Costing in value based health and care system

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By Knowledge Hub

Michael Porter said, “The biggest problem with health care isn’t with insurers 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 to improve resource utilisation, 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 complete cycle of care—and compares those costs to outcomes. as providers and payors better understand costs, they will be positioned to achieve an actual waste reduction from within the system, not based on top-down mandates.

“Value” generation in healthcare?

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

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

Confusion on what cost means?

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

We must abandon the idea that charges billed or reimbursements paid in the 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. Existing costing systems, which measure the costs of individual departments, services, or support activities, often encourage shifting costs from one type of service or provider to another or the payor or consumer. The micro-management of the expenses at the individual, organisational unit level does little to reduce total cost or improve Value—and may, in fact, destroy Value by decreasing the effectiveness of care and driving up administrative costs.

What should be done for accurate costing?

At a fundamental level, any accurate costing system must account for the total costs of all the resources a patient uses as they traverse 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 cannot do. This deficiency can be addressed; technological advances can significantly improve providers’ ability to track the type and amount of resources individual patients use. In its initial implementation, such a costing system may appear complex. However, 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 reorganising into units focused on conditions, standardising their protocols and treatment processes, and improving their information systems, the process will become much more straightforward.

The outcome of accurate costing

Costs and outcomes are the most powerful lever for transforming healthcare economics today. 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 the confidence to have difficult discussions with medical professionals.” As providers and payors better understand costs, they will see numerous opportunities to properly “bend 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 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): Timely outpatient care can avoid unnecessary or preventable costs such as end-of-life support, elective procedures, and visits to specialised centres.

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

Specific initiatives on Bundled Capitation (Population-Based Payments System with Quality Metrics and Risk Sharing), Integrated Practice Units (operating under an 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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