Imagine that your uncle has been told he needs several weeks of outpatient rehabilitation to recover from a knee replacement. His physician referred him to a physical therapist at an outpatient facility, but it is not conveniently located and does not offer appointments before or after work. In addition, your uncle would like to know how much the outpatient physical therapy will cost because he has a health savings account and is concerned about the out-of-pocket expense of extended therapy. However, he cannot get a straight answer from anyone in his health system or insurance company. He receives an explanation of benefits from his insurance company but does not receive a bill until several weeks after service is provided. By that time, he cannot recall if the invoice is consistent with the explanation of benefits. He reluctantly pays the bill but is confused by the expense and frustrated with the entire process.
Knowledge Demands Commitment
Healthcare organizations nationwide struggle to determine the actual cost of providing care to patients. The information is critical for successfully negotiating risk contracts and developing pricing strategies. Most nonprofit health systems strive to deliver high-quality care at a low cost. The challenge is in truly understanding the costs associated with care, both on an individual basis and in aggregate.
Healthcare organizations must now understand and control costs to align expenses and pricing with more prudent reimbursement. Americans spend more per capita on healthcare than do people in any other developed nation, largely because price and cost are not directly correlated, and healthcare does not operate like most other industries.
Defining the Cost of Care
The “cost of care” typically refers to patients’ premiums, copays, deductibles, and coinsurance, which are linked to the health insurance claims for a care episode. However, the term does not reflect the actual cost of delivering that care. The cost to health systems for supplies, labor, depreciation, and other expenses is important, but many organizations focus on these items primarily to manage margin.
At a macro level, the total cost of care comprises three main components: frequency, mix, and price per unit of healthcare services used. Each component is affected by many factors. To understand the total cost of care, an organization needs to look at the factors for each component separately:
- Frequency of service can be driven by demographic profile, physician practice pattern or care model, marketing, and availability of services and products (e.g., new drugs, new medical technology), as well as access to care.
- Mix of service can be affected by access, physician practice patterns, and patient preference, among other factors.
- Price per unit depends on the fixed and variable costs of production, the regulatory environment, and market competition. The administrative complexity of regulatory requirements has also added pressure. To understand the cost of production, an organization may need to collect data differently than in the past to uncover the true cost of delivering the highest-quality service. For example, data are needed to understand resource utilization by service line, variation in physician practices, and marginal cost per patient or procedure.
An organization cannot determine the actual cost of delivering the highest-quality services until it can measure the current cost and quality.
The Cost Imperative
The cost of providing care is now fundamental to healthcare finance, operations, and planning. Healthcare organizations must take a disciplined approach to identifying and reducing the true cost of care. They owe it to consumers, who feel vulnerable when an illness occurs. Patients and families cannot control the physical unknowns, so they want as much information as possible about the care they are receiving and about the cost of that care.
Healthcare costs, including medical insurance, physician visit copays, dental care, and prescription and nonprescription medications, continue to be some of the biggest expenses for families. Family insurance premiums for employer-provided health plans have increased 19 percent since 2012 and 55 percent since 2007 (Henry J. Kaiser Family Foundation 2017), while workers’ wages have remained largely stagnant over the past four decades (Desilver 2018). With high- deductible health plans becoming more popular, consumers also have more of their personal finances at stake as they are required to pay more out of pocket for procedures and specialty visits. For workers with an annual deductible, the average amount for single coverage is $1,505 (Henry J. Kaiser Family Foundation 2017). Four in ten adults with health insurance say they have difficulty affording their deductible, while three in ten report problems paying medical bills (DeJulio et al. 2017).
Despite the impact of these expenses, most consumers still have no idea what they will be asked to pay after visiting a primary care physician or undergoing an inpatient procedure. In this respect, healthcare is unlike virtually all other aspects of the consumer experience in the United States. Many people do not realize that procedure prices can vary by thousands of dollars, depending on the facility chosen to receive care. For example, knee arthroscopic surgery can range from $1,200 to more than $11,000, and a colonoscopy can cost anywhere from $600 to $3,600, depending on the provider and facility. The reason for these variances is that price and cost are not directly correlated, and healthcare has traditionally not operated like for-profit businesses.
Strategies and Measures to Determine the Cost of Care
There are many aspects to understanding the true cost of care. Although there is no silver bullet, tools and processes are available to any organization willing to invest the time, effort, and money to search for answers. The factors involved in setting prices include the direct and indirect costs of care delivery, but they also include location, hours of operation, staffing levels, expertise, numbers of patients served, and more. Efficiency experts and process improvement specialists can help identify waste and overspending on supplies. However, accomplishing this forces healthcare leaders to focus on one area at a time, which is a complex process that must be executed strategically.
