, customer sophistication, deregulation and an expanding number of competitors have reignited interest in pricing strategies (McKinney, 1990). The healthcare sector has experienced a change in service pricing within the last decade. The three common pricing strategies are cost-oriented, demand-oriented and competition-oriented. The latter strategy can also be referred to as going-rate or imitative pricing (Krentz and Jennings, 1986; McKinney, 1990). Various innovative pricing strategies have been discussed by scholars, including Illness Outcome Groups (IOGs) (Horowitz and Kleiman, 1994), package pricing (Horowitz and Kleiman, 1994; Tengilimoglu and Dziegielewski, 2000; Reinhardt, 2006; Tanwar et al., 2019) and reference pricing (Brown and Atal, 2018; Nassiri et al., 2020), marginal pricing and global budgets (Sutherland, 2015; Malmmose et al., 2018), pri- cing models for contracts (Teymourifar et al., 2020), bundled payment pricing (Hellsten et al., 2016) and cost accounting pricing models (Audibert et al., 2007; Thekkekara and Thiagarajan, 2019). Horowitz and Kleiman (1994) acknowledge that pricing strategies must reflect market competition realities and minimise financial risks for organisations. Therefore, if hospitals seek to progress in their pricing strategies, it is imperative that they focus more significantly on resolv- ing operational, financial and information systems issues (Horowitz and Kleiman, 1994).

3.2.3 Pricing practices The service pricing literature frequently uses the terms ‘pricing strategies’ and ‘pricing practices’ interchangeably. As healthcare costs continue to rise, hospitals must have a defined strategic plan for analysing pricing practices. This requirement has been reiterated in the literature (Bonnici, 1992; Kleimenhagen et al., 1994). Cross-subsidisation is the principal mechanism by which hos- pitals (David et al., 2014) subsidise unprofitable departments with profit-making departments. Mysterious within the literature, the pricing practice plays a critical role in compensating for inequities and distortions in existing health insurance coverage (Harris, 1979). The literature pro- vides anecdotal evidence of cross-subsidisation which is not thoroughly documented (David et al., 2014). Cross-subsidisation is defined by Harris (1979) as a kind of discriminatory pricing. This investigation reiterates that hospitals must deviate from the average cost pricing policy in a systematic way since it is not the most efficient pricing policy for them. Any optimal pricing pol- icy should be based on marginal cost, co-payment rate, own price elasticity of demand, and the covariance between consumption and individual or social marginal utility of income. A study by

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Dittman and Morey (1981) indicates that profit maximisation in a constrained hospital environ- ment can cause cross-subsidisation.

Cost-shifting is a pricing strategy that has received extensive discussion in the literature on pri- cing (Dranove, 1988; Frakt, 2011; Robinson, 2011; Brown, 2014, Malmmose et al., 2018). This strategy involves using a differential pricing system to maintain profitability (Tompkins et al., 2006; Melnick and Fonkych, 2008). Research on cost-shifting within hospital settings has focused on price differences for insured and uninsured patients (Melnick and Fonkych, 2008; Woodworth et al., 2017). For cost-shifting to take place, the provider must have the ability to establish higher fees for some patients and lower fees for others (Freisner and Rosenman, 2009). A provider becomes restricted in doing so if an insurer decreases its reimbursement. However, providers shift costs solely when they cannot compensate their losses with cost or efficiency savings. The cost-shifting conduct is observable in hospitals that aim to maximise profits (Dranove, 1988). The practices have raised concerns among hospitals and insurance companies, although they are now less widespread than in past decades and not as significant a phenomenon of late (Frakt, 2011). It is important to note that the dynamic phenomenon of cost-shifting should not be confused with price discrimination, which is driven by differences in market power, as cost-shifting has a direct impact on prices charged (Frakt, 2011).

