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July 2013

June 2013

What rock stars can teach us about pricing

This NPR article about Kid Rock provides an interesting look into his strategy to fend off scalpers and let his fans attend his concerts at low cost: since scalpers benefit from scarcity (which allows them to put a steep markup on tickets for resale), Kid Rock schedules more shows in the same city (eight in Detroit alone, for instance), so that more of the demand can be met on the primary market. The goal is for the shows to be close to sold out but not quite.

Kid Rock and his team also raised the prices on the best seats in the house (called the platinum seats), traditionally targeted by scalpers. To sit in these seats, you must also show ID and the credit card you used when buying the tickets. In addition, the first two rows are reserved for "die-hard fans" only, although the article doesn't explain how those are identified. The journalist also points out that less money spent on tickets means more money left to spend on drinks and merchandise, and the rocker gets a percentage of all those sales too.

Is it working? A Ticketmaster employee suggests that it is. You can learn about revenue management in the unlikeliest places.

More insights on revenue management in music here and here.

Revenue management at the Metropolitan Museum

(Picture credit: Metropolitan Museum Updated 7/1 - see bottom of the page. I've written a few posts on revenue management in museums, especially the Metropolitan Museum, in the past (here, here and here), so it shouldn't come as a surprise that today's post will be on two recent developments at New York City's premier museum:

  1. the Metropolitan Museum will be open seven days a week starting this Monday (July 1),
  2. it is getting rid of its colorful, distinctive metal admission tags to favor instead those cheap, low-key "removable" admission stickers that I stopped putting on my clothes a long time ago, for good reason. 

I'm very happy with the first decision, which has long struck me as an anachronism. The museum started its policy of closing on Monday in 1971 to save money (see this New York Times article for more details), but it had become hard to believe that the argument for Monday closings still held - and more opportunities to visit the museum mean a more enjoyable experience for museum-goers as well, given the sharp growth in tourism the city has witnessed over the past few years.

(From the NYT article, dated September 2012: "tourism to New York City has grown 16.2 percent in the last five years, to nearly 51 million visitors in 2011 from 43.8 million in 2006. The Met’s attendance has been rising too, to a record-breaking 6.3 million visitors in the fiscal year that ended in June, about 600,000 more than the year before.")

Deciding whether opening Mondays was cost-effective must have involved quite a few mathematical calculations, from the number of additional staff members needed to the revenue generated by tourists who'd pay the suggested admission price, buy souvenirs at the bookstore/gift shop or eat a bite at the various restaurants and coffee shops.

Other museums' practices must also have played an important role in discussions: the National Gallery of Art in DC and the Museum of Fine Arts in Boston are open every day, as well as the Prado in Madrid and major London institutions such as the National Gallery and the Tate Modern.

Two weeks after this NYT article ran (in September of last year), another NYT article announced that the Museum of Modern Art - which had already opened every day for the past two summers, pioneering the trend in New York long before the Metropolitan Museum - would open seven days a week starting this May, beating the Met to a permanent seven-days-a-week schedule by a few weeks.

The other newsworthy item this week, as far as revenue management and the Metropolitan Museum are concerned, is the museum's decision to stop using colorful metal admissions tags and replace them instead by removable stickers. The argument given in the NYT article is one of cost, which is hard to believe. We're talking about small tags in tin metal here, and according to Charity Navigator, the Met had excess funds this year (revenue minus cost) of almost $125 million, as well as assets totaling almost $3 billion. I think they can afford paying for metal admission tags. Replacing them by cheap stickers devalues the Met brand.

More of an issue, though, might have been people asking strangers to give them their metal admission tags (this happened to me once as I was in the main hall leaving the museum - a removable sticker wouldn't adhere as well to the clothes the second time around, so might serve as a deterrent for ignorant cheapskates, unaware the $25 price tag is simply recommended). I've also always wondered whether some visitors kept their old admission tags and observed people exiting the museum to figure out which color they should sport on their lapel this time around. The removable sticker does help in the case of visitors who want to exit the museum and re-enter the same day.

