This article explores the current state of the creation and use of evidence by managers for cost containment in hospitals. We assert that hospitals do not know enough about what things cost, and until they get evidence on costs, it is not likely that much can be done to narrow the chasm between common practice and best practice. Part of the problem is that managers do not seek out available evidence that exists, and part of the problem is a lack of sufficient research efforts to generate evidence for managers to use. The article strives to help direct future efforts by researchers and managers in the area of evidence-based cost containment research by presenting a framework for priorities that managers and researchers can use to increase the amount of research done to generate evidence and to increase the use of evidence by health care managers.
There is a recent movement that is encouraging health services managers to increase their reliance on evidence as they make decisions related to the operation of health care provider organizations.1 The use of such information by managers is referred to as evidence-based management. This article looks at issues related to a lack of adequate research efforts to generate evidence. It also considers the inadequate use of evidence that does exist, by managers making decisions designed to help control hospital costs, both inpatient and ambulatory.2 This article is a call for both a framework for management research in the area of cost control and the adoption of evidence-based decision-making practices among practitioners.
In some cases, evidence can be collected by researchers or managers within a particular hospital. That hospital can then use that evidence to aid decision-making. At least equally important, however, is the collection of broader evidence by researchers from a wide number of hospitals: evidence that tells about the experience of many hospitals, and lets managers incorporate that information into the decision-making process within any one hospital or network. Ultimately, the goal of this evidence is to enable decisions that allow costs to be contained, while either maintaining or improving the quality of care provided.
Given the continued operations of the vast majority of hospitals, it appears that most hospitals can control their costs and keep them in line with the prevailing reimbursement levels.3 Less apparent, however, is whether such cost control takes place without reductions in the level of quality of care. The link between cost control, productivity, and health care outcomes is not well known. A research program focused on cost control must simultaneously be able to assess changes in quality and health outcomes.
We know little about the manner in which cost control happens in hospitals. Does it typically result from evidence-based management decisions, or from broad across-the-board cuts that are unlikely to effectively retain the lean while eliminating the fat? For example, Johnson and Johnson recently announced their new cardiac stent, which is expected to reduce the rate of repeat procedures for cardiac catheterization. It is quite possible that this improved stent may reduce overall health care costs. But from the hospital perspective, spending on stents is expected to double in one year to about $3 billion in 2003.4 It is doubtful that insurers will increase rates for these procedures by enough to pick up this $1.5 billion increase in hospital costs, at least in the short run. How will hospitals find a way to save that money? Will the savings be based on reasoned, evidence-based decisions, or on an urgent across-the-board cutback without an assessment of the implications of such a cut?
Hospitals have spent substantial sums on improving their cost accounting systems. One reason for these investments is to generate more accurate information that will lead to better decisions. Is there any evidence of this? How do organizations decide how much information they need from their cost accounting systems and how accurate that information needs to be? There is always a tradeoff between accuracy of cost information and the amount spent to obtain that information. Are systems evaluated with an eye toward the cost of information and the outcomes resulting from having obtained that information? Or, is it simply assumed that more and better information equals better management outcomes? There is a great need for research focused on how cost containment occurs within health care organizations, what cost containment strategies managers adopt, and how these strategies impact services and ultimately outcomes.
It should be noted that cost containment can happen at multiple levels. The Federal government and many state governments have been active over the last two decades, attempting to control the increase in health care costs. The tools they use include adjustments to payment systems, regulations, etc. However, such policy solutions are not the focus of this article. We are only considering actions that managers take in operating their specific health care organizations.
Cost containment must not be seen as an end in and of itself. The goal must be the efficient delivery of high-quality health care. In what follows, we will argue that the key to assessing cost containment is a framework that uses evidence to link three basic questions:
1. What does something cost? (cost measurement)
2. What organizational strategies are effective at constraining those costs? (cost control), and
3. What impact do those strategies have on quality and patient outcomes? (assessment of value).
The attempts of a hospital to answer these three questions can be thought of as the strategic cost containment efforts of a hospital. Linked by evidence, these three aspects of cost containment provide a framework to help guide future management research activities. This framework is presented in Figure 1. Cost measurement is the first element, because you must have accurate measures of cost in order to be strategic about cost containment. A potentially valuable line of inquiry for research would be to obtain data on cost measurement systems.
For example, the Transitions Systems, Inc. (TSI) system is a dominant force in the hospital cost accounting market. How many hospitals use TSI? What other systems are there and how commonly used are they? How happy are users with the different cost accounting systems? What types of information do they get from it? Do they base decisions on evidence from their cost systems? How do the various cost accounting systems differ and to what extent do their different capabilities change or impact decision-making within organizations?
The second aspect of cost containment is cost control: this relates to strategies to contain costs within an organization. Strategies can be of many types-reengineering or automation, addition or deletion of programs or services, simple reductions in personnel and/or other than personnel services, etc. From a managerial research perspective, it is important to assess across multiple organizations the circumstances in which certain strategies work and others do not. In addition, it is important to be able to assess the nonfinancial impact of the various cost containment strategies. To date, a systematic assessment of cost containment strategies has not been done.
The third aspect of cost containment is assessment of value. A significant issue is whether a hospital provides good value for the dollar. Clearly, quality, outcomes, and value must be an essential component of the efforts of hospitals to control costs. Therefore, strategic cost containment should be based on approaches that assess the impact of cost control initiatives on outcomes and value to the organization and the customer (patient).
There is also a fourth potential element of strategic cost containment. That is the cost imposed by factors external to the organization, such as regulators and payers. Policy research usually assesses such factors from a societal viewpoint. However, from the organizational management perspective, the issue of external factors can be (and should be) addressed within the framework presented above. Managers should identify the cost of new regulations ("Cost Measurement"). Managers certainly need to develop strategies to contain costs imposed by external factors ("Cost Control"). And finally, managers must assess the impact of external factors on quality ("Assessment of Value").
The next section of this article provides a brief background meant to help the reader understand why hospitals have long operated without a substantial focus on evidence-based management. That is followed by a literature review. That review reveals significant gaps in the literature, and is followed by a section that asks why those gaps exist. The article then reports on the results of a brief survey of the attendees of a recent conference on health care management research. Also discussed in that section is a summary of a panel discussion held at that conference. The panel discussion summary is followed by a general discussion and then our conclusions.
Steven A. Finkler, Ph.D., CPA, is Director of the Specialization in Public Finance and Financial Management, and Professor of Public and Health Administration, Accounting and Financial Management, Program in Health Policy and Management, The Wagner School, New York University, New York.
David M. Ward, Ph.D., is Chairman and Associate Professor, Department of Health Administration and Policy, Medical University of South Carolina, Charleston, South Carolina.
The authors are indebted to Douglas Conrad, Tony Kovner, and the anonymous journal reviewers for their helpful comments. This article was written for presentation at the Agenda Setting for Health Care Management Research Conference held at the Wagner School, New York University, in January 2003, sponsored by the Agency for Health Research and Quality (AHRQ) and with support from Wellpoint Health Networks.