Buy a ticket on almost any airline these days and, if you're willing to travel during off-peak periods and book in advance, you're likely to land a bargain.
Thanks to a technique called "revenue management," bargain hunters get cheap fares and airlines fill otherwise empty seats. Meanwhile, peak-demand flights and destinations get priced at a premium.
Hotels and rental-car companies employ the technique, too, generating millions in additional revenues each year. So why not healthcare providers?
Robert G. Cross, chairman of Aeronomics, an Atlanta-based research and consulting firm, thinks revenue management is perfectly applicable. "I think there's a ton of opportunity," he says.
Cross describes his approach to boosting wealth in Revenue Management: Hard-core Tactics for Market Domination, defining revenue management as a way of ensuring "that companies sell the right product to the right customer at the right time for the right price."
Cross honed the age-old revenue management idea as an attorney for Delta Air Lines during the industry's post-deregulation price wars and later as a consultant.
"There is a tremendous opportunity for savvy companies to grab more than their share of consumers' disposable income," Cross says. Many companies focus on cost containment, thinking they can't control revenues, "and that's just absolutely wrong," he says.
In 1992, Duke University Medical Center's Diet and Fitness Center used revenue management to stem the center's losses during the off-peak months of November and December, Cross says. By reducing rates by 25% during those months, the center attracted enough clients to erase monthly losses of as much as $75,000 to turn a monthly profit of $5,000 to $10,000.
But the experiment was short-lived. Jonathan Carmel, the diet and fitness center's former administrative director, applied a mathematical model to project enrollment ahead of time, says Karen Hines, a medical center spokeswoman. The center has not continued that approach because of the difficulty in predicting when patients will enroll, she says. Unlike a gym or a diet program, Duke attracts severely obese patients who stay for weeks at a time while trained professionals help them learn new eating and exercise behaviors.
"There's just a lot of movement in how people enroll in a medically supervised program," she explains. The center does offer some reduced rates around the holidays, Hines adds, but those discounts are not tied to a revenue management program.
Hines says the center's financial performance has improved since the early 1990s. Although program development, advertising and good publicity have played a role, she doesn't know what effect revenue management has had on the bottom line.
Cross says a fundamental concept of revenue management is measuring the impact on the business. Another is having a champion who believes in the concept.
Does the healthcare industry's movement to capitation interfere with revenue management? Even under a per-member per-month arrangement, some payers may be willing to fork over a premium for certain services, Cross says.
Upheaval and underutilization create revenue-boosting opportunities. "Even if you're in an excess capacity situation, every company has areas where they are turning away demand," he adds, citing 8 a.m. surgery as an example. `'You have to look at your micromarket opportunities," he says.
By "micromarkets," Cross is referring to segments within a market for which a customer may be willing to pay more. A hospital, for example, may be able to charge more for certain surgery slots, he says. Other micromarket opportunities may be found in peak-demand periods for diagnostic tests.
Hospitals could stand to rip a page from airlines' cost and pricing manual, agrees Princeton University healthcare economist Uwe Reinhardt. Empty beds, like empty seats, are a one-time cost, not one that should be reflected in the cost of producing a new service, he says. "You have the bed. You already built it."