Anyway, surely there could have been a middle ground between the distinctive metal admission tags and the cheap, awful "removable" sticker that always takes with them some threads of people's clothings. MoMA, again at the forefront, scans bar-coded member cards and admission tickets at the entrance of the collections. This gives the museum much better attendance data than the Met and removes the need to wear tags or stickers - certainly a more forward-thinking practice than its uptown neighbor has come up with.

Update 7/1: The New York Times ran yet another article about the schedule change at the Met on the first Monday it was opened. It has some interesting insights about the logistics involved. For instance, 45 new security and admissions employees were hired and the museum will now be open half an hour later, at 10am rather than 9:30am, so that crews can move artwork (which was previously done on Mondays and involves having expensive paintings go through public areas).

How much do hospitals charge?

Last month the Centers for Medicare and Medicaid Services released the amounts that hospitals charge for common inpatient services. This has obviously received a lot of attention in the press, from the national newspapers to the local outlets, each describing price discrepancies between local hospitals.

For instance, the Washington Post states: "George Washington University’s average bill for a patient on a ventilator was $115,000, while Providence Hospital’s average charge for the same service was just under $53,000. For a lower joint replacement, George Washington University charged almost $69,000 compared with Sibley Memorial Hospital’s average of just under $30,000."

This begs for the following comments. First of all, the numbers are the averages of what the hospitals charge, not the averages of what Medicare pays them. (Which is a much small number number, also included in the data released by CMS but not as headline-grabbing by far.)

Second, the fact that we're talking about averages means they will be skewed by outlier points (patients whose care costs an enormous amount of money). George Washington University is a well-known teaching hospital with a first-rate reputation, while I'd never heard of the other two until I read the WaPo article.

Patients pay not only for the procedure, but for the peace of mind that comes with being treated by first-rate specialists who have completed enough procedures to know exactly what to do if something goes wrong. This is even more relevant if you know you're a complicated case (for instance due to multiple chronic conditions). Then it makes sense that the hospital would charge you more - you're also paying for the knowledge the physicians will draw upon in case of complications.

What's not normal is for lesser-known hospitals to charge a lot of money when they bring little added value. But unless this is quantified properly, publishing these numbers without putting them in context only belittles the experience of doctors who have built their career on a specialization, leading to more procedures and more training, and have so far taken pride (one assumes) in the price premium their expertise was able to bring to their hospital, in addition to their own salary.

It is also important to remember that what is shown is the average list price, while Medicare typically negotiates lower rates. But an increase in transparency in the system can only be a good thing. It is up to the hospitals now to make the case that their product is not just a procedure or an episode of care, but also the context in which this procedure or episode of care takes place, especially if something goes wrong. If they can't, then they should decrease their prices very quickly, before finding themselves covered with ridicule and in the middle of a public relations nightmare.


Australia’s “Fourth Hurdle” Drug Review

In contrast with the traditional drug assessment process involving the three hurdles of safety, efficacy and quality – which is currently in place in the United States – Australia introduced two decades ago a “fourth hurdle” comparing costs and benefits of the proposed new drug to those of existing ones. The purpose of “Australia’s ‘Fourth Hurdle’ Drug Review Comparing Costs and Benefits Holds Lessons for the United States” by Ruth Lopert, now at the Therapeutic Goods Administration in Canberra, Australia and Adam Elshaug, in the Department of Health Care Policy at Harvard Medical School, is to describe the Australian model and “distill aspects of the Australian experience that are relevant to the United States as it forges its own path toward greater value in health care.”

Australia’s Pharmaceutical Benefits Scheme “reimburses community pharmacies for the costs of dispensing outpatient prescription medicines” and “consists of a single, comprehensive national formulary with none of the tiers commonly found in drug formularies in the United States”. The patients’ contributions are based on fixed copayments and are computed as follows:

  • Low-income patients pay AU$5.90 for a drug,
  • Others pay up to AU$36.10 irrespective of the drug’s cost,
  • Low-income patients have annual outlays capped at AU$354.

Drugs clearing the first three hurdles (safety, efficacy and quality) can be approved by the Therapeutic Drugs Administration, which allows these drugs to be prescribed and dispensed, but they won’t receive any government subsidy unless they undergo an additional evaluation process. If a drug is no worse than a comparator already available on the market and cannot demonstrate any clinical benefit, it “cannot be listed at a higher price than the therapy most likely to be replaced by it in practice.”

