To guide healthcare’s transformation to a value-based model and address financial challenges, leaders must be able to calculate the true cost of care and achieve price transparency. In their estimable efforts to determine the accurate cost of care, some hospitals and health systems have implemented various costing systems with questionable credibility. Unfortunately, lacking accurate data, efforts to reduce costs and provide prices are seeing limited success.
How can organizations make decisions to support transformation and improve quality if costs are not correctly computed? This question is important because organizational viability is contingent on assessing the true costs of care, including the cost of errors and inefficient processes and the money wasted on overtreatment and unnecessary supplies. True costs—identified with the right data and analytics—must be calculated before price transparency can be achieved.
As the articles and commentaries in this issue of Frontiers of Health Services Management point out, many factors make the task of determining the actual cost of care and services particularly difficult. Healthcare differs from other US business sectors in its extreme complexity, and consumers have not purchased healthcare in the same way they shop for other goods and services (even if they have been inclined to do so). However, skyrocketing deductibles and out-of-pocket costs are now prompting consumers to shop around and ask more questions about prices. And so, to function effectively in a value-based risk payment environment, hospitals and health systems must be able to provide accurate information to consumers, engage them in their care, negotiate favorable contracts with payers, and clearly identify resource utilization in caring for a defined population.
A HealthLeaders Media national survey of healthcare executives indicates the scope of the challenge to achieve price transparency: “Only 6% of respondents say that they are able to determine the true cost of providing all care, 29% say they can do this for most care provided, and 51% say they do this for some care provided. The response for those who have no true cost data for any care provided comes in at 15%” (Bees 2016). It is imperative that hospitals and health systems evolve so that they can measure the exact cost of care through accurate data and accounting systems; reduce waste, variation, and unnecessary services; and develop best practices to achieve positive cost and quality outcomes.
In his feature article, Stephen A. Purves, FACHE, details key information about the challenges, strategic imperatives, financial turnaround, and stewardship of resources at Maricopa Integrated Health System (MIHS) in Phoenix, Arizona. As president and CEO of MIHS, he describes the organization’s margin improvement journey back from financial peril. He shares strategies and tools that have helped to determine total costs and provide price transparency and tells how the organization is looking forward to the work ahead.
Tina Freese Decker, FACHE, president and CEO of Spectrum Health in Grand Rapids, Michigan, provides a compelling analysis of value and price transparency in her feature article. She discusses the components, strategies, and measures for determining the total cost of care. She describes Spectrum Health’s challenges in addressing these issues as well as its successes, such as a cost estimator. “Spectrum Health has learned that when the needs and perspectives of patients and health plan members are included in the design and delivery of care, value is increased exponentially. Meaningful healthcare value must be sustainable and aligned with a focus on better health and wellness for all,” she notes.
In their commentary, Michael Nurok, PhD, FCCM; Jonathan Warsh, PhD; Bruce L. Gewertz, MD; and Harry C. Sax, MD, FACHE, explain that hospitals and health systems can reduce and control costs by partnering with physicians as “responsible stewards of healthcare resources”; by providing necessary financial training, data, and costing systems; by aligning incentives; and by implementing strategy and process changes. The authors suggest that “hospitals must . . . put mechanisms in place that empower physicians to understand the financial consequences of their clinical decisions. This move will ensure that care is of an appropriate standard, that overtreatment is minimized, and that billing practices are fair.”
As a professor of accounting at the University of Texas at San Antonio, commentator Dana A. Forgione, PhD, makes the case for financial literacy in the health professions and its role in addressing the escalating cost of care and advancing price transparency. “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. . . . 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,” he concludes.
Lawrence Massa, FACHE, president and CEO of the Minnesota Hospital Association, provides an insightful commentary on the challenges healthcare organizations face in responding to demands for price transparency and affordable care. The growing number of policy mandates and consumer requests for useful information is prompting providers to find solutions to these complex issues. And yet, Massa explains, “price transparency’s power is limited. Other disruptive delivery and payment reforms are needed to transform our healthcare system . . . to a new model truly designed to help individuals achieve their health priorities at easily understood, reliably predictable, and affordable costs.”