Cream-skimming is a practice that involves selecting patients based on characteristics other than their need for care and is well-documented in the literature (Newhouse, 1984; Pauly, 1984; Matsaganis and Glennerster, 1994; Ellis, 1998; Barros, 2003; Freisner and Rosenman, 2009; Berta et al., 2010; Levaggi and Montefiori, 2011; Cheng et al., 2015; Yang et al., 2020; Chen and Lang, 2021; Kjøstolfsen et al., 2021). Cream-skimming involves selecting patients with lower-than-average costs in a prospective payment system such as a Diagnosis-Related Group (DRG), to maximise financial gains (Yang et al., 2020). Levaggi and Montefiori (2011) classify cream-skimming into horizontal and vertical categories. The limited evidence on cream-skimming practices highlights the need for further research to attain ample evidence.

3.3 Factors affecting the pricing of hospital services

The determinants influencing hospital service prices are shaped by the factors impacting the demand for care (Bonnici, 1992). The drivers of patient’s medical care demand are characteris- tically economic, incidence of illnesses and cultural-demographic factors (Feldstein, 2005). Prices are also affected by internal and external factors. The internal factors comprise of the level of payer class, the level of uncompensated care due to lack of insurance and the adequacy of the underlying information systems/support. The external factors are the position of competitive costs, the total volume of services, the scope of the contract and the needs of the purchaser (Krentz and Jennings, 1986). Heshmat (1989) has established a framework to achieve market- based pricing decisions, including pricing objectives, cost, demand analysis and competition. We have analysed the factors that affect the pricing of hospital services and will outline our find- ings in the following section.

3.3.1 Institutional factors The hospital market is comprised of private for-profit, private not-for-profit and publicly owned and operated firms (Dranove, 1988; Duggan, 2000; Hsu, 2011). The pricing objectives differ depending on the hospital’s ownership structure. For example, profit objectives can be attained by targeting either a return on investment or ‘satisfactory’ profit maximisation (Bonnici, 1992), while non-profit objectives can be achieved by maximising net revenues (Heshmat, 1992). Considerable emphasis has been placed on comprehending the pricing aims of non-profit health- care facilities (Weisbrod, 1965; Bauerschmidt and Jacobs, 1985; Dranove, 1988; Heshmat, 1992). A statistical analysis reveals that non-profit institutions charge more for their services than pub- licly owned hospitals (Hsia et al., 2014). Additionally, for-profit hospitals charge more for

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interventions than any other facility (Hsia et al., 2014). As public hospitals rely on tax funding to operate their services, pricing decisions are not vital for them.

Pricing practices for healthcare services are assessed according to the teaching and non- teaching status of hospitals, as evidenced by studies conducted by Newhouse (2003), White et al. (2014), Burke et al. (2019) and Kotwal et al. (2019). The findings suggest that teaching hos- pitals, which offer education and training for medical practitioners and treat complex cases, tend to be more costly than non-teaching establishments (Koenig et al., 2003; Hsu, 2011; Burke et al., 2019). Price variations also occur depending on the location where the service is provided. Prices differ depending on the services offered in various healthcare settings, including hospital out- patient departments. (Sledge et al., 1996; Hsu, 2011; Higgins et al., 2016; Babcock, 2019). Studies have shown that healthcare services provided in rural areas are generally less expensive than those in urban regions. However, in rural healthcare markets, prices can be higher due to lower patient volumes and increased overhead costs. Moreover, larger hospitals that offer numer- ous services may establish higher fees for their services in comparison to their smaller counter- parts (Hsu, 2011). Therefore, the different fees for services can be attributed to variable pricing approaches based on the institutions’ pricing goals.

