Can cost accounting save health care?

In the September 2011 issue of Harvard Business Review, Harvard Business School professors Robert Kaplan and Michael Porter argue that a better understanding of the actual cost of care patient-by-patient can have a dramatic impact in the effort to control health care costs. They maintain that actual costs are poorly understood, that there is a mistaken belief that many costs are too complex to allocate accurately, and that there has been an unwillingness to take the time to break down the costs of the individual components of the cycle of care.

A simplified overview of their solution is that creating more detailed “patient process maps” and more accurate measurements of the time and cost of each step of that process can create a detailed picture of the total cost of a patient’s cycle of care. With this information, waste can be identified, efficiency improved, and costs controlled. We agree with this though it does not capture the complete picture.

The article makes many excellent points including pointing out the confusion between what a given procedure costs, its reimbursement rate, and its actual cost. Their dissection of the process of knee replacement due to severe osteoarthritis is complete and insightful. It also represents one of the easier problems to solve because of its routinized nature.

However we believe that Kaplan and Porter miss three important points that are critical to meeting this challenge:

1. They make the common argument that better early detection and diagnosis help patients avoid more expensive treatments required if their conditions advance. This is true. What is not true is that this automatically reduces costs. Healthier patients are likely to live longer and may cost the system more over time. We are emphatically not suggesting that the system should have a goal of shortening people’s lives; long lives, however, will entail more care – and more costs – as patients age;

2. The second mistake is to treat the health care system as a seamlessly integrated network where each step of a patient’s cycle of care can be evaluated, costed, and controlled. This may be possible with unified systems where all aspects of the patient experience happen under the auspices of a single organization. This is not the case for most patients. One typical cancer patient we know in Boston had a surgeon at one hospital, an oncologist from another, and a radiologist from a third. Although these three institutions are linked, the patient received separate bills from each. While unified in concept and using interoperable electronic medical records, the institutions function separately in many ways. The patient also worked with an primary care doctor, an acupuncturist, a pharmacy, and other providers who may or may not be willing or able to share the information necessary to create a unified view of a patient’s care cycle;

3. The third issue, almost the inverse of #2, is that Kaplan and Porter apply a linear approach to solving a systems problem. They have a seven-step process which seeks to reduce costs by gaining an ever-more-detailed look at each of the pieces in the process. Systems thinking, however, has shown that it is the relationships between components that are most important for understanding and changing system behavior. For example, the authors do an excellent job of showing how to deliver more value-per-dollar-spent for “sick care” but not how to transform the system to one that is focused on health. As one of the people we interviewed for our recent book told us, the system is great at knee replacement but not at helping patients avoid the need for knee replacement. Ultimately, helping a patient preserve the function of their original knees will give them more value, and save more costs, than even the most efficient knee replacement process. Yet the system is full of incentives that promote joint replacement rather than joint retention.

We applaud Kaplan and Porter’s efforts to bring a more coherent approach to the challenges of costs in health care. Their prescription can be useful for delivering more value when “sick care” is required and for self-contained care cycles. However it is only part of the solution to the broader issues that underlie the continued rise in health care costs. That will requiring the paradigm of the system – and renegotiating everyone’s role in it – toward the promotion of health.

Barry C. Dorn is a retired orthopedic surgeon and co-director of the Program on Health Care Negotiation and Conflict Resolution at the Harvard School of Public Health. Eric J. McNulty is Senior Editorial Assoicate in the the Program on Health Care Negotiation and Conflict Resolution at the Harvard School of Public Health. They are, along with Leonard Marcus PhD, co-authors of Renegotiating Health Care: Resolving Conflict to Build Collaboration (Jossey-Bass, 2011).

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  • http://twitter.com/drvijay82 Dr Vijay Kumar

    Well, aside from activity based costing and preventive health care, the real question is; do patients want health or healthcare?

    A society who wants/demands health
    A society who wants/demands healthcare
    A society ignorant of either

  • Anonymous

    And fourthly the bulk of medical expense is fixed.  Unless highly preventive there will be need for the same amount of providers in a system.  The latter represents 60% of the cost or more.  If one revenue stream is interrupted another will have to be found to support a health institution especially hospitals.  Since the prevention is an add on requiring more human effort it increases costs as alluded to in this article.

  • http://twitter.com/dhandelsman Dave Handelsman

    Addressing health care “cost” is really about far more than just the cost of procedures, hospital stays and more, and this article does a good job of summarizing not only the original Kaplan/Porter article, but also several additional and critical points that must be considered.

    In particular, I think the fractured nature of the health care system is a huge impediment to “bending the cost curve”.   The average new cancer patient sees 18 *different* practitioners during their first year of treatment.   As a patient, you can theoretically measure the out-of-pocket expense, and the insurer can measure their out-of-pocket expense, but it’s virtually impossible to assess the total provider cost of care in this situation.   And if you can’t assess that total cost, you can’t measure if it’s being reduced.

    As noted by Jason Burke in this article http://blogs.sas.com/content/hls/2011/09/14/activity-based-costing-as-a-cure-all-for-health-care/, there is much work to be done regarding how best to integrate cost and value, and incentives and behaviors, so that health care can be “cured”.   It is a daunting problem regardless of where you are in the healthcare ecosystem — consumer, health care professional, health care organization, government, etc., but one that must be addressed.