The real cost of health care
Why has the cost of health care risen so dramatically? In his work on redefining health care, Michael Porter has identified one of the fundamental drivers of escalating costs: We have no system for measuring value. Providers don’t know how much it costs to deliver patient care, or how those costs relate to patient outcomes. In fact, participants in the health care system don’t even agree on what they mean by “costs.”
By better understanding costs, providers and payers will be able to achieve a true “bending of the cost curve” from within the system. There are numerous cost reduction opportunities that do not require outcome tradeoffs, but will actually improve outcomes, ranging from over-provision of low-value adding services or tests, to redundant administrative and scheduling units, to lack of cost awareness in clinical teams.
Principles of Measuring the Cost of Care
- Cost is the actual expense of patient care, not the charges billed or collected
- Cost should be measured around the patient
- Cost should be aggregated over the full cycle of care for the patient’s medical condition, not for departments, services, or line items
- Cost depends on the actual use of resources involved in a patient’s care process (personnel, facilities, supplies):
• The time devoted to each patient by these resources
• The capacity cost of each resource
• The support costs required for each patient-facing resource
Time-Driven Activity-Based Costing
Time-Driven Activity-Based Costing (TDABC) is useful tool for creating successful strategies in health care as well as many other industries. Effective TDABC requires mapping each step in the value-chain process.
The Value-Based Health Care Delivery (VBHCD) initiative at Harvard Business School helps provider sites implement TDABC to measure costs over the full care cycle, and then identify cost savings while maintaining quality of care.