3.3.2 Cost factors To ensure efficient use of healthcare financial resources while maintaining price transparency, scholars have called for the development of strong cost accounting techniques (Tengilimoglu and Dziegielewski, 2000; Tompkins et al., 2006). Additionally, they have emphasised the import- ance of hospitals understanding their cost structures (Sutherland, 2015). Much of the inter- national evidence highlights the need for reliable cost-accounting techniques to support cost-based pricing (Raulinajtys-Grzybek 2014). While Davis (1971) suggests that pricing should not always be based on costs, implementing a costing mechanism can facilitate transparent and efficient management of financial resources (Audibert et al., 2007). Additionally, such a mechan- ism is crucial for achieving revenue optimisation (Karaesmen and Nakshin, 2007). Therefore, there are current academic endeavours to implement costing methodologies comprising step- down approaches (Audibert et al., 2007) or bottom-up approaches (Sangwan et al., 2017; Thekkekara and Thiagarajan, 2019) and to construct cost models that encompass input expenses or service quantities to achieve the objective of cost-effectiveness in pricing (Tompkins et al., 2006). Activity-based costing in hospitals offers both value extraction and creation whilst enhan- cing healthcare service quality (Llewellyn et al., 2020).

Accurately measuring healthcare costs and gathering associated cost information is crucial for healthcare providers in both setting prices and arranging reimbursement (Krentz and Jennings, 1986; Raulinajtys-Grzybek, 2014). Hu (1971) studies the pricing behaviour of hospitals and uses maternity care as a case study to assess hospital costs. The provision of cost information for cost- plus pricing enables price setters to make informed decisions on resource allocation (Bahuguna et al., 2020). Cost information comprises of fixed and variable costs, cost per care, costs related to outlier cases, costs specific to physicians, costs incurred per day of stay, payor-specific costs and so on (Horowitz and Kleiman, 1994). Achieving pricing based on cost data is possible only when there is uniformity in cost calculation methods. However, cost-based pricing fails to consider the dynamics of a marketplace (Krentz and Jennings, 1986).

3.3.3 Supply factors Guerin-Calvert and Israilevich (2011) suggest that hospital prices are determined by both labour and non-labour factors associated with the supply of hospital resources. Provider service factors comprise of physicians providing specialty services at hospitals (Zuckerman et al., 2010) and phy- sicians’ practice type (Reschovsky et al., 2011). Specialty physician services are a primary cost generator for hospital services (Feldstein, 1970; Guerin-Calvert and Israilevich, 2011). The rising costs of physicians have led to the proposal and development of pricing models to contain the

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expenses (Feldstein, 1970) and to assess the impact of hospital–physician integration on costs (Baker et al., 2014). Various factors such as the structure of the healthcare delivery system, reim- bursement systems, high consumer switching costs and differences in the training of physicians have been attributed to the increasing physician service prices (Sheiner and Cutler, 1999). Disagreements among medical professionals regarding treatments, financial incentives for physi- cians and the quantity of physicians in healthcare settings all have an impact on pricing for hos- pital physician services. Hospital costs also include the salaries and benefits of nurses, technicians and numerous other personnel (Guerin-Calvert and Israilevich, 2011).

The provision of specialised clinical services by hospitals using high-tech services commands a higher price-cost margin, indicating an evident manifestation of price escalation (Dranove et al., 1993). High and ever-increasing healthcare costs are mainly driven by ceaseless innovations in medical technologies for diagnosis and treatments (Bodenheimer, 2005), invariably leading to price escalation. The pricing of hospital services is closely associated with the blend of services provided and the level and type of care offered by each hospital, thereby leading to regional variations in the costs of hospital services (Dranove et al., 1993; Guerin-Calvert and Israilevich, 2011).

3.3.4 Demand factors The demand for healthcare services relies on a range of patient characteristics. Several quantita- tive studies have taken into account factors such as race, income, age, individual treatment pre- ferences, marital status, education, employment and income levels. These characteristics influence demand and thus have an impact on healthcare pricing (Bonnici, 1992; Sheiner and Cutler, 1999; Zuckerman et al., 2010; White et al., 2014). Moreover, scholars contend that specific geographical regions have comparatively weaker populations than others. The health status of a region’s popu- lation can be evaluated based on various measurements, such as the percentage of smokers and individuals with hypertension, as well as rates of obesity, sedentary lifestyles, hospitalisation for hip fractures and incidences of heart attacks, strokes, gastrointestinal bleeding, surgeries for lung or colon cancers and myocardial infarction (Sheiner and Cutler, 1999; Zuckerman et al., 2010). The severity of a patient’s health condition is a precursor to the level of care provided at hospitals and subsequently affects pricing.

