Value-based Pricing for Healthcare Consulting Services?

This article is bound to generate some flack from some readers, but it is worth it to say what needs mentioned.

When hiring a consultant, value-based pricing strategies can be contrasted with other pricing strategies common to the professional services marketplace used by consultants, both domestic and international.

Time and Materials Pricing involves calculating the cost of the labor (time) and other expenses (materials) and adding a markup to cover overhead and profit. This marked-up rate is often referred to as the hourly billing rate and may vary depending on who does the work. More-senior professionals, named partners, or those employed at firms with a stronger brand, typically command a higher rate.?The problem is you’ll likely be managed by their intern or subordinate. CLARIFY!

Market Pricing, another common approach to pricing professional services, attempts to price services at a rate that reflects the price commonly paid for this service at competitive service providers. This pricing model assumes that the service and benefits are comparable across competitors (i.e., undifferentiated). A firm may choose to be at the low end of the market to gain a pricing advantage or at the high end of the market (premium pricing) to capture the value of their brand or reputation. Alternatively, some price by the market in which you are located. Rural America gets one rate, while clients in major commercial centers are charged a much higher rate even though the consultant resides and has overheads tied to less expensive locations.?

In foreign transactions, often the reverse happens. Fees charged by US consultants bearing the overhead expense of a US-based firm cannot work for competitive rates that are market priced in Turkey or Eastern Europe, the Caribbean or Latin America where usual and customary rates are much lower for local consultants - and frequently, the experience and expertise level is also largely local and incomparable.

Package Pricing is a strategy that offers a fixed price for a defined group of services. Sometimes called fixed pricing, this strategy can be used with or without value pricing. However, there is a natural affinity between package pricing and value pricing. Since clients are not being billed based on time spent, they are already focused on the overall value of the package. This makes value pricing easier to implement. Lots of prospective clients initially believe they want a flat fee quote because they don't understand how to buy consulting guidance. But a package pricing with a commensurate deliverable can be disappointing.

Value-Based Pricing is a pricing strategy is one we hear a lot about in healthcare. But I would offer that it is largely misunderstood. Value-based pricing in healthcare or consulting is one that attempts to capture the extra value that a a physician may prefer and find more “fair and equitable” to meet their needs. It requires that the consulting expert's service offering is different in some meaningful way from its competitors (i.e., differentiated) and that potential clients value that particular difference.?

For example, in my case, I am differentiated by a long-established career in healthcare business administration and clinical operations. I bring the expertise of having authored 23 internationally-published, peer-reviewed textbooks and handbooks on healthcare business administration, marketing and program development by leading international life sciences publishers. I further leverage work experience with projects commissioned by the WHO, International Development Banks, the US Embassy, Agency for International Development, and having been honored with 7 different Lifetime Achievement Awards in Healthcare Business Development. No other consultant firm in North America has similar accolades or experience.?But is that what's needed by the client? Is there value in that experience and authority? That's 100% client-decided.

Value-based pricing rests on one key concept

Just like in concierge medicine and medical travel, the value of professional services from consultants are subjective and vary for clients in different circumstances and in different countries.?

Many of my physician, ASC and hospital clients have little understanding of the real business value of the services they buy and few remember to contract for specific deliverable from consultants.?I spend hours upon hours explaining these nuance constructs, but in the end, they "get it".

Many government procurement and public sector procurement officers are often challenged when it comes to evaluating "value received". This is because, many consulting agreements are actually “illusory” as to deliverable. What's worse, so many are not involved in healthcare. They are inexperienced in contracting for specific healthcare deliverable and are at the mercy of the consultants- honest or not. Many times, while one party appears to?have promised “consideration” to the other, there is no deliverable stated. The contract benefits one party while the other party entered into the contract on the perception of getting consideration, while in reality, there was little to no consideration.?I see this so often in medical tourism consulting engagements that I often wonder if the phenomenon is actually laden with nefarious intention. Unfortunately, I only see these contracts after the loss has been sustained by the client(s).

In contract law, no matter what the jurisdiction, illusory contracts are not enforceable. But in reality, most contracts are paid and the client disgruntled or feels abused but nothing comes of it. This angers me. Precious resources of time and money are sucked out of the system leaving the buyer impaired to try again.

Many illusory time and materials and market pricing contracts really only promise “hours spent on a matter” and not an “end result” that can be measured in terms of “value”. This is similar to a medical services “contract” that promises “visits”, or “exams”, or “time spent” but doesn’t deliver much else in terms of “results” or other metrics.?We see lots of treatment plans that bill on and on for treatments or hours spent, but never gets to maximum medical improvement. But if a payor says that the contract was illusory, there’s no way to enforce the lack of a “measurable result” of the treatment. That's because visits were contracted and visits were delivered. That’s what the contract covered. No more; No less.

On the other hand, if a consultant contracts for a deliverable such as “market analysis” and then produces a report of findings, that’s a specific deliverable. The report in your hand is your deliverable. Does it deliver value? Only if you specified what you want included in the report. But it cannot guarantee that the result will be to move forward with your project. And it matters not how many hours it took, how much desk research versus local market observation and analysis, checklists employed, or other expertise and experience were used in the completion of the assignment.??

