For years, my question to hospital system executives has been: “Do you guys do cost accounting?” It is usually met by blank looks, shoulder shrugs and indefinite responses.
The question was an obvious one since the pattern of chaotic pricing surfaced because of he demand for price transparency inherent in consumer-driven health plans. How could the same procedure vary by 200% to 400% within a region – or incredibly, even within a hospital system?
In one such system in southeastern Wisconsin, a consumer can pay $23,000 all-in for a hip replacement at one of its hospitals or $43,000 at another. Costs shouldn’t vary that widely, so why would prices? While medical outcomes can be brilliant, as in the case of my ceramic-coated, titanium hip joint that allows me do ski long distances, the economics of health care constitute chaos.
An obvious conclusion is the huge, complicated, sprawling health systems have little visibility on their cost structures. One health care CEO adamantly told me that medical procedures and treatments are too complex to be measured for cost.
Enter two distinguished Harvard Business school professors who make the case that accurate cost accounting can be accomplished and that better costing is essential to taming the hyperinflation in health care (up 7-9% this year). They propound a method called Time-Driven Activity Based Cost Accounting (TDABC), a tried and true approach in the manufacturing world. .
Michael Porter and Robert Kaplan believe health care should be reformed from the inside out through better management, while their colleague at Harvard, Regina Herzlinger, is the nation’s leading voice for reform driven from without, by pressure from an army of consumers and market forces. A fourth Harvard professor, Clayton Christianson, sees the solution to the economic chaos, in disruptive innovation.
It’s quite an intellectual tussle, one that yields fat consulting and speech fees for all four. There’s a slowly emerging market for health care, but there’s a boom market for people who have ideas about an economic cure.
That such a market still exists after the passage of ObamaCare demonstrates that there is little hope for significant change on the cost side under the new law. The reverse, heightened inflation, is more likely.
Kaplan and Porter pierce through the conventional wisdoms of the status quo on prices and costing:
• They contend there is no linkage between charges (prices or reimbursements) and the underlying costs.
• They refute the lame excuse that medial overheads are too complex to be calculated and show specific TDABC models of how to do it. Further, they successfully tested and demonstrated their model at two actual sites.
• They maintain that most health care costs are not fixed, that they are variable and therefore can be controlled.
Their thesis could be as profound as the introduction of lean disciplines into health care. Indeed, the two levers for internal transformation need each other. Good measurements are essential to lean improvements.
My quarrel with Kaplan and Porter, beyond their omission of lean disciplines, is their blind eye to consumer and market forces in fashioning a pragmatic solution to taming the beast. Vendors jump higher to deliver value when customers demand value — quality, competitive prices and high levels of service. Hertzlinger has that part right. Big corporations in health care won’t move fast enough unless pushed hard by customers.
Proof? The inflation for medical care is projected at 7% at lest in 2012.
The biggest nugget in the Porter-Kaplan thinking is the realization that accurate costing can lead to a total revamp of the pricing system in health care. It’s a mess, engendered by how the government pays for Medicare, procedure by procedure. Volume, not quality, is rewarded. Only bundled pricing over an episode of care can solve that fatally flawed pricing approach. Manufacturing got rid of piece rates decades ago.
‘ Private payers should insist that providers use TDABL accounting to offer bundled prices. We can’t wait for government payers to get there.
Moreover, a few enlightened providers are already offering attractive bundled prices for some procedures. What Kaplan and Porter propose is already being done in the real world.