The literature on hospital pricing of services based on case-mix has focused on payment reim- bursements (Jencks et al., 1984; Wiley, 1992; Oostenbrink and Rutten, 2006). For example, hos- pitals in developed countries have implemented prospective payment systems through DRGs that are based on the case-mix of patients. These classification systems have been found to lower healthcare costs (Lewis, 1984; Benz, 1988; Corti et al., 2018). Corti et al. (2018) have created a clinical group system that is risk-adjusted to account for variations in healthcare costs. Hof et al. (2017) posit that using case-mix to establish cost-efficiency highlights the uncertainty surrounding the price-setting protocols adopted by hospitals. This case-mix consists of a precise combination and number of patients, which, under the DRG pricing strategy, can potentially benefit healthcare facilities economically (Hof et al., 2017).

3.3.5 Market structure Hospitals demonstrate monopolistic market behaviour as they establish their prices by distin- guishing their services on various parameters, including location, range of services, quality and level of sophistication (Dranove, 1988; Hsu, 2011). Scholars investigate how organisational changes, such as mergers and vertical integrations, impact the pricing of hospital services (Connor et al., 1998; Melnick et al., 1999; Krishnan, 2001; Haas-Wilson and Garmon, 2011; Tenn 2011; Baker et al., 2014; Gowrisankaran et al., 2015). Connor et al. (1998) observe that merging hospitals horizontally and consequently changing their functions can lead to average cost savings, which, in turn, may have a dampening effect on the prices charged by such hospitals. Nonetheless, Tenn (2011) verified an increase in inpatient prices post-merger. Anti-competitive

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mergers may cause prices for services to soar due to hospitals having increased market power (Baker et al., 2014). Prices for services in hospitals that have merged with different ownership types have increased, according to Melnick et al. (1999). Therefore, mergers between hospitals can cause prices for the same services to be ambiguous compared to other hospitals. We found some evidence of vertical integration affecting hospital prices. However, Ciliberto and Dranove (2006) found no evidence of higher prices resulting from the vertical integration of hospitals. Baker et al. (2014) demonstrated that hospitals which underwent vertical integration raised their service prices. Despite an increase in hospital prices and spending, the prices of physician services significantly reduced following vertical integration with physician practices (Baker et al., 2014).

Hospital concentration has no significant relationship with hospital service prices, according to Moriya et al. (2010). In contrast, Robinson (2011) has found empirical evidence that hospitals in concentrated markets raise their prices to private insurers in case of payment shortfalls. The literature has evaluated the effect of competition on the pricing behaviour of for-profit and not-for-profit hospitals (Melnick et al., 1992, 1999). Non-price competitions based on factors such as the quality of care, features, amenities and location of hospitals contribute to the high cost of competing hospitals (Heshmat, 1989). However, a shift from non-price to price competition has resulted in lower costs for hospitals (Melnick et al., 1999). The evolution of hospital market concentration has seen pricing become a key consideration (Keeler et al., 1999). The implemen- tation of such a transition can potentially undermine the role of technology and specialised healthcare services in enhancing the quality of healthcare. It is worth noting, however, that the growth in productivity and advancements in technology must be assessed in the context of service pricing (Tengilimoglu and Dziegielewski, 2000; Tompkins et al., 2006). Based on the synthesis of literature, there is no clear consensus on the influence of market structures and strategic decisions on hospital pricing.

