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The Importance of Rack Rates

How to maximize the patients you capture from health plans.

GARY GERBER, O.D.

Hotels call them "Rack Rates." Auto dealers call them sticker prices. We doctors call them "Usual and Customary" (U&C) fees. Their common denominator: These are the prices hotels, auto dealers and we O.D.s WISH we could collect for the services we provide. Instead, these illusory digits are only a dream. So, if this is the case, why list them, or, more to the point, why not list the fees we really charge?

Setting fees in a third party payer world is as time consuming and frustrating as unraveling a plate of spaghetti. And, indeed, so many of us spend so much time on this side of the fee equation that we forget to examine the importance fees have on the image and positioning of our practices.

Here, I discuss not how to set your fees, but the importance of how your fees impact the perception of your practice — and how that relates to third party plans.

Fees and image

When faced with a high price, most consumers reason: "If it's expensive, it must be good."

For example, if you won a prize on a TV game show and the host gave you a choice between a one-week vacation in a hotel with a rack rate of $1,200 per night or $89 per night, which one would you choose? If you had no other information, other than that both hotels are in the same resort area, you'd probably choose the higher priced hotel.

Yet in this case, your actual rate is $0 since you were the lucky winner.

Extending this example to optometric fees, my colleagues reply: "Why even bother raising my U&C (Rack Rate) fees since I'm already way above what a third party plan would pay me anyway? All I'm doing is writing off a larger and larger amount."

On the bookkeeping side of things, this thinking is correct. On the marketing side, however, this thinking is dead wrong. Let's say your U&C examination fee is $225 and your closest competitor charges $110 for the (perceived) same service. Now, if both you and your competitor belong to plan XYZ, and they reimburse both of you $31 for that service (Ok, that's generous, I agree — let's use a realistic number of $14), a phone shopper is now in the exact same position as the game show winner.

When calling your competitor the patient asks, "How much does an eye examination cost?"

Your competitor tells him: "It's usually $110, but since you have XYZ insurance, it's only going to cost you a $20 copay."

When he calls your office, you tell him: "It's usually $225 but it's only going to cost you $20 because you have XYZ insurance."

As in the game show example, given no other information, who do you think the patient will choose? He'll most likely choose you. This is because the higher fee gives the patient the perception (deserved or not) that you provide a higher quality of care than your competitor.

Free yourself

Don't let the handcuffs of third party payers restrict you from raising your fees. While it's true you won't actually collect them, if you're willing to accept the reimbursement from and participate with a particular plan, you might as well attempt to maximize the number of patients you can capture from that plan. Setting fees appropriately is one way to do that. OM