Costing in value based health and care system

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By Knowledge Hub

Michael Porter said, “biggest problem with health care isn’t with insurer or politics. it’s that we’re measuring the wrong things the wrong way.” Much of the rapid escalation in healthcare 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 utilization, reduce delays, and eliminate activities that don’t improve outcomes. Pilot projects in the U.S. (MD Anderson Cancer Center in Houston, Children’s Hospital in Boston) and Europe (Schon Klink in Germany) 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 waste reduction from within the system, not based on top-down mandates.

“Value”generation in healthcare?

The meaning of word “Value” in healthcare is unclear and depending on who you talk to value means different to different stakeholders. For example, view of a policy makers can be quite different from that of patients, providers or insurers. Summarising different views, superior outcomes, quality and service, high patient satisfaction, access to care with lower cost are the most commonly sought.

In financial context, the Value is measured in terms of of the patient Outcomes achieved per pound of Cost. Therefore, Value is generated by reducing the health care cost and improving outcomes and quality.

Confusion on what cost means?

The wide spread confusion between what a provider charges, what it is actually reimbursed, and its costs is a major barrier to reducing the cost of health care. Providers have aggravated this problem by structuring important aspects of their costing systems around the way they are reimbursed. For example, Fee for Service (1980 volume based), Per Case (1983 volume based), Capitation (without Quality metrics) systems, have all contributed to suboptimal patient care and higher financial costs.

We need to abandon the idea that charges billed or reimbursements paid, in systems above, in any way reflect costs. in reality, the cost of using a resource—a physician, nurse, case manager, piece of equipment, or square meter of space is the same whether the resource is performing a poorly or a highly reimbursed service. cost depends on how much of a resource’s available capacity (time) is used in the care for a particular patient, not on the charge or reimbursement for the service, or whether it is reimbursed at all. Existing costing systems, which measure the costs of individual departments, services, or support activities, often encourage the shifting of costs from one type of service or provider to another, or to the payor or consumer. The micro-management of costs at the individual organisational unit level does little to reduce total cost or improve value—and may in fact destroy value by reducing the effectiveness of care and driving up administrative costs.

What should be done for accurate costing?

Any accurate costing system must, at a fundamental level, account for the total costs of all the resources used by a patient as she or he traverses the system. That means tracking the sequence and duration of clinical and administrative processes used by individual patients—something that most hospital information systems today are unable to do. This deficiency can be addressed; technology advances can greatly improve providers’ ability to track the type and amount of resources used by individual patients. In its initial implementation, such a costing system may appear complex. But the complexity arises not from the methodology but from today’s idiosyncratic delivery system, with its poorly documented processes for treating patients with particular conditions and its inability to map asset and expense categories to patient processes. As healthcare providers begin to reorganize into units focused on conditions, standardise their protocols and treatment processes, and improve their informations systems, the process will become much simpler.

Outcome of accurate costing

Costs and outcomes is the single most powerful lever we have today for transforming the economics of healthcare. As healthcare leaders obtain more accurate and appropriate costing numbers, they can make bold and politically difficult decisions to lower costs while sustaining or improving outcomes. Dr. Jens Deerberg-Wittram, a senior executive at Schön Klinik said, “A good costing system tells you which areas are worth addressing and gives you confidence to have the difficult discussions with medical professionals.” As providers and payors better understand costs, they will see numerous opportunities to achieve a true “bending of the cost curve” from within the system, not in response to top-down mandates.

Recent studies reveal, that inadequate, unnecessary, uncoordinated, and inefficient care and suboptimal business processes waste up at least 35% to 50% of the national expenditure on health care. The main areas of waste are as follows:

  1. Production (5% of total) – Unit of Care (Dugs, Labs, X-rays and Nursing hours)
  2. Case-Level (50% of total) – Suboptimal use of resources such as redundant and or duplicate tests
  3. Population level (45% of total) – Unnecessary or preventible costs such as end of life support, elective procedures and visits to specialised centres – avoidable by timely outpatient care.

Accurate costing also unlocks a whole cascade of opportunities, such as process improvement, better organisation of care, and new reimbursement approaches that will accelerate the pace of innovation and value creation.

Specific initiatives on Bundled Capitation (Population Based Payments System with Quality Metrics and Risk Sharing), Integrated Practice Units (operating under Integrated Care System), Development of Community engagement and support programs, Prevention and educational programs, Supplies costs rationing and tendering, control over duplicate clinical tests when originals are either lost or misplaced and temporary staff labour costs are a few examples to improve the overall performance.

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