Gundersen Health System in La Crosse, Wisconsin, tackled inefficiencies and reduced the cost of total knee replacement surgery after conducting a time-consuming analysis (Evans 2018). Reduced time in the operating room, a speedy transition of patients to physical therapy, and even switching to generic bone cement all contributed to significant savings, some of which were passed on to patients.
Health plans have a broad view of care delivered in multiple settings and, therefore, a better understanding of the total charges for an episode of care. Although providers also have an idea of what services cost, they have historically aggregated them by episode of care. Taking both views will help uncover an organization’s costs, as well as its inefficiencies and efficiencies, and allow for rational pricing to improve the financing of healthcare. Historical costs with trend modifiers can be used to help predict the total cost of care. Efforts to present unified bills are another step in defining the total cost of care.
Reducing the cost of care is not the sole responsibility of the chief financial officer. It starts with the organization’s board and must be a goal of every member of the healthcare team. Benchmarking the cost of supplies and labor, eliminating variation in processes, and making decisions in a strategic manner are all important in helping to reduce costs and, ultimately, to pass those savings on to patients in the form of lower health insurance costs. Traditionally, this has usually been just a conversation between finance departments and health plan contracting teams. The process of data sharing and analytics now includes clinicians on both sides to better understand what changes might be needed.
Lessons Learned and Successes
Spectrum Health is working to identify and reduce costs one step at a time. Many challenges lie along the way. In the following sections, we outline our lessons learned and successes to date.
Lesson Learned: Culture Is Critical
First, Spectrum Health learned that culture is critical. However, it is difficult for large, integrated health systems to change a historically hospital-based culture that is driven by new technology, procedures, or priority projects. In addition, it is challenging to change patient behavior with respect to emergency department (ED) utilization and elective procedures, such as scheduled C-sections, hysterectomies, and knee arthroscopies, that many have come to see as necessary. Fostering the right culture is essential to moving an organization and its teams to a systems approach that is truly integrated and can achieve outstanding patient care in the optimal cost structure.
Spectrum Health is committed to addressing the affordability of care and coverage while maintaining and improving quality. Achieving these objectives requires innovative thinking and shaking up the status quo. A well-defined culture anchored by leaders who consistently demonstrate courage, decisiveness, and authenticity allows for risk taking and changes in operational models.
Lesson Learned: Change Is Challenging
Many people are afraid of change, and fear drives behavior. Because they fear change and a loss of control, people resist working on cost. Price transparency is dreaded because it might mean the need to compete with lower-fee providers who do not have the same cost structure. Even when leaders commit to doing the right thing, addressing cost is challenging when reduced reimbursement means changing how you work or realizing that your job might be on the line if your health system earns less money. A focus on cost is an ethical imperative that changes the dialogue. Health systems must make this commitment for the communities they serve, which may require deconstructing parts of the delivery system and starting over with a new model. Such disruptive change takes courage and steady hands.
Spectrum Health has undertaken a number of efforts to understand cost; however, even when cost is determined, creating a delivery model that reflects the true cost can be difficult. For example, several years ago, Spectrum Health realized that the way it cared for patients who received warfarin treatment was highly variable and, at times, unsafe. Some patients were not being monitored regularly, refills were not being tracked, and patients sometimes stopped taking the medication for no apparent reason, resulting in unnecessary complications.
After two serious safety events, Spectrum Health decided to standardize the way it delivered warfarin care across its medical group. Because warfarin management is generally an unreimbursed service, the health system tried to determine the true cost of delivering high-quality care as part of a sustainable delivery model. After exhaustive research, a warfarin clinic was identified as the safest model. While this seems like a simple fix, it was complicated by the fact that warfarin management was free for patients. Physicians (or, in many cases, medical assistants) managed the regimen mostly by phone between appointments and other responsibilities. Many had little understanding of the dangerous nature of this medication, and there were no quality controls. But what did evidence-based warfarin management really cost? Spectrum Health conducted time and material studies with staff and patients and determined that the clinic model would cost about $60 per month per person. Because approximately 4,000 patients at Spectrum Health are treated with warfarin at any given time, the true cost was set at about $2.9 million annually.