3.3.6 Pricing regulation The healthcare sector is characterised by market failures, which necessitates the regulation of healthcare service pricing. One branch of literature on price regulation has investigated the impact of legislation on the fluctuation of hospital service charges (Liu et al., 2000; Bai, 2015; McClintock et al., 2019). Thus, such regulations are involved in this pricing process. The litera- ture on regulatory aspects of pricing presents evidence that healthcare providers do not strictly adhere to the regulated prices. For example, Liu et al. (2000) examined the impact of hospital pricing policies in China and identified that regulatory prices were inadequate in covering all the costs. Consequently, hospitals resorted to charging significantly more for services that used advanced technologies and drugs to offset the losses incurred by hospitals. Similarly, Bai (2015) evaluated the effect of the legislation on uninsured patients. The research uncovered that the legislation facilitated a decrease in prices payable by those without insurance. In a similar vein, McClintock et al. (2019) conducted a study that revealed how the extension of Medicaid under the Affordable Care Act (ACA) 2010 in the United States did not result in an increase of charges to private patients by safety net hospitals despite reimbursement reductions for those without insurance.

3.3.7 Third-party reimbursements Price differences between insured and uninsured patients have been highlighted. Uninsured patients are charged higher prices and receive less comprehensive care (Reinhardt, 2006; Tompkins et al., 2006; Melnick and Fonkych, 2008; Robinson, 2011; Batty and Ippolito, 2017). This indicates that a patient’s ability to possess insurance affects the amount they are charged for hospital services and the level of healthcare services they receive at hospitals. A distinct pricing system is implemented for patients based on the third-party payer’s identity (Reinhardt, 2006; Tompkins et al., 2006; Anderson, 2007; Bai and Andersen, 2018). Patients may be insured by

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public or private payers, resulting in dissimilar prices within and across hospitals depending on the contract type and the agreed-upon service costs between the payers and providers (Barros and Martinez-Giralt, 2008; Bai and Anderson, 2016). Cooper et al. (2019) investigated the increase in insurer-negotiated physician prices for care rendered in hospitals, as well as the growth in hospital prices and found an increase in hospital prices. This highlights the need for policymakers to address hospital price hikes in the context of third-party reimbursement. Additionally, policymakers should tackle the issue of price disparities among insured and uninsured patients in hospitals.

Contracting. Contracting is the process of establishing agreements between hospitals and third- party entities. According to Oostenbrink and Rutten (2006), reimbursement prices are determined by contracts between hospitals and insurers. Prior to negotiating contracts with third parties, hospitals first develop a pricing strategy (Barros and Martinez-Giralt, 2008). Insurers, on the other hand, place significant importance on healthcare quality when establishing contracts with hospitals (Magid et al., 2017). Price contracts may incorporate discounts on fees, case-based reimbursements, per diem reimbursements and capitated payments (Horowitz and Kleiman, 1994; Wu, 2009). Some literature suggests creating novel contract mechanisms and pri- cing strategies between private hospitals and governments (Teymourifar et al., 2020). Contractual mechanisms can significantly enhance health system performance, especially when public hospi- tals face a reduction in capacity. In their 2012 publication, Robinson and McPherson discuss ‘cen- tres-of-excellence contracting’, in which patients are directed towards hospitals that offer high-quality care at discounted rates in exchange for an increased volume of patients.

Reference pricing. Setting a reference price as the upper limit of charges to be reimbursed by the insurer is reference pricing, a recently originated phenomenon (Robinson and MacPherson, 2012; Brown and Atal, 2018; Nassiri et al., 2020). The literature on reference pricing centres around service prices, their link with insurer spending, as well as an analysis of the reference pri- cing payment system and its impact on patients, competing providers and insurers (Robinson and MacPherson, 2012; Brown and Atal, 2018; Nassiri et al., 2020). While reference pricing presents a promising payment system for shoppable healthcare services and incentivises patients to choose more economical options, it also has cost-reducing benefits for hospitals (Nassiri et al., 2020). This pricing practice has led to a decline in total per-procedure expenditure for providers and subsequently impacts hospital pricing practices and their profitability. Nassiri et al. (2020) suggest that hospitals are viewed as value-based providers by insurers when they charge patients the ref- erence price or less. This impacts the hospital’s reputation and eventual profitability. The meth- odological reliability of reference pricing studies was assessed by Robinson et al. (2015a, 2015b) and Brown and Atal (2018). The impact of reference pricing was investigated on care outcomes, including the choice of care venue, overall costs and treatment complications, for procedures such as arthroscopy and colonoscopy (Robinson et al., 2015a, 2015b). Future studies are needed to examine the effect of reference pricing schemes on pricing for hospital services.

