Counting the cost – a medic’s take on healthcare finance

When the September 2011 issue of the Harvard Business Review landed on my doormat earlier this month, I was excited to see that Robert S Kaplan and Michael E Porter  – both internationally renowned Professors at Harvard Business School – had written an article on ‘How to Solve the Cost Crisis in Health Care’.  After all, Kaplan and Norton’s The Balanced Scorecard: Measures That Drive Performance  and Porter’s Five Forces of Competitive Strategy  had been permanently imprinted on my impressionable medical brain by the time I had completed my MBA. But I’ve been left disappointed by their rather simplistic and, dare I say, poorly researched approach to the growing problem of containing healthcare costs. This is why.

Kaplan and Porter have looked primarily at the US healthcare system which, despite spending approximately 17% of the country’s GDP, doesn’t have the population health outcomes to match. The authors’ main contention is that, in the US, providers don’t really know how much it costs them to provide healthcare services. Instead, they often allocate costs to procedures, services and departments based not on the actual resources spent but on how much they are reimbursed by insurers and the government. Therefore, reimbursement is used as a proxy for cost. This is absurd, given that ‘reimbursement itself is based on arbitrary and inaccurate assumptions about the intensity of care’! So Kaplan and Porter are right in stating that in the US ‘we are measuring the wrong things the wrong way’and describe the importance of measuring value-for-money, with value = patient outcomes achieved / money spent. Surely, anyone with a passing interest in systems thinking and health economics already knows that. And it most certainly isn’t a concept that clinicians will find hard to understand. Their actions may contribute to some of the waste on the frontline but they are also in the best position to identify such waste on a regular basis.

Having dealt with the importance of value-for-money, the authors then devote the rest of the article to accurate costing of the full cycle of an individual patient’s care. It is true that calculating tariffs or reimbursements on the basis of average costs of a medical intervention penalises tertiary referral centres that typically undertake more complex interventions. This argument has been put forth recently by the Shelford Group – a powerful and influential group of hospital CEOs in the English NHS. So it makes sense to capture costs, as accurately as possible, at a granular patient level and include all relevant resources in the equation i.e. staff pay, equipment, drugs, diagnostic tests, heating, lighting etc. Kaplan and Porter call this TDABC – Time Driven Activity Based Costing. They assert that this method helps to identify waste and inefficiencies at the individual patient level and gives managers the confidence to have difficult conversations with medical professionals. So far, so good. But to describe their suggestion of costing at patient level as ‘The Big Idea’ in healthcare is somewhat disingenuous. And curiously, they make no reference to NHS financing systems.

Across the pond from Massachusetts, the NHS is already in the process of implementing Patient Level Information and Costing Systems (PLICS) and the Health Service Journal has reported how this could drive clinical engagement in service improvement. Try telling a doctor that a percutaneous biopsy of the pancreas sits within the same Healthcare Resource Group (HRG) as a laparoscopic ultrasound examination of the pancreas and watch their eyes glaze over. ‘Whatever!’ you hear them mutter. But show them the costs of every single clinical decision they have taken on a given patient – from ordering an unnecessary X-ray to prescribing a more expensive anti-vomiting drug – and watch them sit up with interest. More so when they wish to compare the cost of their own actions with that of their fellow medics. It might also change prescribing behaviour and improve quality of care e.g. demonstrating the hospital cost of treating deep vein thrombosis which might have been prevented by prescribing an anti-clotting injection to a high-risk patient. Rightly or wrongly, medical school trains doctors to look at individual patients, not systems. Hence, medics engage best when they can relate healthcare costs to individual patients because they are trained to make improvements at that level. And if you want evidence of such behaviour, this study in the Archives of Surgery describes a reduction in unnecessary blood tests by giving doctors information about the cost of these tests. After all, many of them shop on Amazon and so know what the trolley will add up to at checkout.

But collecting and coding accurate costs at patient level along the entire pathway of care is not easy. As described by the recent Audit Commission report, data quality and completeness is often the issue as are the disparate information systems that collect the data but often lack interoperability. These are all major barriers to PLICS and if we were to follow Kaplan and Porter’s activity based costing system for each patient, we’d have to employ an army of accountants and information analysts. That’s why the NHS uses Reference Costs – these are the average cost to the NHS of providing a defined service in a given financial year. NHS providers are mandated to collect and provide annual reference cost data to the Department of Health. Reference Costs have been collected annually since 1998 and are used to underpin the Payment by Results national tariff, programme budgeting analysis and are also used by the NHS to performance manage and benchmark their services. Could the US learn from this?

More intriguingly, although Kaplan and Porter assert the importance of measuring patient outcomes to determine value-for-money, they refer to outcome measures only in passing. What about Patient Reported Outcome Measures (PROMs) or Commissioning for Quality and Innovation (CQUIN) or the Quality, Innovation, Productivity, Prevention (QIPP) initiatives of the NHS? And, surely, when they say ‘introduce value-based reimbursements that reward providers who deliver the best overall care at the lowest cost and who minimise complications rather than create them’, they are referring to NHS Best Practice Tariffs?

The authors conclude that ‘accurate measurement of cost and outcomes is the hidden secret for solving the healthcare cost crisis’. Hidden secret? Really?! I thought the NHS, with 1.4 million employees, was the world’s seventh largest employer and was undergoing large-scale reform ‘so big that it can be seen from space’. Guess it’s well hidden from across the Atlantic.


About Suparna @ e3

Suparna is a hospital doctor and director/co-founder of e3 intelligence Ltd, providing clinical oversight and a frontline perspective - more info here


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