Rising health care costs are busting the federal budget as well as those of states, counties and municipalities. Policy makers and health care leaders have spent decades trying to figure out what to do about this.
Yet their solutions are failing because of a fundamental and largely unrecognized problem: We don’t know what it costs to deliver health care to individual patients, much less how those costs compare to the outcomes achieved.
When insurance companies or government bodies try to control costs, they usually make across-the-board reimbursement cuts that ultimately are unsustainable because they have no connection to the true costs of delivering care. Providers themselves do not measure their costs correctly. They assign costs to patients based on what they charge, not on the actual costs of the resources, like personnel and equipment, used to care for the patient. The result is that attempts to cut costs fail, and total health care costs just keep rising.
Regardless of what decision the Supreme Court reaches on the legality of the Affordable Care Act, measuring outcomes and costs is indispensable to driving improvements.
Because health care charges and reimbursements have become disconnected from actual costs, some procedures are reimbursed very generously, while others are priced below their actual cost or not reimbursed at all. This leads many providers to expand into well-reimbursed procedures, like knee and hip replacements or high-end imaging, producing huge excess capacity for these at the same time that shortages persist in poorly reimbursed but critical services like primary and preventive care.
The lack of cost and outcome information also prevents the forces of competition from working: Hospitals and doctors are reimbursed for performing lots of procedures and tests regardless of whether they are necessary to make their patients get better. Providers who excel and achieve better outcomes with fewer visits, procedures and complications are penalized by being paid less.
Our research and executive workshops show that many sites are already improving their measurements of patient outcomes. But they have done little to measure the actual costs of achieving those outcomes. We are currently working with several health care organizations, including MD Anderson Cancer Center in Houston, Children’s Hospital Boston, Partners Healthcare in Boston and Schön Klinik in Germany, that are beginning to figure out how to measure costs. They use teams of clinicians and administrators to identify all the processes involved in care, from a patient’s first contact with a health care provider through his or her inpatient stay and outpatient follow-up care. The teams then identify the quantity and unit cost of each resource — clinical staff, equipment, supplies, devices and administrative support — used in each process and add these together to learn the total cost of a patient’s care.
The information helps them discover immediate and significant opportunities for improvements in care and reduced spending. MD Anderson, for example, has studied its evaluation process for new head and neck cancer patients. By substituting trained staff members for physicians, standardizing processes and improving information technology, it has been able to make care more efficient without any adverse effect on patient outcomes. It has made changes that reduced total costs by 36 percent, and freed employees to serve more patients without adding to costs.
A surgeon repairing cleft palates at Children’s Hospital Boston discovered that 40 percent of the total cost of an 18-month-care process was due to the time a child spent in the intensive care unit before and after surgery. By using a far less intensively staffed and equipped observation room, the hospital could achieve equivalent quality and safety at much lower costs.
Most health care providers have hundreds of these opportunities to use time, equipment and facilities more intelligently. These opportunities have been obscured by existing costing systems that have little connection to the processes actually performed.
With accurate information on outcomes and costs, providers can improve care and save money by eliminating things that don’t help the patient, like multiple check-ins and medical histories, tests that provide little new information and long waiting times. Many routine tasks are performed today by highly trained doctors and nurses. These tasks can be shifted to others, freeing the most skilled clinicians for far more productive work.
Health care providers with expensive and poorly utilized equipment, space and staff can see the benefits of consolidating services to improve utilization and reduce some existing capacity. They can also perform routine services in lower-cost locations, reserving expensive medical centers for complex care.
These opportunities will allow the health care needs of an aging population to be met with little need to increase spending. Understanding costs could be the single most powerful lever to transform the value of health care. This would give payers and providers the data they need to improve patient care, and to stop arbitrary cuts and counterproductive cost shifting.
Robert S. Kaplan and Michael E. Porter are professors of accounting and strategy, respectively, at Harvard Business School.