According to the federal Agency for Healthcare Research and Quality (AHRQ), inpatient hospital costs account for nearly 30% of healthcare spending in the United States and are increasing by about 2% per year over inflation. This cost issue is a focus of the Affordable Care Act, which is accelerating the move away from fee-for-service to a single, diagnosis-related comprehensive payment, similar to Medicare reimbursement. Such payment systems punish unnecessary testing, prolonged hospitalization, and readmissions. It also potentially rewards good outcomes and efficient care. A logical conclusion from this circumstance is that in order for hospitals to make money, they, like all other businesses, have to have an accurate knowledge of what the goods and services they provide actually cost. But, defying logic, hospitals are quite aware of what insurers will pay them, yet are clueless as to any relationship between this reimbursement and their costs.
The leadership at the University of Utah Health Care was not satisfied with this paradox and are addressing the problem in a 21st century manner, applying big-data computer analysis to a complex problem. They have developed a continually evolving computer program with 200 million rows of specific costs for every drug, medical device, physician and staff time, operating room time, supplies, radiographic imaging and laboratory test. The software also tracks length of stay and readmission rates allowing comparison of each staff physicians’ cost and outcomes in a particular department.
Armed with knowledge, the University has finally decreased costs by 0.5% the past few years, an unheard of result, bending the cost curve.
20%-50% of lab tests ordered where found unnecessary and subsequently, testing protocols were modified. Moreover, aside from cost savings, new quality assurance protocols were identified, implemented and tracked resulting in better patient outcomes.
This pioneering work has not gone unnoticed. Pilot programs predicated on the Utah experience are being implemented at the Mayo Clinic and M.D. Anderson Cancer Center. It is mind-boggling to me how such a simple business concept such as cost-based pricing has eluded, until now, providers of almost a third of healthcare cost. But a journey of a thousand miles begins with a single step in the right direction. Let the trip begin.
By Norman Silverman, MD, with Ryan McKennon, DO and Ren Carlton