1 ADVANCE for Executive Insight

cover STORY
Hospitals and other providers need to quantify and
understand the way costs are incurred for patient
care and be aware of alternatives.
COST TRANSPARENCY
Much of the rapid escalation in healthcare costs
can be attributed to providers’ lack of awareness
as to the real costs of delivering patient care. To
stay competitive, healthcare organizations need
to streamline inefficient processes and fully understand
resource requirements. Ultimately,
the value proposition should maximize patient
outcomes at the least cost. This goes way beyond
having an accurate cost accounting system,
although that is important. Cost transparency
can be improved through proven techniques, including
Activity Based Management (ABM) and
Comparative Cost Effectiveness (CCE).
Activity Based Management (ABM)
ABM is an approach to cost management used
across industries that aims to maximize valueadd
activities while minimizing or eliminating
non value-add activities. For healthcare, this
means analyzing activities and related costs to
ensure they contribute to quality patient care
while eliminating or reducing non-supportive,
unproductive costs. Instead of focusing on broad
expense categories (i.e., what is spent), the focus
is on activities that take place (i.e., what is done).
ABM can be deployed in both administrative
and clinical departments to identify where costs
are excessive, ineffective or not well understood.
Adoption of ABM in healthcare has been
hindered by a general lack of understanding of
the benefits along with misperceptions that it
is more expensive and complex to deploy. Certainly
it is more difficult to apply in the healthcare
world, where patient care considerations
generally trump cost considerations. However,
the value of being able to better manage financial
results far outweighs the effort of deployment.
Comparative Cost Effectiveness (CCE)
CCE is a cost evaluation technique that focuses
on existing alternatives for care delivery. CCE
is often used with episode of care costing, particularly
with regard to the choice of clinical
treatment plans for the more costly diagnoses/
treatments/procedures. This approach fully considers
the combined cost of care (including pharmaceuticals,
devices, technology, physicians and
hospital costs), and compares it to the outcomes
achieved during the entire episode of patient
care. As we face a future with bundled payments
that will force us to look more deeply at costs as
a function of cross-continuum care coordination,
this kind of approach is becoming critical.
Hospitals and other providers need to quantify
and understand the way costs are incurred for
patient care and be aware of alternatives. CCE
is a complex process requiring systems to generate
the right analytical data as well as qualified
personnel who can consolidate and interpret the
data. Most healthcare providers are not set up
to gather this data and manufacturers have been
reluctant to provide such information.
Studies have shown that the most expensive
alternatives do not necessarily provide the best
clinical outcomes. Managed care companies are
very focused on this reality. Interestingly, parts of
Europe have been incorporating this analysis into
their healthcare organizations for many years and
consider it a major component of limiting healthcare
spending; it has been accepted and embraced
as a necessity. That contrasts to the U.S.,
where the medical community here has not been
as supportive of including cost considerations in
clinical decisions. Certainly medical device and
pharmaceutical manufacturers are not wholly
supportive — much of their focus is on preserving
their own income. CCE focusing on episodes
of care is needed to balance improved bottom
line performance with the best clinical outcomes.
LABOR MANAGEMENT
Any discussion of cost containment in healthcare
has to include the cost of labor. Labor costs
are over 50% of revenues in most not-for-profit
hospitals and are regularly over 80% of medical
practice costs. Yet, for-profit hospital systems
report labor cost averages of as low as 40% of
revenues. Simple math reveals that a provider
with $100 million of revenue would experience
bottom line improvement of $1 million for every
1% improvement in this ratio. As described earlier,
accountability and activity-based management
are key components of controlling labor
costs. How is this done on a tactical level? Here
16 ADVANCE for Executive Insight