Monday, September 5, 2011

Learning How to Cost Healthcare Services

Two Harvard professors, Robert S. Kaplan and Michael E. Porter, have provided an article in the Harvard Business Review that maps a way forward in first understanding healthcare costs, and then controlling them.

Their theme is that you cannot control costs if you don’t know what they are. They describe the current system as being a series of contentious interactions between providers, insurers, and government agencies, each having a stake in distributing funds, but none of whom have any actual knowledge of costs. To providers, cost has become whatever is reimbursable, not the actual expense. To insurers it is a compromise between what providers and government agencies will put up with. To government agencies cost is the minimum they can get providers to accept.

The authors propose the sort of approach that one would expect any serious business to take in setting up a process. They refer to time-driven, activity-based costing (TDABC). That is a fancy way of saying you track who does what and how much their time costs, and you track utilization of resources and tally those costs. That sounds rather obvious, but it requires some up-front time investment. The authors say they have several organizations that are using their methods and the results are encouraging.

The appropriate manner in which to apply the approach is from the broad perspective of total treatment of a given condition such as asthma, diabetes, joint replacement.... This method assumes one moves away from the fee-for-service system, and it assumes that every individual has a cost associated with their time. In other words doctors will have an hourly wage associated with their activities.

A companion article by Heidi Albright and Thomas Feeley, from the MD Anderson Cancer Center described their implementation of TDABC at their facility for patients in the Head and Neck Center.

“The team began by developing a care delivery value chain that mapped out the full treatment of a patient. Within each segment of care—the outpatient clinic, diagnostic imaging, the operating room, inpatient care, radiation therapy, and chemotherapy administration—we created process maps that also included all the resources involved. Each segment of the process map took approximately 40 hours to complete, with a team consisting of a project manager, a project coordinator, a process mapping expert, financial staff, clinical and business managers, and staff members from each function being mapped.”

“The process team then estimated how much time it takes to perform each task and the capacity cost of each health care provider. We validated all the process steps, time estimates and branching points with the help of frontline health personnel who were actually performing the tasks....”

The obvious lesson from utilizing such a process analysis is that it is a marvelous means to detect inefficiencies and unnecessary activities. For example, it was discovered that many tasks could be performed by personnel that were less highly trained and thus less expensive: nurses could do what doctors had been doing, and aides could replace nurses for some functions.

They then redefined their processing of patients through the Anesthesia Assessment Center (AAC) based on the lessons learned from the TDABC analysis.

“The modified process resulted in a 16% (11 minute) reduction in process time, a 12% decrease in costs for technical staff, and a 67% reduction in costs for professional staff (physicians and other providers). Total costs fell 36% from approximately $250 per patient (including direct and indirect costs) to $160.”

The arguments of Kaplan and Porter, along with this kind of example, are tremendously encouraging. However, to take advantage of these methods will require many changes to the way in which healthcare is currently delivered. A patient in a situation where he needs care from three different doctors might now have to deal with three different administrative staffs at three different locations with three separate sets of equipment. The wasted time, effort, and resources can be enormous. The authors’ approach and other forces at work are going to constrain providers into ever larger and more coherent structures where they are efficiently paid for the time and resources provided.

They highlight resource utilization as a major cost issue. They quote joint replacement costs in Germany and Sweden as being approximately $8,500. The equivalent costs in the US are $30,000. There is a general inflation factor that contributes, but the majority of the difference can be attributed to poor utilization of resources. For example, business and marketing considerations lead hospitals to wish to be able to treat any situation they might encounter, even if occurrences are rare. This leads to an accumulation of equipment, staff and space that are not fully utilized, but must be paid for by someone. Rarely performed procedures also lead to the potential for poor health outcomes. If facilities could share resources instead of duplicating them, costs would go down and patients would be safer.

Efficiency and cost reduction are not for free. This is not a zero sum game.

“A cruel fact of life is that total costs will not actually fall unless providers issue fewer and smaller paychecks, consume less (and less expensive) space, buy fewer supplies, and retire or dispose of excess equipment.”

The discussion and findings presented provide us with yet another example of how money can be saved in our healthcare system. And remember that fifty cents of every dollar saved goes back into a government treasury. It seems absurd to talk about limiting services before we take the steps necessary to eliminate waste.


  1. I have two recent health care examples that illustrate both the complexity of the medical system and that the question of costs is not simple. In both cases I only saw the costs billed to me and that paid by the insurer. In the first case the insurer paid about half the costs billed and in the second only one third of the billed amount was paid. In neither case did I have to pay more. Both of these bills were of the order of $100,000. How can a system bill so much more than it gets paid? More importantly, how can a system prey on the uninsured with such outrageous bills?

  2. Hospitals, like many organizations add up their peceived costs and divide by the number of customers to determine what they charge. Since they have negotiated rates with insurers and the government that do not cover their costs, the charges get jacked up and, paradoxically, the uninsured see the highest costs. As this article shows, the hopitals waste a lot of money on excess equipment and excess capacity. Such examples of waste, not to mention fraud,exist throughout our healthcare system.

  3. Do you know of any other cancer centers that have piloted and/or implemented TBABC? Results?

  4. Working TDABC is currently being piloted at Boston Children's Hospital and the University of Iowa Hospitals and Clinics. Significant preliminary work has been performed by Apurva Shah, MD MBA.


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