According to the recent HIMSS Provider Survey, reducing cost has become the No. 1 priority for hospitals.

A few weeks ago I was sitting in a conference room with the senior executive team from one of the top academic medical centers in the country.  The Chief Information Officer introduced my team to his team by saying, “OK everyone, let me make this simple. Pay attention. Cost accounting is sexy.”

Now, that’s four words most folks in healthcare would never expect to hear.  Yet, an hour later, it was clear that everyone, from physicians to finance, agreed.

Why were they so enthusiastic about something so seemingly mundane?  Well, it turns out, it’s anything but.

For context, it is worth reading the recent Harvard Business Review article, “The Strategy That Will Fix Health Care,” by Michael Porter and Thomas Lee.  They stated it perfectly when they wrote, “For a field in which high cost is an overarching problem, the absence of accurate cost information in healthcare is nothing short of astounding.”  They went on to state that when it comes to cost, providers are “flying blind.”

To go one step deeper, it’s helpful to let the numbers tell the story.  Here are four data points from four pretty reputable places:

  • The Centers for Medicare & Medicaid projects a total healthcare spend in the U.S. of $3 trillion this year, $4 trillion in five years and $5 trillion within 10 years
  • The Institute of Medicine estimates that one-third of that spend is wasted
  • The Commonwealth Fund’s updated analysis comparing healthcare in “wealthy” nations placed the U.S., once again, first in cost — with a cost per capita nearly two times any other nation — and last in outcomes
  • The American Hospital Association recently announced that hospital margins are now down to nearly two percent and one-third of hospitals operate in the red

Coupled with the shift to reimbursement structures where providers won’t be paid for volume, it is clear that better understanding and aggressively managing costs is now a requirement for healthcare providers.  According to the recentHIMSS Provider Survey, reducing cost has become the No. 1 priority for hospitals.

Unfortunately, there is a gap, which brings us to a second set of numbers:

  • Health Affairs Study revealed that only 20 percent of orthopedic surgeons can accurately estimate the cost of common implantables within 20 percent of the actual cost. Yet 80 percent of the surveyed surgeons would incorporate cost information into their decisions if they had it.
  • A study published in JAMA revealed that when physicians were presented with cost information, they drove down lab costs by 25 percent
  • Research that we conducted here at Strata Decision Technology showed that less than 10 percent of hospitals have an advanced cost accounting application that can 1) run costing in minutes vs. days, 2) provider costing for both inpatient and outpatient settings and 3) integrate with EHRs and EDWs so that organizations can look at clinical and financial outcomes together.

This lack of accurate, reliable cost data  is an enormous risk to the long-term viability of hospitals and health systems. Most hospitals don’t even know if they are making or losing money on service lines or episodes of care.  Archaic costing systems are a black hole.  The data isn’t accessible, actionable or accurate.

To fill this cost void, hospitals will require applications that provide better access (data liquidity) to accurate cost data (data integrity) and the ability to drill into that data at a deeper, more actionable level (data density). The end game will be to leverage that cost data to make better, more informed decisions that can have a positive impact on the bottom line, from both a clinical and financial perspective.

The good news is that a number of healthcare delivery systems have stepped ahead, implementing more advanced cost accounting and financial decision support systems allowing them to fill the cost void and take action:

  • Mission Health, a six-hospital system in North Carolina, needed access to accurate cost data to fulfill the requirements of newly-passed state legislation regarding healthcare price transparency. With their legacy cost accounting solution it took 720 minutes to run cost reporting, rendering the data useless.  After implementing a more advanced solution, they can now run costing in 10 minutes (a 99 percent increase in efficiency).  The increase in accessibility provided the ability to price more accurately as they now can review and analyze their true costs and margins, something they couldn’t do before.
  • Children’s Healthcare of Atlanta used cost accounting to look deeper at costs for supplies and implants. They found that their organization’s costs for supplies and implants were inaccurate by as much as 20-30 percent. Leveraging Activity-Based Costing to link traditional overhead costs more directly with patient care and cleared up misperceptions of both cost and value.
  • CentraCare is a five-hospital system in Minnesota, used advanced costing algorithms to identify over $11 million in savings by evaluating the cost of variation, harm and waste in a number of their most common service lines.
  • Parrish Medical Center, a 210-bed acute care hospital in Florida, leveraged cost accounting and decision support as part of its organization-wide initiative to achieve Medicare break-even for several service lines.  They analyzed service lines on a monthly basis to identify which DRG’s were driving cost, identified root causes of cost, benchmark physicians and created population profiles to further control costs across the continuum of care. They also conducted high cost audit reports to identify larger cost trends and to determine which patients were incurring the highest costs and flagged unusually high cost charges that required additional review.  The end result of the overall initiative has been millions of dollars in savings, with several service lines moving from a loss to a positive margin while providing safe, high quality care.   This would not have been possible without knowing their cost.

Once cost data becomes liquid, the opportunity will be huge.  An interesting example of the art of the possible is India’s Narayana Health.  Dr. Ashutosh Raghuvanshi, Narayana’s Chief Executive Officer, tells a thought provoking story of how they are delivering open heart surgery with the same or better quality for less than 10 percent the cost of the U.S.  Their innovative model, featured in the Wall Street Journal and in the Harvard Business Review, has emerged as a global industry standard for low cost, high quality care.

While some may choose to dismiss this by saying “we’re different,” the point is that, whether it is Narayana with low-cost high-quality open heart surgery, or Walgreens with low-cost high-quality chronic care, or Theranos with low-cost high-quality laboratory testing, innovation is happening in healthcare delivery and cost disruption is coming fast.

While all stakeholders would agree that high-quality safe patient care must always need to be the first priority, they are also starting to realize that it can’t be done well if we continue to turn a blind eye to the cost of care.  In that light, when it comes to getting our collective heads and our hands around cost, the opportunity to do well by doing well is huge.

And that’s why cost is the new cool and “cost accounting is sexy”.

Written By Dan Michelson, Chief Executive Officer of Strata Decision Technology

October 21, 2014
Written by Dan Michelson