Missing link in medical pricing: cost accounting

Suspicions confirmed. Cost accounting is a foreign concept in most big health care corporations.

You have to suspect that is so, because prices vary wildly. A knee replacement can vary in a regional market from $19,377 to $47,504. It’s pricing chaos.

Eric Bricker, a former primary care doctor, a former financial analyst for hospitals, and now chief medical officer for Compass, a patient advocacy firm, conceded that big hospital systems use a variety of pricing strategies, but they are not based on costs.

In most industries, there is a close connection between costs and prices. But that takes an accurate assessment of costs, which is accomplished through an old discipline called cost accounting.

We payers are told by hospital executives that medical services are “too complicated” to analyze for costing purposes.

In a word: nonsense.

A couple of professional cost accountants could figure out in a week how to spread hospital overhead costs to come up, say, with an all-in price for a normal vaginal delivery. Not to say such deliveries are uncomplicated or easy. But the accounting would be relatively easy.

Wouldn’t you like to get a bundled bill for, say, $7000 for a normal birth, rather than an incomprehensible set of bills from different providers with dozens of line items?

Dr. Bricker’s firm is shining a bright light on those prices, and he is doing the nation a great service in the process. The nation can’t stand the health care inflation that results, in part, from foggy pricing.

“By and large, no, they don’t know what their costs are,” said Bricker.

He said there is “a lot of conversation going on” in the circles of financial officers of health care companies about the need for cost accounting.

The emerging marketplace for health care, generated by as many as 50 million consumers on high-deductible plans, will demand bundled prices. That means CFOs need to move past the discussion stage on cost accounting.

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