4. Discussion The pricing of hospital services is a multifaceted process influenced by an array of services pro- vided by hospitals. Hospitals face significant pressure to offer services at affordable prices to ensure accessibility for patients. The issue of hospital pricing remains largely ignored and persists to this day. This study aimed to comprehend how hospitals establish their pricing decisions by surpassing prior research. The literature review revealed the factors that affect hospital pricing, pricing objectives, practices and strategies in the hospital context. Our findings attest to the fact that hospital service pricing can be examined from multiple perspectives, and that these are interconnected. For example, Keeler’s et al. (1999) study explored the interplay between com- petition, institutional factors and hospital pricing behaviour. The literature on pricing is limited during the period of 1970–1995 and its coverage is scant (Harris, 1979; Leven, 1984; Krentz and

244 Andria J. N. Sirur and Rajasekharan Pillai K

Jennings, 1986; Benz, 1988; McKinney, 1990; Bonnici, 1992; Horowitz and Kleiman, 1994). The pricing of hospital services is a multifaceted process and can be seen as both intricate (Thekkekara and Thiagarajan, 2019; Babcock, 2019; Pandey and Raina, 2019) and discriminatory (Harris, 1979).

The study examined pricing goals (Bauerschmidt and Jacobs, 1985), tactics (McKinney, 1990; Horowitz and Kleiman, 1994; Tengilimoglu and Dziegielewski, 2000), as well as prevalent pricing approaches, including cost-shifting (Tompkins et al., 2006; Melnick and Fonkych, 2008) and cross-subsidy (Dittman and Morey, 1981). Previous research has examined the effects of whether hospitals have teaching status or not on pricing (Burke et al., 2019), the care setting (Higgins et al., 2016), hospital size (Hsu, 2011), cost structures (Sutherland, 2015; Llewellyn et al., 2020), DRG pricing (Corti et al., 2018) and reference pricing (Nassiri et al., 2020). Pricing litera- ture for hospitals may be categorised according to institutional, cost, supply, demand, market structure, regulatory and third-party reimbursement factors. Recent pricing innovations in hos- pital services – such as case-mix pricing, reference pricing, bundled payments, global budgets, contractual mechanisms – were not previously anticipated within hospital service pricing. The latest pricing mechanisms provide possibilities for additional research, particularly within the context of developing countries.

Following Cronin et al.’s (2008) advice, this study reports methodological diversities in the lit- erature. For example, Dranove (1988) constructed an econometric model to illustrate how price determination, patient treatment costs, number of services provided and profit factors influence profit maximisation in hospitals. The findings of a panel data analysis (Hsu, 2011) suggest a dir- ect link between hospital prices and the cost of operations, which are in turn influenced by the level of capacity utilisation and demand variability. Tanwar et al. (2020) devised a pricing model to determine the optimal price in the face of cost uncertainty. Ciliberto and Dranove (2006) u- tilised a fixed regression model to examine the impact of vertical integration on the pricing of privately insured patients. Many studies have utilised secondary data sources for their empirical analysis, providing opportunities to explore alternative methodological approaches for studying hospital service pricing.

However, the main limitation of this study is the methodology employed for literature search, omitting substantial publications of grey literature like magazines and conference papers. Therefore, there is a possibility of missing significant information. Moreover, we observe discip- linary overlaps in the pricing of hospital services from a conceptual point of view. The pricing phenomenon is within the scope of social science, while its specific setting falls under medical science. These disciplinary attributes influence our understanding of the subtleties of hospital pri- cing. The hospitals’ diverse and conflicting objectives, strategies and practices may have impeded the synthesis of relevant evidence from literature. The pricing literature’s dynamic nature provides extensive evidence to recognise the intricate nature of the pricing phenomenon in hospitals.

