For more than a half century, the healthcare industry applied a flawed business model that failed to accurately link revenue to costs. Volume-based reimbursement tied revenues to volume so organizations that maximized volume, maximized profits. There existed little incentive to focus on costs as organizations inflated their charges to account for what they calculated as a rough estimate of their costs.
The passage of the Affordable Care Act (ACA) dramatically changed the healthcare marketplace and the economics driving it. No longer could provider organizations indiscriminately raise prices to increase revenue and cover their costs. The ACA set rules strongly encouraging provider organizations to take on risk and deliver measurable quality of care.
For example, hospitals no longer receive reimbursement for Medicare beneficiaries readmitted within 30 days for the same condition. Additionally, ACA incented the formation of Accountable Care Organizations (ACO), which requires these organizations to accept financial risk for patient care. Under this environment, both quality and cost matter like never before.
An $8 Hospital Bill
Recent reports from New York State and detailed in The New York Times (Bernstein, Nina. Big Markups, and Odd Bargains, The New York Times, December 9, 2013) show how variable and out of control are healthcare costs. The report listed hospitals with their charges and costs for a variety of conditions during the period 2009 to 2011. According to The New York Times article:
In 2011, prices ranged from the $8 bill at Benedictine Hospital in Kingston, N.Y., for treating a case of gastritis (cost: $2), to a $2.8 million charge for a blood disorder case at University Hospital of Brooklyn that cost it $918,462. (1)
Without even knowing the details of the case, it is hard to believe the $8 bill for gastritis is correct and the cost of the treatment was only $2. If the gastritis case lacks credibility of its accuracy, the same must be said for the blood disorder case.
As noted above, this new reality of value-based reimbursement requires organizations to closely monitor cost and quality. Although many professional and regulatory organizations focused on the quality metrics for many years (e.g., JCAHO, NCQH, AHRQ, etc.), approaches to measuring costs trail in their sophistication. Most current cost modeling depends upon extended lists of assumptions that put the entire cost model in question.
Although supply chain software improved our ability to track supplies used in patient care, the capability of existing applications to track people, the component making up upwards of 60% of the cost of care, uses research assumptions rather than actual data to measure staff costs. These assumptions derive from expert panel recommendations that are generalized to very different institutions, clinical professionals, and a variations in patient mix.
Leverage Transactional Data
Although the best available approach at the time for these first and second generation applications, cost accounting tools now require a much more sophisticated approach that takes advantage of existing data sources to more accurately measure the impact of staff services on the cost of care. Fortunately, the expansion in the use of electronic medical records provides a valuable data pool for use in cost accounting. A third generation system tool will effectively leverage existing data sets created through the use of transactional systems and produce results that represent the actual cost of care.
In order to thrive in the era of value-based reimbursement, healthcare organizations need a reliable, third generation healthcare information technology tool that allows them to measure the true cost of care while linking it to their clinical outcomes. Only then will they be able to deliver the highest quality of care at a reasonable cost to a deserving American public.
About the author: Dr. Barry Chaiken is board certified in General Preventive Medicine and Public Health and Health Care Quality Management, and served as a board member, chair and continues his involvement as a fellow of HIMSS. He’s been in the healthcare industry for 20 years, having previously been the CMO at DocsNetwork, Ltd, and now helps design, build, implement and support the healthcare sector at Infor as the company’s first-ever CMIO.