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Cost of Care Initiatives Make Great Strides Forward

Forgione, Dana A.

Frontiers of Health Services Management: April 2019 - Volume 35 - Issue 3 - p 30–34
doi: 10.1097/HAP.0000000000000053

Dana A. Forgione, PhD, CPA, CMA, CFE, is professor of accounting at the University of Texas at San Antonio.

The author declares no conflicts of interest.

Purves and Freese Decker have written inspiring articles on the great advances their respective organizations are making in cost reduction, price transparency, quality of care, access to appropriate care, and population health. The development and adoption of advanced digital tools has been a significant contributor to the organizational and leadership achievements they have attained. If their strides forward on these issues are multiplied throughout the healthcare professions, we will realize a significantly improved healthcare system in the United States.

As both authors observe, healthcare providers throughout the nation have lacked the tools and incentives to make these changes, resulting in needless cost, inefficiency, redundancy, and suboptimal patient outcomes. The latest advances in these areas are long overdue; in the recent merger of Advocate Health Care in Illinois with Wisconsin- based Aurora Health Care, the point was made that healthcare is behind the curve when it comes to mergers and acquisitions. I would suggest that although we have made spectacular advances—leading the world in state-of-the-art medical technology, for example—healthcare has been slow to adopt administrative technology, cost accounting and analysis systems, and efficient business management practices.

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A Basic Need for Financial Literacy

I hold adjunct professor positions in cardiothoracic surgery, pediatrics, and public health at the University of Texas Health Science Center in San Antonio. I also serve on its graduate faculty for the translational science PhD program and formerly taught in the PharmD program at the University of Maryland. No, they don’t let me perform surgeries—what I bring to the table is financial literacy. What we so greatly need to do is to require financial literacy in the health professions educational system—especially in the medical school curriculum. When I make presentations to medical students, they are like deer in the headlights. In medical school, we teach them to put on economic blinders: They must not allow economics to influence their clinical decision-making. They must do what is medically in the best interest of their patients. Certainly, that is what we all want. But what if the plan of care is bankrupting patients so that they, and other members of their household, cannot get the care they need? On a macro scale, what if the escalated cost of care is bankrupting the entire country?

It is certainly not news that we need to find ways to deliver care in a more cost-efficient manner and with better quality outcomes for the population. What may not be as well recognized is the magnitude of the cost problem on a national scale. In fact, if we count the present value of our Medicare, Medicaid, Social Security, and other major federal and state health and postemployment benefit obligations, we have obligated ourselves as a country to more than a quarter of a quadrillion dollars—92 percent of the world’s wealth, including every country except China, even though our share of the world’s wealth is only about 38 percent (Forgione 2018). If we count the entire federal budget, we could probably encompass China’s wealth, too. Unsustainable is an understatement.

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The Right Incentives

As Purves and Freese Decker point out, cost accounting and analysis in healthcare is complex and daunting. I would counter that cost accounting and analysis in the manufacture of airliners, space shuttles, aircraft carriers, and nuclear submarines is also complex, yet those industries have managed to develop advanced cost analysis systems. As the feature article authors note, healthcare is behind the curve because we have lacked the proper incentives. As long as we had the money and reimbursement was not based on cost, there was no strong incentive to accurately measure and manage the costs of health service delivery (or worse, reimbursement was based on cost, so the incentive was to increase cost to increase reimbursement). But that world has changed. With an aging population, active cost management is no longer optional. And organizations such as Maricopa Integrated Health System (MIHS) and Spectrum Health, featured in this issue, are doing a great job taking that bull by the horns.

Actually, healthcare does have the core elements needed for cost analysis. Unlike most other professions in the world (e.g., accounting, law, architecture), healthcare has every conceivable procedure and service identified and coded in relative value units. Every diagnosis is categorized in diagnosis- related groups with weights, and every outpatient, long-term care, and psychiatric service is also categorized and coded. Hospital service departments and revenue-producing units are identified and utilization statistics are analyzed down to square feet of floor space and pounds of clean, dry laundry. Although we can argue the accuracy and appropriateness of certain metrics, we have little excuse for not being further along on the cost analysis curve than we have been. As mentioned earlier, it comes down to incentives: People do what they are paid to do.