5. Scope for future research Based on the review, we have identified specific areas that require additional research and evi- dence to understand hospital pricing. Firstly, hospital service pricing is complex and obscure (Brown, 2014). Therefore, more research on pricing methods is needed to increase the trans- parency of the pricing process. The World Health Organization’s report, as outlined by Barber et al. (2019), elucidated pricing and payment systems applicable to developed nations. Consequently, additional study on pricing and payment systems in developing countries is necessary. Research on pricing in emerging economies such as India is inadequate. Future scholars are advised to concentrate on pricing mechanisms in low- and middle-income countries as well.

Secondly, the literature lacks an appropriate pricing strategy for hospitals, with pricing terms often used interchangeably. The ambiguity of terms such as ‘cost’, ‘price’ and ‘charge’ can lead to

Health Economics, Policy and Law 245

confusion. Additionally, there is an absence of clarity regarding ‘pricing practices’ and ‘pricing strategies’. Future researchers should focus on operationalising these terms to provide a clear structure and deeper understanding.

Thirdly, it is widely believed that unfulfilled healthcare requirements provide an opportunity for providers to engage in price skimming. However, there is insufficient evidence in the literature to demonstrate its occurrence. Therefore, investigating cream-skimming pricing practices could be a promising avenue for future research.

Fourthly, it is essential to conduct studies investigating the interplay between health insurance and hospital pricing practices for the development of appropriate policy frameworks and effective regulatory interventions. In addition, the role of technology in pricing hospital services is still up for debate. Proper scholarly intervention can aid in resolving this theoretical tension.

Table 2. Tentative research questions

Factors Key research questions

Institutional factors (1) How should price-setting practices vary based on the institutional set up? (2) What pricing strategies would work best for urban hospitals and their rural

counterparts? (3) What pricing practices would suit best for non-teaching hospitals incorporate in

practice? (4) What pricing practices are best suited for teaching hospitals? (5) What is the combined effect of ownership and operational structures on the pricing

of hospital services? (6) How will the healthcare delivery nature- multi-specialty or super-specialty – impact

on pricing decisions?

Cost factors (1) How can uniformity in cost-calculation methods be achieved? (2) How can hospitals leverage on cost-accounting techniques and cost-optimisation

tools to have an edge over pricing? (3) What are normative dimensions of costing techniques to have pre-eminence in

pricing? (4) Is cost-price conundrum real or fictional?

Supply-driven factors (1) What incentives can be used to reduce physician prices in hospitals? (2) Are high-tech diagnostic and interventional apparatus drivers to charge higher

prices? (3) How can we operationalise the concept of quality care?

Demand-driven factors (1) How can the efficient use of Diagnosis-Related Group pricing be extended to developing countries?

(2) How does the case-mix classification system achieve cost-efficiency? (3) Why do governments not make it a policy mandate to ensure affordable care if

case-mixing system culminates into cost-efficiency?

Market structure (1) What can be done to furnish a consensus on the role of market structures and strategic decisions on hospital pricing?

(2) What is the role of market-based pricing for hospital services in developing countries?

(3) How does the corporate restructuring influence price setting?

Regulatory mechanism (1) What is the extent of influence of hospital regulations in developing countries? (2) How does indirect regulation play a role in pricing for hospital services?

Third-party reimbursements

(1) How can hospitals negotiate effectively with insurers to combat hospital price growth?

(2) What can be done to reduce differential pricing within hospitals? (3) How does the reference pricing bring down the total pre-procedure expenditure for

providers? (4) How are the third-party payments instrumental in driving up the health care prices,

relatively to the perceived cost-price spiral? (5) How far the co-payment mechanisms in ameliorating out-of-pocket expenses?

Source: Current study.

