When a car rolls off an assembly line, the automaker knows exactly what parts, labor and facilities cost. Not so in health care, and now some health executives are trying to change that.
Although U.S. hospitals account for the single largest chunk of the nation’s $2.7 trillion in health spending, few of them can say how much it actually costs them to care for every patient they admit.
“To think that health care is this ginormous business that doesn’t understand costs is mind-blowing,” says Vivian Lee, senior vice president for health sciences at the University of Utah, an academic medical center with four hospitals and 1,330 physicians. In 2012, Lee was stunned when she challenged senior managers and physicians to find ways to reduce spending, and “they said, ‘We don’t know what it costs, so how can we manage it?'”
Today, the Utah health system is one of a handful in the nation with a data system that can track cost and quality of care for every one of its 26,000 patients. Those data are shared with doctors and nurses for further input about ways to streamline cost and improve care.
In the first year, the system shaved nearly $2.5 million from a $1 billion budget — a tiny fraction, to be sure, but officials say the new accounting will help to reduce spending growth while boosting the quality of care. Administrators also say they’ll be in a better position to negotiate with insurers because they know precisely how much it costs to perform a particular procedure.
Several other systems, including MD Anderson in Houston and Intermountain Healthcare in Utah, are among a handful nationwide that have made such ambitious efforts.
“The primary purpose is to get better outcomes for patients while spending less,” says Bob Kaplan, a professor emeritus at Harvard Business School who partly blames the rapid escalation in health spending on the industry’s inability to measure cost and quality.
For now, the savings are accruing mainly to the health system, but they may lead to lower prices that make their way to consumers in the form of smaller insurance premium increases, as well as better care.
COSTS ALL OVER THE BOARD
Yes, most hospitals have long lists of prices they charge for every service — from aspirin to MRI scans — and those end up on bills given to insurers and patients. But most hospital charges have little or no connection to what a supply, service or episode of patient care actually costs the facility.
For decades, hospitals set those prices using an opaque process that relied on abstruse formulas to account for factors such as unpaid bills and inflation. The list prices that resulted were more akin to a car’s sticker price, used as a starting point for negotiations with insurers, who generally win substantial discounts.
“Some organizations are now trying to do what they do in other industries, such as manufacturing, where they know how much it takes to make the widget, in terms of time and materials,” says Cynthia Ambres, a principal at consulting firm KPMG.
The developments are key at a time when hospitals’ very survival may depend on how well they understand their costs.
“There will be hospitals that don’t … but they will go out of business,” warns Steve Johnson, who helped develop the new tool at the Utah health system.
Hospitals face huge financial pressures: Medicare payments are being squeezed. Insurers and employers are increasingly demanding data about quality and costs. And many policy experts, insurers and Medicare officials are urging a move away from the traditional way hospitals are paid — for each service, doctor visit and drug — to flat or “bundled” payments for a patient’s care.
Kaplan warns that without understanding “where inefficiencies, fat and waste are,” hospitals under pressure to reduce spending may make the wrong cuts.
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