Activity-based costing as a cure-all for health care?


The September edition of the Harvard Business Review had a very compelling article by Robert Kaplan (of balanced scorecard infamy) and Michael Porter (author of Redefining Health Care) entitled “How to Solve the Cost Crisis in Health Care.”  I have followed their work in strategy management and health improvement (respectively) for years.  So seeing them team up on an article was a real treat.  But I walked away from the article both inspired and struggling.

For those who have not read it, the main thrust of Kaplan and Porter's article is that health care should adopt an activity-based costing (ABC) framework at the level of the individual patient.  The proposition is that such an approach enables everyone to improve value in health care (defined as patient outcomes achieved per dollar spent).

In trying to distill my thoughts into this blog post, I’m appreciative of Barry Dorn and Eric McNulty's great post over at summarizing the article and 3 exceptions that they have to the article.  While supportive of many of Kaplan and Porter’s points, Dorn and McNulty point out that

  • Healthier patients that live longer do not necessarily reduce costs of health care
  • Building models that assume health care operates as a seamless, integrated network do not reflect the reality of care today
  • In an industry facing “system”-like problems, linear approaches to problem solving are less likely to be effective

I agree, and would offer a few additional points as well.

First, it is worth acknowledging how crazy it is that we don’t do ABC today in healthcare more broadly -- of course it is a good idea (for example, see this case study on the Danish National Board of Health).  But let's also acknowledge how difficult it would be to do ABC in health care at any degree of "scale." Beyond the practical issues of costing and analyzing activities and processes that are not under common organizational governance, organizations taking on ABC would expect a return on their ABC investment -- a return that is extremely difficult to realize in the current fragmented health system.

I'm also concerned about the underlying assumptions.  Consider for a moment the first sentence in the synopsis:

Much of the rapid escalation in health care costs can be attributed to the fact that providers have an almost complete lack of understanding how much it costs to deliver patient care.

To me, this is a false premise.  It is true that costs have escalated dramatically; it is also true that providers lack visibility to real costs.  But the degree to which the relationship is causal or even attributable is debatable – there are dozens of reasons that health care costs have risen.  “Seeing” definitely moves us towards “fixing", but ABC is not the cure-all for a structurally-decrepit care delivery, management and financing ecosystem.

We do need to measure costs and outcomes separately and discretely.  But more broadly, I think you can characterize problems in healthcare across three dimensions:

  • Knowledge.  Do we know where the costs are?  Do we know what treatments will be effective?  Do we understand how diseases actually progress, and can we prevent them?
  • Incentives.  Are we motivated to undertake behaviors that avoid costs for everyone?  That avoid the occurrence of medical conditions?  That drive the design of and efficiency within the system?
  • Values.  Do we all agree what the “right” thing is?  Do we prioritize outcomes and their associated costs similarly enough to get scale and efficiency through standardization?

Today, we have dramatic shortages in the above – our knowledge is incomplete, our incentives are not shared, and our values are disparate and varied.  If the question is would we be better off if we pursued more knowledge work around costs (whether through ABC or some other framework), my answer would be yes.  But our species has a long history illustrating that knowledge is not sufficient to drive timely changes in incentives, values, and behaviors...usually necessary, but not sufficient.

Kaplan and Porter's HBR article is best viewed in the context of Porter's other cited work which focuses on defining and measuring value and health outcomes across health care.  This important work nicely establishes some of the broader landscape I am referring to, and will be the subject of my next blog post.  So despite the challenges outlined so far, I am not arguing against ABC.  But I do not believe ABC -- pursued outside the context of this broader, systemic problem space -- will have a transformative impact.  As part of a broader program of activity, though, I do believe there is an opportunity for real improvement -- and I'll talk more about it next time.

One Comment

  1. Posted January 17, 2016 at 1:23 pm | Permalink

    thank you for your article, now i know about health care

2 Trackbacks

  1. By The problem with health value - A Shot in the Arm on September 19, 2011 at 9:26 am

    [...] content HTML Feed SAS Blogs Home > A Shot in the Arm > The problem with health value « Activity-based costing as a cure-all for health care? The problem with health value Jason Burke|September 19, 2011 [...]

  2. By Nine Ways Health Analytics Can Transform Health Care on September 28, 2011 at 11:34 am

    [...] blog post is the third in a series looking at health value and outcomes.  In the first post, I set forth my belief that a single approach like activity-based costing (though vitally [...]

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