Hiring staff and finding the funds to support this level of care with no reimbursement was a challenge, so a financial model was developed that involved patient cost sharing of about $20 per month. For the first time, patients actually experienced the cost of this service, which was a significant change for them. About 100 of the 4,000 patients left the group because of the charge.
Five years later, quality outcomes and patient satisfaction with the clinic are excellent, but some patients still object to paying for a previously free service. A few providers also do not consistently adhere to the guidelines, so ongoing education is necessary.
In another example, a specialty procedure performed at a hospital site in an outlying area was priced much higher than the same procedure at ambulatory sites in a larger city. If the quality at the outlying community site was better, the higher cost might be justified. However, there was no evidence to support that. The cost structure of a smaller hospital drives up the price, and businesses and patients ultimately pay these costs.
After analyzing data and conducting provider interviews, Spectrum Health learned why colonoscopies cost $800 to $1,000 more in the outlying area than in the metropolitan area and determined what could be done to correct it. Physicians at the hospital site in the outlying area were using anesthesiologists to administer sedation, requiring extra equipment, while those in the metropolitan area administered conscious sedation, which did not require an anesthesiologist. Spectrum Health reeducated and retrained some providers in the outlying area to administer conscious sedation; the result was lower costs. However, changing behavior—which may reduce provider reimbursement—is difficult.
Lesson Learned: Complexity Slows the Process
Defining the cost of care is an exceedingly complex and time-consuming process. Cost is defined differently by various stakeholders, so the definition must be clarified before interventions are designed. Cost to the insurance company and patient is determined by price and utilization. Cost to a provider or healthcare system is based on all known elements, particularly cost structure and indirect costs that are not easily measured, such as the amount of time physicians spend on the phone with patients and other providers.
Reducing costs requires that the elements be measured and incentives aligned so that all stakeholders are on the same page. Providers need to be efficient while maintaining quality and appropriateness standards, and compensation should be linked to these objectives. Prices need to be transparent so patients can shop for the best value. Moreover, clarity will enable all stakeholders to make smarter decisions and will allow providers to deliver better and more appropriate care.
Knowing the cost of care may also introduce difficult choices, such as whether to cover true costs if reimbursement does not pay for them in full. However, reducing costs will be problematic if providers continue to receive incentives for volume-based services and if indirect work (e.g., time on the telephone) is not accounted for or additional staff are not hired to cover the workload. Likewise, if consumers cannot make informed decisions based on price or are not held accountable for their choices, reducing costs will be difficult.
Success: Innovative Products and Services
New models of delivery transformation show promise for bending the cost curve (Change Healthcare 2018). These models must be aligned with a clear business case, and patients, providers, and staff all must be engaged partners. At Spectrum Health, home-based primary care is one such successful model. Patients electing to participate in this program receive care at home from primary care physicians and nurses who provide comprehensive services to prevent illness and reduce avoidable costs. Patients also are assigned personal care managers who work to keep them healthy and at home and who connect them and family members with needed services. Patients are expected to call a nurse for acute complaints before going to the ED.
The initial results have been heartening on several fronts. Reflecting an enhanced experience of care, nearly 100 percent of participants responding to a survey said they would “definitely recommend” the program, expressed confidence in their providers, and commended the office staff’s ability to handle their concerns. Also, Priority Health (Spectrum Health’s insurance company) developed a set of criteria to identify members who are most appropriate for the program, which resulted in a 20 percent to 40 percent reduction in the cost of care. Overall, provider satisfaction scores increased six percentage points (from 78 percent to 84 percent) between January 2018 and July 2018.
While Spectrum Health is working to reduce costs in its structure and operations, the health system also aims to deliver care in more cost-effective ways to meet consumer needs. Our telemedicine service offers convenience and better access for patients by connecting them with healthcare providers from home, thus eliminating the wait for an appointment and the hassle of traveling to a physician’s office.
Spectrum Health developed its own telehealth system, rather than using an off-the-shelf version, so that it could best meet its consumers’ expectations. A telemedicine app allows anyone in Michigan with a smart device to see Spectrum Health providers. The health system is the first in the country to build a stand-alone, consumer-facing telemedicine app for users inside and outside of its health system. By handling low-acuity cases such as sinus infections, cough, and flu by means of telemedicine rather than in- office visits, Spectrum Health can treat more patients in less time and in a less costly setting. As a result, physicians can spend more time with patients who have more complex conditions. In the near future, most patients—unless they need to undergo a procedure—will routinely see their physicians virtually rather than in the office.