Thankfully, people are starting to get paid to stay on top of cost analysis in healthcare. The growth in recent years of joint MD/MBA programs is a step in the right direction. I teach in an executive MBA program in which several highly accomplished physicians and surgeons participate, encouraged by their medical school dean. This is a great start, and if we can win over more deans, faculty, and eventually the medical school accrediting agencies, one day we will transform educational institutions in a way that produces a new breed of medical-business professionals who understand both the clinical and the financial outcomes of their medical decision-making. Of course, we don’t want to incentivize putting money over patients’ health and safety. Everything we do in healthcare requires personal and professional ethics. However, we have been pitting economic incentives directly against the medical ethics of practitioners. We have incentivized both overtreatment (paying for more procedures) and undertreatment (paying for less care)—seemingly just about everything except appropriate care. Value-based payment systems are a step in the right direction, and healthcare systems that are on the leading edge of embracing that vision will have the best prognosis for survival and advancement into the future.

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Patient Engagement and Cost Control

Both Purves and Freese Decker are on target with their thoughts regarding price transparency as an essential factor for patient engagement and cost control. Few other industries offer such pervasive opacity in pricing— and as anyone with a basic grounding in economics knows, everything in a market- based economy is driven by pricing. As long as consumers are shielded from the cost of services and can focus only on their own out- of-pocket expenses, providers and health systems will feel only limited accountability or pressure to be cost efficient. The authors of both feature articles explain that patients want and need to have a better understanding of their out-of-pocket costs of care. Spectrum Health enables patients to see their own costs and insurance coverage, which implies the entire cost of the service consumed. MIHS has a price estimation tool, explains the financial programs available, and connects patients with financial counselors.

What a change from the past! Twenty-six years ago, when my first child was about to be born and I was a young and naive parent-to-be, I dutifully asked the hospital admissions person how much this baby delivery was going to cost me so I could plan to have the money ready (I am an accountant, after all). She gave me a piece of paper that said something along the lines of $1,000. Not a bad deal. But after the baby was delivered, I got a bill for $10,000. Yikes! How did that happen? I asked the admissions person about that $1,000 she showed me earlier. That, she explained, was only for patients without insurance. So if I hadn’t told the hospital I had insurance, the baby would have cost me only a tenth as much? Oh, but that would be insurance fraud. So my share was a 20 percent copay—$2,000.

Before the delivery, I also asked the obstetrician how much his services would cost. When I tried to decline a certain part of the service and requested a small price reduction, the staff was shocked by the boorish effrontery to question their billing. I was just trying to plan my finances. How far we have come in recognizing the value of the patient’s engagement in this process! And yet, how very far we still have to go in transparency, pricing, and cost efficiency.

How far do we want to go with digital assistants and their alerts telling us when we need to leave for the doctor’s office, when there will be high allergen counts, and what we should or should not eat? I appreciate the need for preventive healthcare. And I certainly understand the avoidable lifestyle-driven costs of obesity and diabetes and subsequent need for dialysis, kidney transplants, retinopathies, foot amputations, and so forth. Improved diet and exercise management would eliminate massive amounts of cost and human suffering from our healthcare system. But how far do we want to go? For practitioners, healthcare is their career. For me, it is something I deal with as needed. Otherwise, I already have a career. I know, we have to strike a balance between what we need and what we want. Every digital healthcare assistant system will need to factor in the patient’s desire to customize it for individual preferences (although not into complete irrelevance).

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Additional Cost-of-Care Considerations

Although neither of the feature article authors addresses tort reform, no discussion of cost-of-care initiatives would be complete without mentioning the legal issues. Many countries promoting medical tourism can significantly underprice the US delivery system on labor and supply costs. A major reason for their lower cost structure is their almost complete lack of medical malpractice litigation. The expense of malpractice is a significant part of the US health system’s escalated cost structure; it is good and important when harm is done, but the cost affects the entire system. After Texas passed tort reform legislation several years ago, capping pain-and-suffering claims at $250,000, malpractice insurance costs dropped substantially—in some specializations, reportedly by as much as 50 percent—because the action eliminated a large number of frivolous claims (Insurance Journal 2013). But the fear of malpractice lawsuits still drives healthcare costs.