246 Andria J. N. Sirur and Rajasekharan Pillai K

Lastly, comprehending the challenges confronted by hospitals in pricing is vital. This approach can only be achieved through engaging in discussions and conducting interviews with hospital managers or heads of hospitals.

Figure 2. Factors influencing pricing of hospital services. Source: Current study.

Figure 3. Dimensions of the factors influencing pricing for hospital services. Source: Current study.

Health Economics, Policy and Law 247

No peer-reviewed studies have been found that explore hospitals’ pricing practices. However, to achieve better pricing solutions, it is essential to comprehend pricing methods in hospitals. This can be achieved by employing qualitative methods such as interviews and focus group dis- cussions with hospital managers and administrators.

Additionally, we propose to conduct multiple research investigations into the factors that impact the pricing of healthcare services, as presented in Table 2.

The research questions are aligned with the factors that impact hospital pricing to provide clear focus. Institutional factors, including locational specificity, ownership, size, operational structure and the extent of specialty services offered, are crucial in determining pricing practices within hos- pitals. Similarly, the validity of co-payment arrangements in health insurance policies is also under scrutiny due to increasing out-of-pocket expenses (Sugunan et al., 2023) in recent times.

The study has produced a conceptual diagram outlining the factors that affect hospital service pricing, as shown in Figure 2. The primary aim of this study was to uncover the factors that influ- ence the pricing mechanism due to its perceived ambiguity and complexity. These factors include institutional, cost, demand and supply, market structure, regulatory requirements and third-party reimbursement.

The literature review indicates that multiple factors influence hospital service pricing practices, demonstrating the inherent complexity of this area. This study has organised these factors into specific themes, as shown in Figure 3, to provide a clearer understanding of each individual dimension.

6. Conclusion Prices impact the supply and demand of services, which ultimately affects the profitability of busi- nesses. Despite its impact on profitability, there’s a dearth of interest in service pricing in both theoretical and empirical contexts. The healthcare services market doesn’t follow a traditional buyer and seller structure, making healthcare pricing complex for both patients and providers. Patients are insensitive to prices when seeking hospital services due to their necessity. From the healthcare providers’ perspective, prices play a crucial role in determining the required resources and providing incentives for efficient, comprehensive and high-quality delivery of healthcare. The unquantifiable characteristics of services make their pricing challenging and dis- tinct from that of tangible products. Pricing remains an underutilised management tool. Factors such as third-party payers or insurers’ involvement, incomplete information and inadequate cost measurement processes impact the focus on pricing hospital services.

We have compiled the factors that underpin hospital pricing literature into five themes: insti- tutional factors, costs, supply factors, demand factors, price regulation and third-party reimbur- sements. These factors amalgamate to affect pricing of hospital services. For example, reimbursement systems differ between private and public providers. Additionally, the literature documents pricing objectives and strategies. Furthermore, the study has revealed evidence of cream-skimming, cost-shifting and cross-subsidisation practices in hospitals. Our research sug- gests that service pricing in hospitals is context-dependent. There are no definitive pricing pol- icies or ideal prices that align with a country’s health system objectives. Despite the vast evidence on pricing, it is extensively fragmented, and a specific focus on pricing in low- and middle-income countries is necessary.

Supplementary material. The supplementary material for this article can be found at https://doi.org/10.1017/ S1744133123000397.

Acknowledgement. The authors would like to thank Department of Commerce and Manipal Institute of Management, Manipal Academy of Higher Education, Manipal, Karnataka, India for providing the resources during the research period.

Financial support. No financial support was obtained for this study.

248 Andria J. N. Sirur and Rajasekharan Pillai K

Competing interests. There are no conflicts of interest for this study.

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Cite this article: Sirur AJN, Pillai K R (2024). Pricing of hospital services: evidence from a thematic review. Health Economics, Policy and Law 19, 234–252. https://doi.org/10.1017/S1744133123000397

252 Andria J. N. Sirur and Rajasekharan Pillai K

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