If a consultant contracts to be available for calls and Q&A advice for an hour, then the hour is paid and that is time and materials; not value-based. The answers "may" turn out to be valuable, but the contract was time-based. Lots of mental health counseling contracts are "time-based" talk therapy. They don't promise another deliverable.

If the consultant contracts to write a marketing or business development strategy and execution plan, it matters not how many hours were spent and/or options were considered prior to the final product. The value is that the strategy incorporates experience, expertise, and authority in the domain knowledge being called upon.?

When a deliverable is a strategic plan and execution road map and/or a budget estimate of things known at the time the deliverable was produced.?If the client delays for months to kickstart the project, the market could change, the execution plan could face hurdles that were not anticipated with an earlier timeline and costs associated with the execution plan could have increased.?Rarely can a value-based contract deliverable honestly promise a?specific concierge medicine enrollment by a certain date or a specific revenue target by a certain date because those two metrics are outside the control of the consultant.?

If the consultant contracts to analyze managed care contracts for a client, the analysis results in a debriefing and a recommendation to sign and participate or counter offer or decline. It doesn’t guarantee an outcome of profitability or even a signed agreement as the outcome. It promises a skilled and authoritative analysis and insights. If the doctor’s staff or manager don’t know how to analyze managed care agreements, but only to sign where indicated, the value is in the know how and reliance on the expertise to keep the doctor or healthcare provider as “safe” as possible and to mitigate risks of non-payment, hassle factors, claw backs, late payments or uncompensated busy work that negates any margins won in the fee schedule.

If the consultant contracts to build a medical travel program for the client, then the deliverable will be a functioning program with forms, tools, procedures, processes, and instruction for the staff and physicians and administrators to operate the program. Travel costs to get to the destination where the work will occur is inferred and stated as “ travel expenses” which includes all fees, costs, and accommodation expenses, not just the time to prepare the deliverable. The travel is inextricably linked to the the project, so the expenses for the travel are also inextricably linked.?

But when the travel takes 30 hours in each direction, that time is not “free time.” It is natural for it to be calculated into the project costs formula. If work cannot be performed while traveling 30 hours in each direction in an economy seat, that compromised time is also calculated in as lost opportunity to engage in other remunerative work and outputs. Since it is inextricably linked to the project, it is charged. On the other hand, if seating is booked in international first class, then work can be carried out while traveling and the work time is not lost.? What gets me very angry is when the consultant brings an unnecessary entourage and the client is expected to pay for that entourage's expenses. There was a medical tourism consultant who would bring a "cast of imposters" meant to appear that they were insurance brokers and employer representatives when they were merely friends of the consultant along for the sightseeing activities and to give the appearance that the consultant was bringing along "real live buyers' representatives". Those government officials were taken advantage of because they failed to check backgrounds that were so easily determined to be imposters.

Another thing about international consulting talent being engaged is when nothing can be done while traveling and the travel itself poses higher risk of health problems such as DVT in a cramped economy seat for 60 sedentary hours of travel. The value-based fee charged reflects the difference accordingly.?To travel to a region that requires the consultant to prove health insurance that covers travel health risks, likewise, the premium for said insurance is an expense of the project. But for the project engagement, the insurance would not otherwise be necessary.?Likewise, if the travel is to take place on an overnight flight spent in an airport or aircraft, then an extra night accommodation upon arrival to freshen up and restore and be ready for business is not only inextricably linked to the project, it is a reasonable and necessary expense.

Rules to live by

When vetting and engaging consulting talent and experts to give you guidance for your next entrepreneurial endeavor, slow down and ask good questions. Don't be in a hurry to get to the price unless all you want to contract for are "hours spent" on your matter.

Instead, give careful consideration with how you will assign "value" to the assistance you've requested. Will it accelerate your go to market timing? Will you expect to make fewer mistakes? Are you really in need of a "contractor" to "do" things you don't want to do? That's not a consultant. That's a freelance task completer. They "do" what they are asked to "do". They rarely assess or recommend. Which do you want? If you already did the assessment and decided on the way forward, and all you need is extra help to get it done, that's a freelance contractor. If you aren't sure how to proceed, the contractor is not your answer. And the difference in price should be reflected.

A contractor is one paid about 25% more than your local market rate for the same work that an employee would be paid. When I pay a contractor in our practice to get something done we don't have time to do, if the market rate for a similarly trained employee is $21 per hour, then the contractor would be reasonably paid less than $30 per hour.

A consultant paid for their value proposition that includes relevant expertise, experience, guidance and authority is a totally different fee structure and deliverable. The hourly rate is generally measured in hundreds of dollars per hour.

Another faux pas is to mix up the assignment. Hiring a consultant to do the work of a contractor is extremely expensive.

• A good consultant who is in high-demand ethically won't take that assignment because it is not the best use of their time and they generally are too busy to do the tedious menial work that needs to be done. They do more good by declining the wrong projects or recommending a contractor to help you.
• An under-occupied "consultant" without enough work is a good sign you are dealing with a contractor. True consultants are experts with a following and a full calendar and may need many weeks of advance planning to get to your project. Contractors can usually start within a week.

Questions? Feel free to ask right here in comments so everyone benefits from the shared knowledge.