Here is a personal example of a patient encounter. One night, I was working late and got a call from my wife at the emergency room of our local hospital. My 12-year-old son was having major stomach pains. I immediately asked, “Is it his appendix?” The doctor did not know and wanted to do a CT scan with my consent. A CT scan for a tummy ache? Well, if the doctor did not do a CT scan and my son really did have a burst appendix—and then died—what would I have done as a parent? Sued for malpractice, of course. I authorized the CT scan. The diagnosis was gas. The cost was $8,000, of which my share was $1,600. Fear of litigation can drive up the cost of healthcare—for both providers and patients.

As for the high costs of end-of-life care in the United States, we choose to spend the money. Other developed countries do not; gravely ill patients go home for the remainder of their days. Here, major cancer or heart surgeries are done on patients in their eighties or nineties who then may experience a significantly deteriorated quality of life for a few weeks before passing away. Clearly, social and spiritual issues must be addressed, and we as a society need to do some soul searching on the subject.

Prescription drugs also play an important role in the cost of care. It can take 15 years and a billion dollars to get a new drug from lab to market (Hao et al. 2017). As soon as a promising new compound is discovered, the pharmaceutical company files for a patent. Patents last for 20 years. So, 15 years later, when the new drug finally completes all three phases of clinical trials and reaches the market for postmarket trials, the pharmaceutical company has only five years to recover its billion-dollar investment. New Zealand takes an interesting approach to this problem. Its national health insurance features one health maintenance organization (HMO) for the whole country of 4.4 million people. The HMO buys prescription drugs for everyone at the same time—only generics, no name-brand drugs. In addition, there is a very narrow formulary for each category of medications. When pharmaceutical companies complain that the nation is not paying its fair share of research and development costs, the government’s response is to ask for a cost breakdown: How much does it cost to develop the drug? How much does it cost to produce the drug? And how much are you spending on direct-to-consumer advertising (which leads to unnecessary prescriptions and potential adverse effects on patients and which we, as consumers, will not pay for)? To date, the pharmaceutical companies have not disclosed their cost breakdowns and instead accept the generic pricing structure.

A commentary published earlier in this journal mentioned the value of developing a “hub-and-spoke” organizational structure in healthcare (Jackson 2017). That approach makes a lot of sense, especially in a rural setting. Regional facilities can avoid duplication of services, equipment, and staffing by referring patients to central secondary and tertiary care facilities. My first real accounting job was as a junior accountant in a 150-bed hospital in the suburbs of a major city. The CFO and I would occasionally have lunch together in the cafeteria, and he would describe the direction healthcare needed to go: to a hub-and-spoke system. That was 43 years ago. Are we there yet?

Of course, there are hindrances to such a reorganization and situations where a hub-and-spoke structure does not make sense. But all these years later, we are still talking about the need for the same changes. Economically, we have reached the point where implementation is required. In ten years, the last of the baby boomers will be 65. Ten years beyond that, they will all have retired (myself included) and reached the peak of their drawdown on the Medicare and Social Security programs. That is when the music stops, economically. Are we going to be ready? As Purves and Freese Decker demonstrate, some organizations are making great headway in the right directions. Will your organization join them in leading the way?

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Forgione D.-A. 2018. “Update on the Economic Condition of the US and Its Relation to Healthcare Reform.” Presentation at the Institute of Management Accountants—Stuart Cameron McLeod Society annual conference, October 22–23, San Antonio, Texas.
Hao M., Forgione D. A., Guo L., Zhang H.. 2017. “Improvement in Clinical Trial Disclosures and Analysts’ Forecast Accuracy: Evidence from the Pharmaceutical Industry.” Review of Quantitative Finance and Accounting 47 (4): 1–26.
Insurance Journal. 2013. “10 Years of Tort Reform in Texas Bring Fewer Suits, Lower Payouts.” (Associated Press report.)
Jackson, V. M. 2017. “Providers Can Meet Community Health Needs as Independent Partners.” Frontiers of Health Services Management 34 (1): 35–40.
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