The health care cost crisis: Something’s gonna give

One thing you’ve got to admire about Dr. Robert Kaplan – he doesn’t sweat the small stuff, he tackles the big problems head on.  If you’ve heard or seen him speak recently, perhaps at a New York finance conference or at the Palladium Group, you know that he has taken to dividing his 90-minute keynote into three sections.  The first tends to be a state-of-the-art update on metrics and the balanced scorecard.  The second segment generally pertains to risk, a topic on which I could concur with him to no end, but we haven’t got time for that today, for we must move on to the third half of his presentation and his current passion – health care costs, where he has co-authored an important HBR article with Michael Porter entitled “The Big Idea: How to Solve the Cost Crisis in Health Care”.

The situation in the United States is particularly dire, hence the word “crisis” in the article’s title.  OECD data shows the per capita cost of health care in the U.S. at twice the OECD average, with a lower measure of outcome (average life expectancy).  I’ve no qualm with health care costs rising as a percentage of GDP; efficiencies in agriculture, mining and manufacturing are going to show up as higher spending levels elsewhere in the economy, with improved health care a clear priority for additional resources for most citizens.  But at twice the cost?

The drive to control health care costs is coming from several sectors, the primary actors being the government/Medicare, health insurers, large health care provider systems, and large self-insured employers (through their insurer partners).  The chief culprit immediately in the cross-hairs is the “reimbursement” driven approach which distorts costs and incentives from the top to the bottom of the system.  Beyond reforming/ditching the current reimbursement-centered process, the holy grail looming on the horizon is “outcome-based” health care.  For provider organizations not prepared for an outcome-based approach, the impact could be devastating.

Kaplan’s prescription, outlined in the above mentioned article, relies heavily on attacking the cost problem through the use of activity-based costing (ABC), something Dr. Kaplan is quite familiar with, having been one of the inventors of ABC in the late 1980’s.  When I talk to an audience about ABC I put it this way:  If somehow you could rewind and reset the economic history of modern humankind such that services preceded heavy industry chronologically, we would ALL be using ABC today.  It would be a no-brainer.  Instead, like QWERTY, we have inherited a traditional cost accounting system from our industrial legacy that has largely outlived its usefulness in supporting good business decisions, yet manages to survive through its own inertia.  Even in the high-tech manufacturing companies where I have spent most of my career, the direct-to-indirect cost ratio is approaching an even 50/50 split, while most of the service sector has progressed even beyond that.  We are applying a methodology that was sufficient in the 1920’s for costing out automobiles, to a complex, modern health care system, and getting bad data, bad decisions, and an unsustainable cost structure.

Beyond the mechanics of ABC, the real value that Kaplan’s analysis brings to the table is his focus on mapping out the patient care value chain and delivery process flow, and using that insight to drive improvement in the processes that by their very nature will result in lower costs and better outcomes.  Quite frankly, the result is an extremely complex process map with all the different players, providers, functions, flows and clinical services involved, but the cost crisis arises precisely because each actor only focuses on their own narrow functional scope, which is good for neither the economy nor the patient.

[As an aside, don’t get too worked up over Kaplan’s specificity in spelling out “time-driven” activity-based costing.  Time-driven is simply one of many costing methodologies that can be utilized when employing ABC, with a robust solution such as SAS Activity-Based Management (ABM) capable of supporting them all equally well. For more on the time-driven approach you can refer to this short SAS write-up: Five myths about time-driven activity-based costing.]

The initial benefits / cost reductions from Kaplan's approach will be achieved by streamlining processes, eliminating unnecessary steps and duplication, and standardization.  But needless to say, the cost control and reduction effort won’t be stopping there.  Consider the cost and outcome focused approaches being implemented in some of the OECD countries mentioned earlier.  In this exemplary effort, the Danish National Board of Health is using an ABC/M approach in benchmarking, leading to lower costs, and to allocate and prioritize resources, leading to better outcomes.   On a less grand, but equally important scale, San Martino Regional Hospital is using ABC/M to analyze costs in support of the planning and budgeting process, that, as in Denmark, results in a greatly improved allocation of scarce healthcare resources.

If you are now ready to pursue your cost crisis research more deeply, I recommend the Performance Management section of the SAS® for Health Care Providers website.  A comprehensive webinar on Health Care Cost Analytics goes into even greater depth on the issues and potential solutions.

Both Dr. Kaplan and myself have used the words “crisis” and “unsustainable” repeatedly, and not without cause.  The broken reimbursement process and broken delivery system has led to a broken economy with broken employees and patients.  It’s not even clear that ANYONE is doing well under these conditions.  My own personal physician has related to me several times how difficult it has become to maintain both a patient and a business focus in his practice.  In the end, a sustainable solution that really does result in improved patient outcomes is going to require some political will, but that doesn’t mean that the rest of the system can't make great strides forward in the meantime, providing the leadership that otherwise seems lacking.  As this Telekom Austria example shows (with the use of ABC/M outside of healthcare), the health care industry itself can have a major influence and impact on the legislators and regulators if it so chooses.  Costs are going to come out of the health care delivery system one way or another – let’s make certain they are the right costs, from the right places, so as not to adversely impact the patient, customer, employee or citizen.


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    There are two sides to the Value equation: value creation and value extraction, and analytics has a role to play in both. Leo Sadovy, a former Vice President with 25+ years of strategy, finance and marketing experience at Fortune 50 companies, takes a bi-weekly trip down Value Alley to explore some of the innovation and operational insights that analytics can provide, from forecasting to segmentation to data visualization. The common currency of our digital economy is data, but it takes analytics to turn that data into information, into insights, and into value, both for your customers and for your stakeholders.
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