A key metric in assessing the costs and benefits of a new therapy is the incremental cost-effectiveness ratio, or the additional cost associated with each additional unit of benefit (expressed in most cases as incremental cost per additional quality-adjusted life-year). Other metrics include: the degree of clinical need, the availability of other treatment options, and the affordability of the new drug in the absence of a subsidy.

The authors make the case, based on their observations of drug prices in the Australian system, that “fourth-hurdle systems reward true innovations by tacitly directing financial incentives toward products that deliver tangible improvements in health outcomes.” In addition, they note that “when an application is rejected, there is almost invariably a subsequent resubmission”, where the manufacturer can suggest a lower listing price or submit “additional evidence of incremental benefit or identify with greater specificity the patient populations or settings in which there is evidence that the drug is comparatively effective and cost-effective.”

The authors also discuss recent events that suggest that the US healthcare system is becoming more value-driven. For instance, after “oncologist from the Memorial Sloan-Kettering Cancer Center announced they were ‘not going to give a phenomenally expensive new cancer drug to our patients’, [based on] a simple analysis of cost versus benefit,” the manufacturer of the new drug, which had been more than twice as expensive as another drug with similar survival benefits, “reported that it would effectively reduce the price by 50 percent.”

It is important to note, as the authors do, that “to date the US Medicare program has been constrained by Congress in considering cost and value in coverage and payment decisions for prescription drugs.” However, this is beginning to change, as shown in new initiatives sponsored by the Center for Medicare and Medicaid Innovation and Blue Cross Blue Shield’s Alternative Quality Contract. The authors conclude that “fourth-hurdle processes are feasible and can elucidate value for money.”

The Center for Medicare and Medicaid Innovation (2/2)

This is the second part of a two-part post on the Center for Medicare and Medicaid Innovation.

Health Care Innovation Awards: “are funding up to $1 billion in grants to applicants who will implement the most compelling new ideas to deliver better health, improved care and lower costs to people enrolled in Medicare, Medicaid and Children's Health Insurance Program (CHIP), particularly those with the highest health care needs.”

Awardees include:

  • Pittsburgh Regional Health Initiative (funding amount: $10.4 million, estimated 3-year savings: $74.1 million) “to create specialized support centers, staffed by nurse care managers and pharmacists, to help small primary care practices offer more integrated care within the service areas of seven regional hospitals in Western PA,”
  • University of Pennsylvania (funding amount: $4.8 million, estimated 3-year savings: $2.8 million [although the savings might extend in later years, recouping the investment]) “to improve medication adherence and health outcomes in post-discharge patients who are recovering from acute myocardial infarctions,”
  • Atlantic General Hospital Corporation (funding amount: $1.1 million, estimated 3-year savings: $3.5 million) “to improve care for Medicare beneficiaries [in Worcester County, MD] with either a primary or admitting diagnosis of congestive heart failure, chronic obstructive pulmonary disease or diabetes, who currently rely on high cost ER visits and Acute Care admissions.”
  • CareFirst (funding amount: $24 million, estimated 3-year savings: $29.2 million) “to expand its… Patient-Centered Medical Home model of care delivery and payment” in Maryland, resulting in improved coordination for “multi-chronically ill Medicare beneficiaries and patients at high risk for chronic illnesses.”
  • Johns Hopkins University (funding amount: $19.9 million, estimated 3-year savings: $52.6 million) “to create a comprehensive and integrated program, the Johns Hopkins Community Health Partnership (J-CHIP)… designed to increase access to services for high-risk adults in East Baltimore, MD.”

For the full list of awardees, click here. You might also find the U.S. map of awardees interesting.

State Innovation Models Initiative: “is providing up to $300 million to support the development and testing of state-based models for multi-payer payment and health care delivery system transformation with the aim of improving health system performance for residents of participating states.”

Awards were made in 3 categories: Model Testing Awards, Model Pre-Testing Awards and Model Design Awards. The names of states receiving awards and exact amounts provided can be found in this February press release. The numbers below are rounded. I also list some keywords from each project’s description.

