The Big Idea: How to Solve the Cost Crisis in Health Care

November 19, 2011

Please email me if you would like a copy of this article, or view it at http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1

The authors present a new model for costing healthcare, that better apportions costs to activites. This allows understanding of hidden costs, and removes the need for using government or health fund rebates as a proxy for costs. Similarly, healthcare institutions (providers in the article) can see which high- and low- rebate procedures contribute to profit and loss.

One aspect that has not been covered is patient-driven demand for healthcare. While this will vary from procedure to procedure as they move in and out of vogue, it may account in part for the difference in demand between user-pays and ‘free’ healthcare systems.

by Robert S. Kaplan and Michael E. Porter

The Idea in Brief

Much of the rapid escalation in health care costs can be attributed to the fact that providers have an almost complete lack of understanding of how much it costs to deliver patient care. Thus they lack the knowledge necessary to improve resource utilisation, reduce delays, and eliminate activities that donʼt improve outcomes.

Pilot projects under way at hospital systems in the U.S. and Europe demonstrate the transformative effect of a new approach that accurately measures costs—at the level of the individual patient with a given medical condition over a full cycle of care—and compares those costs to outcomes.

As providers and payors better understand costs, they will be positioned to achieve a true “bending of the cost curve” from within the system, not based on top-down mandates.

The sheer size of the opportunity to reduce health care costs—with no sacrifice in outcomes—is astounding.

Ageing and obesity are causing further upward pressure in costs. The authors argue that an inability to adequately measure the cost and hence cost-per-outcome is the root cause of allocating costs based on rebates (logically unsound) and cross-subsidisation of services that appear to make a profit, with those that don’t.

Further, this system does not reward those who improve the cost-to-outcome ratio – rather it leads to pursuit of highly rebated services. An irony here is that better care frequently is cheaper, through fewer complications or more efficient use of resources.

Kaplan promotes a system of time-driven activity-based costing, where the time spent with each resource is recorded. Each resource is then costed by the expenses attributable to that resource, divided by the capacity of that resource –
e.g. for staff: (annual salary + office + IT)/ annual hours available.

The Cost Measurement Process as used at seven pilot sites (specific examples are given in the article):

1. Select the medical condition, including comorbidities and duration.

2. Define the care delivery value chain: principal activities and locations. Focuses on the full care cycle rather than on individual processes

3. Develop process maps of each activity in patient care delivery. They include all the capacity-supplying resources (personnel, facilities, and equipment) and consumables involved at each process along the path, both those directly used by the patient and those required to make the primary resources available.

4. Obtain time estimates for each process. Estimate how much time each provider or other resource spends with a patient at each step in the process. When a process requires multiple resources, estimate the time required by each one. Consider using standardised times for short, inexpensive processes, but measure complex-care processes

5. Estimate the cost of supplying patient care resources.
– Direct costs include compensation for employees, depreciation or leasing of equipment, supplies, or other operating expenses.
– Account for the time that many physicians spend teaching and doing research in addition to their clinical responsibilities.
– Identify the support resources

Posted in Blog by Douglas Fahlbusch