Abstract
In 2009, the US government slashed Medicare reimbursements pushing over two-thirds of health care providers into losses. Medicare reimbursements are expected to increase in the future albeit more slowly than the rise in the cost of providing quality health care. The challenge for BSA is to be able to align its costs in a way that they are able to deliver quality health care at a much lower cost. The key is to measure both the cost and the outcomes of the health care. There is need to establish an accurate system of measuring costs, as well as to reduce the variability in the medical procedures.
Background
The United States spends more on health care than any other nation in the world. In 2009, the United States spent $2.5 trillion on health care equivalent to 17.4% of the gross domestic product as compared to Netherlands, the next closest nation that spent 12% of her gross domestic product on health care (National Coalition on Health Care, 2012). While the US spends significantly higher on health care than it OECD counterparts, the outcomes are not significantly better. For instance, the average life expectancy in the US is below the OECD average and ranks 27th out of 34 developed nations (National Coalition on Health Care, 2012). The problem is that the current system of reimbursement is disconnected from the actual costs and outcomes (Kaplan and Porter, 2011). This result in cross subsidization of health care services with some services being highly reimbursed while others are reimbursed at a price that is far below than their actual cost. Consequently, there is an over provision of those services that attract high reimbursement and low supply of those services that are poorly reimbursed (Kaplan and Porter, 2011). There is widespread consensus that the US government is overspending on health care without significant improvement in the quality of health care. The government in turn is responding by cutting the reimbursements to health care providers with a view of incentivizing health care providers to provide quality health care as measured by the outcomes.
In 2009, the not-for-profit community hospitals claimed that US government underpaid them a collective $8.2 billion pushing two-thirds of the 1,739 hospitals into losses (Carlson, 2012). The one-third of the hospitals that managed to post a profit recorded a median Medicare profit margin of 5.54% (Carlson, 2012). The American Hospital Association estimated that hospitals received 90 cents on the dollar in Medicare reimbursements. Meaning that on average, hospitals lost money to Medicare patients (Carlson, 2012). Some hospitals are viewing the reduction in reimbursement rates as a challenge to make their process more efficient and thus be able to deliver health care to its patients at a lower cost than the Medicare reimbursement rates.
Baptist St. Anthony (BSA) was one of the hospitals that posted Medicare losses in 2009. BSA posted an operating loss of 9.65% for Medicare patients for the 2009 financial year (Carlson, 2012). BSA operating loss is about twice the median profit margin. This means that BSA would have to cut its costs by almost twice the median profit margin just to break even (Carlson, 2012). Going forward, Medicare reimbursements are likely to decline squeezing margins even further, as the government tries to incentivize value in health care. However, the proportion of Medicare patients is likely to grow as the demographics and the regulatory framework changes (Carlson, 2012). This presents a challenge to BSA and other hospitals to reduce their operating costs while simultaneously improving the quality of health care they provide to their patients if they are to be profitable in the face of declining Medicare reimbursements.
Issues Facing BSA
BSA is facing Medicare losses as they receive less in reimbursement than it costs to provide health care. BSA cannot hope to become profitable by increasing revenue. Rather, profitability will result from rationalizing operating expenses. In order for the cost rationalization to be successful, BSA will have to address the following issues:
Understand the value in health care
BSA can measure the value in heath care in terms of patient outcomes for every dollar spent as opposed to measuring the number of services or the volume of service provided. For instance, a longer stay in hospital or a more expensive procedure does not necessarily translate into better health outcomes. The failure to compare both cost and outcomes leads BSA to be unable to manage value in health care properly. Kaplan and Porter (2011) argue that measured costs and outcomes must consider the entire cycle of care for a patient specific medical condition. For instance, the cost of treating a diabetes patient must include not just the cost of endocrinological care but also the cost of treating associated conditions such as vascular disease, retina disease, and renal disease (Kaplan and Porter, 2011). On the other hand, the health outcomes can be measured using multiple dimensions such as duration of care, survival, and complications (Kaplan and Porter, 2011).
BSA failure to understand the value in health care gives it an incentive to perform highly reimbursed and expensive procedures, instead of focusing on providing quality health care to its patients. Like most providers, BSA has hitherto focused on the health outcomes without giving an equal focus the cost associated with delivering the health care. Consequently, BSA incurred more costs on providing health care than they received in Medicare reimbursement in 2009. Kaplan and Porter (2011) argue that better health outcomes often lead to lower costs. For instance, early detection of disease often results in less complicated and cheaper health care later (Kaplan and Porter, 2011). BSA must implement systems that capture the cost of providing the health care over the entire cycle instead of focusing on the cost per visit.
Measurement of cost
BSA finds measurement of cost challenging because of the complexities in providing health care. For instance, a patient requires different resources such as doctors, equipment, personnel, supplies, and space each with different costs and capabilities (Kaplan and Porter, 2011). Patients also take different paths even when they are suffering from the same medical condition. BSA current costing system of using departments, support activities, or services as costs centers encourages the various cost centers to shift cost from one cost center to another while increasing the overall cost of health care. BSA lack of an accurate costing system makes it difficult for BSA to measure the cost of providing health care to a patient as they move through the system.
