Baltimore Time is Pepsi Time

Paul Levy

Posted 12/15/11 on Not Running a Hospital

Andrea Walker from the Baltimore Sun reports:

PepsiCo has signed a deal that allows employees and dependents across the nation to get certain surgeries at Johns Hopkins Hospital — a cutting-edge arrangement that could grow in popularity as companies look to provide better health care and contain costs.

The world’s second-largest soda company will pay for workers and their dependents — about 250,000 people — to travel to Baltimore for cardiac or complex joint surgeries, such as correcting problems in a previous knee replacement. PepsiCo will also cover the deductible and coinsurance for the procedures.

It’s a free country, so PepsiCo can do as they like, but I wonder what the basis is for choosing Hopkins instead of another hospital.  Is it that it can demonstrate superior outcomes compared to other hospitals around the country?  No it cannot, but there are no published figures that would enable that kind of comparison.

So, the answer has to be that PepsiCo negotiated a really good price for these services:

Hopkins in turn will charge Pepsi a set rate for the surgery, rather than separate fees for physician charges, preoperative testing and other related services. The arrangement was announced last week.

As this is mainly incremental business for Hopkins, I am willing to bet that the price offered is substantially below that charged to local residents going to the hospital, whether covered by Medicare or private insurers.  In a large, fixed-cost institution like Hopkins, as long as you don’t have to add new physical facilities and expensive equipment, you can price just high enough to cover your short-term marginal costs and come out ahead.

But I wonder if PepsiCo considered other institutions or conducted a taste test?  That would have provided a real challenge.

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