I created the map using

View CMMI-StateInnoModels in a full screen map

Model Testing Awards: up to $250 million, for states “ready to implement their State Health Care Innovation Plans” (a “proposal that describes a state’s strategy to use all of the levers available to it to transform its health care delivery system through multi-payer payment reform and other state-led initiatives”). Funding duration: 42 months.

  • Arkansas, up to $42 million, (patient-centered medical home, population-based care delivery, episodes-based payment),
  • Maine, up to $33 million, (aligning Medicaid and Medicare benefits, multi-payer Accountable Care Organizations, data analytics),
  • Massachusetts, up to $44 million, (patient-centered medical homes, shared savings/shared risk payments with quality incentives),
  • Minnesota, up to $45 million, (patient-centered care, Accountable Health Model, team-based coordinated care, community health, preventive services),
  • Oregon, up to $45 million, (Coordinated Care Model, realignment of health care payment and incentives, Coordinated Care Organizations [risk-bearing, community-based entities]),
  • Vermont, up to $45 million, (full coordination and integration of care, shared-savings ACO, bundled payment model, pay-for-performance model, data analytics).

Model Pre-Testing Awards: for states “to continue to work on a comprehensive State Health Care Innovation Plan”, which they will then have six months to submit to CMS. Funding duration: 6 months.

  • Colorado, up to $2 million (State Health Care Innovations Fostering Transformation Program [SHIFT] that will integrate behavioral health and clinical health care),
  • New York, up to $1 million (First Episodic Psychosis Teams, Extended Care Transitions Support, Community-Based Care Management for Older Adults, Transitioning to Community-Based Care for Institutionalized People with Development Disabilities, Accountable Care Organizations and Regional Quality Improvement Collaboratives),
  • Washington, up to $1 million (virtual Accountable Care Organizations, alternative payment models, quality and utilization metrics and evaluation criteria, Regional Collaborative community health and community prevention activities),

Model Design Awards: for state to “produce a State Health Care Innovation Plan”, which they also have six months to submit, to be used to apply to a later round of Model Testing Awards. Funding duration: 6 months.

  • California, up to $2.7 million, (capitated payment models, accountable care organizations, bundled episode payments, Coordinated Care Initiative for dual-eligible Medi-Cal and Medicare beneficiaries),
  • Connecticut, up to $2.8 million, (integrated care models, Health Insurance Exchange, expanded supply of primary care physicians and other professionals, realignment of payment incentives),
  • Delaware, up to $2.5 million, (new payment and service delivery models),
  • Hawaii, up to $1 million, (accountable care, patient-centered medical homes, bundled payments),
  • Idaho, up to $3 million (enhanced communication and coordination of care across the health care continuum),
  • Illinois, up to $2 million, (Care Coordination Innovations Project, Coordinated Care for Medicare-Medicaid Enrollees Demonstration, Provider-Driven Model, Plan-Provider Partnership Model, Plan-Provider Payer Model),
  • Iowa, up to $1.4 million, (integrated care delivery models, payment alignment, value-based purchasing, multi-payer ACO including long term care and behavioral health services),
  • Maryland, up to $2.4 million, (Community-Integrated Medical Homes, geographic information system),
  • Michigan, up to $1.7 million, (patient/family-centered health homes, coordination and accountability of the Medical Neighborhood, care-bridge to behavioral health and long-term care, integration between healthcare and community resources),
  • New Hampshire, up to $1.6 million, (aligning consumer access across delivery system silos, outcomes-based long term care services),
  • Ohio, up to $3 million, (medical homes, episode-based payments for acute medical events),
  • Pennsylvania, up to $1.6 million, (transitions of care, telemedicine and care management, community-based care providing more appropriate services and enhancing access to public health preventive services),
  • Rhode Island, up to $1.6 million, (community-centered delivery system),
  • Tennessee, up to $0.75 million, (integration of scalable purchasing strategies into the TennCare Medicaid managed care model),
  • Texas, up to $2.9 million, (gaps in information technology, data sources, performance measures, quality-improvement initiatives),
  • Utah, up to $0.9 million (improved physician/patient communication and care coordination).

An extensive list of innovation models is available here.

You can see where healthcare innovation is happening on this map of the U.S. The default view includes models run at the state level and healthcare facilities where innovation models are being tested. Although I think the map I "did" looks better!