Variability in medical procedures
BSA experiences wide variation in the tools, processes, equipment, and materials used by physicians in treating patients with the same medical condition. For instance, in a knee-replacement operation, different physicians may use different implants, surgical kits, and supplies thereby resulting in significant cost variations for the same procedure (Kaplan and Porter, 2011). The variability of medical procedures makes it difficult for BSA to identify which line-services are inefficient and contributing to the hospital operating losses.
Questions and Answers
How does BSA improve the value of health care it delivers to its patients?
The government is incentivizing the delivery of quality health care at a much lower cost. BSA should be able to provide the same level of health care at a lower cost, or better health care but at the same cost. For instance, BSA can reduce the length of hospital stay and thereby lower the cost of the treatment and reduce the patients exposure to hospital acquired infections and medical errors (Carlson, 2011). BSA can increase the value of health care it provides to its patients by optimizing the costs and the outcomes of the medical procedures.
How does BSA accurately measure cost?
BSA can accurately measure cost by implementing a costing system that is able to capture the cost of providing health care to patient as they move through the health care system. Kaplan and Porter (2011) recommend the use of a time-driven activity based costing (TDABC) system to assign costs to each resource or activity. For instance, the TDABC system can be used to calculate the cost of attending to an outpatient who uses three resources, an administrator (for registration), a nurse, and a doctor. Assuming that the patient consumes 20 minutes in registration, 15 minutes with the nurse for preliminary examination, and 10 minutes with the doctor, further assume that the cost per hour for an administrator, nurse, and doctor are $55, $100, and $300 respectively, the total cost for attending to such a patient can be calculated as follows:
Using the TDABC indicates that the cost of serving this patient is $93.33. TDBAC would help BSA to better capture cost of the outpatient visit. In addition it would give insights as to what processes can be simplified or shortened. In this case, there is more room for savings by reducing the time a patient spends with a doctor. BSA can rationalize costs in this case by making sure that the nurse conducts most of the preliminary tests and collects as much information from the patient as possible. Thereby reducing the time the doctor takes with the patient.
How does BSA reduce variability in medical procedures?
BSA can reduce the variability in medical procedures by standardizing the medical procedures through techniques such as lean and six-sigma variability techniques. In addition, BSA should develop process maps for each procedure. Going back to the earlier example, a process map for an outpatient process may be as follows:
20 min 15 min 10 min
Process maps would help eliminate most of the variations in medical procedures and provide opportunities for cost cutting. Patients can use electronic handheld RFID devices to track the amount of time they spend on each process. The process map would also help BSA to identify non-value adding process and thereby eliminate them. In addition, the process map would make it easy for BSA to benchmark with other hospitals both in the US and abroad. The process maps would help BSA to determine how much of the cost variation is attributable to variations in procedures, supplies, and productivity.
Once BSA gathers this data, it can use statistical tools to analyze data and take note of any significant variations from the standard. In particular, the use of six-sigma, a quality control initiative that tries to improve quality by reducing variability would be particularly important in reducing variability and improving quality.
How can BSA offer the same level of health care quality to patients with Medicare as to those who have Commercial insurance plans?
Given that, BSA is posting losses on Medicare patients, an easy reaction would be to provide different levels of health care to those on commercial health insurance plans and to those on Medicare. However, in the long run the proportion of patients on Medicare is expected to increase relative to patients with commercial health insurance. Therefore, the goal of BSA should not be about managing Medicare patients, but rather to optimize its operations and align the cost of providing health care with Medicare reimbursements. Having two levels of health care devoted to each group would instead of improving the quality of health care provided would introduce more variability in the medical procedures and thus expose BSA to higher risks, and the possibility of higher losses. BSA should use the Medicare reimbursement rates as the target-selling price for each procedure, and then use target-costing techniques to ensure that they earn the desired profit margin. For instance, if we assume that the cost of a particular procedure is $1000 and BSA desires to make a profit margin of 20%. Then the target cost would be calculated as follows:
Target price $1,000
Less: desired profit margin (20%) ($200)
Target cost $800
Once BSA identifies the target cost, they should then try to estimate the cost of the said procedure. In most cases, there will be a cost gap, say for instance the procedure is estimated to cost $850, there would be a cost gap of $50. BSA should then try to identify ways of eliminating the cost gap, for instance, by eliminating non-value adding procedures, or shortening patient’s length-of stay in the hospital. Using target costing would make BSC to focus externally and help BSC to get rid of inefficiencies by focusing efforts towards aligning health care services with the market rates. A target costing approach would be better than a cost plus mark-up pricing strategy that tends to be inward looking and would not be responsive to the declining Medicare reimbursement rates.
References
Carlson, J. (2012). On the margins of Medicare: Some hospitals are profiting on the program.
Modern Healthcare. Retrieved 13 July 2016, from http://www.modernhealthcare.com/article/20120102/MAGAZINE/301029885
Kaplan, R. & Porter, M. (2011). The Big Idea: How to Solve the Cost Crisis in Health Care.
Harvard Business Review. Retrieved 13 July 2016, from https://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care
National Coalition on Health Care. (2012). The American Health System’s Big Problem: Cost.