Since it began in July 2014, the telemedicine effort has far exceeded expectations. The service has experienced year-over-year growth of more than 260 percent, and there were more than 5,000 downloads of the app in one month. The number of telemedicine patients has increased from nearly 1,700 in 2015—the first full year of the service—to 30,000 patients in 2018. A survey of telemedicine users suggests that 6,582 urgent care and ED visits, involving 650,000 miles of travel, have been avoided.
The copay for a telemedicine visit is usually about $45, depending on insurance coverage. Members of Priority Health receive the service without charge because telemedicine saves the insurance company money, too. On average, a patient with a low-acuity condition will incur a charge of $171 for urgent care, compared with $911 at the ED. The telemedicine service also sees specialty patients, such as those with anxiety and depression. Use of at-home digital diagnostic devices, such as blood pressure cuffs, otoscopes, and scales, will help to further expand telemedicine’s capabilities because these devices can help providers remotely monitor patients with chronic conditions such as hypertension, high cholesterol, and diabetes.
Success: Transparency in Pricing and Cost Estimation
From the consumer’s perspective, the price of healthcare is the amount they must pay out of pocket. Spectrum Health has a tradition of making price data—and quality data—available to patients. In fact, in 2006, it became one of the first healthcare organizations in the nation to post average prices on its website for 200 common services.
Health plans traditionally share pricing information by grouping providers into high-cost and low-cost categories. However, Priority Health has taken a different approach: The insurance company preprocesses claims, taking into consideration the specific copay, deductible, and other aspects of members’ benefits so they know exactly what their out-of-pocket cost will be.
Priority Health has learned that sharing such information helps people get the care they need. Without this information, members may have believed they could not afford the care and did not broach a conversation about it with their provider.
Success: Priority Health’s Cost Estimator
In 2015, Priority Health launched a tool to help members shop for healthcare procedures by calculating their exact out-of-pocket costs based on deductible status. The cost estimator calculates a member’s costs for hundreds of procedures, including X-rays, magnetic resonance imaging scans, lab tests, and surgeries.
Over time, Priority Health has adjusted its strategy based on feedback from providers:
- No surprises for provider partners: Before launching the cost estimator, Priority Health partnered with the majority of its providers to help them understand how their prices compared with market averages. They then had the opportunity to adjust prices based on their priorities.
- Information without judgment: Priority Health’s original cost estimator was similar to other industry tools in its use of red, yellow, and green coding to indicate whether a procedure was above, at, or below fair market price. Providers felt the color coding could imply quality, so Priority Health removed the color coding and simply provided members with the cost of care.
The results have been positive:
- Priority Health members access their healthcare costs six times more frequently than industry benchmarks.
- Usage has increased 20 percent year over year.
- The cost estimator recorded more than 200,000 visits in 2018.
- Through more than 6,000 unique member visits to the cost estimator each month, Priority Health has saved more than $8.2 million in healthcare costs since the tool launched. This is a result of members shopping and selecting lower-cost services because they can see what they will pay based on their specific plan before they receive services.
Most health plans provide general ranges of prices for procedures, tests, and services based on historical averages. However, these prices are not specific to a patient’s insurance plan and do not take into account the member’s deductible or co-pay. Priority Health’s cost estimator provides customized cost information based on a member’s specific health plan. This personalized service is why member engagement at Priority Health is much higher than that of its competitors and the reason the company is a leader in transparency. It was the first insurer in Michigan to launch a cost estimator that incorporated members’ specific benefits and enabled them to view options.
Priority Health introduced its cost estimator to commercial and individual members first. In 2018, the company opened access to its Medicare Advantage enrollees. It continues to enrich the tool to meet member demands, recently adding some of the company’s most searched-for and billed procedures, such as behavioral health, physical therapy, and vaccinations, as well as pharmaceutical cost information. More than 15,000 prescriptions can now be researched with the cost estimator. Searching for medications provides members with choices so they can make informed decisions based on pharmacy location and out-of-pocket cost. Members are informed what they will pay for a prescription and how they could pay less by switching to a lower-priced alternative or opting for home delivery.
Priority Health also is piloting a “provider view” of the cost estimator to enable providers to access the tool and explore procedures and prescriptions for patients during office visits. As a result of these ongoing improvements, use of the cost estimator exceeds industry averages for similar tools by 2 to 3 percent; 12 percent of eligible commercial members access Priority Health’s tool.
Another program that Priority Health offers is PriorityRewards, which rewards members up to $200 ($500 for bundled services) for choosing a fair-priced medical procedure through the cost estimator tool.
Success: The Right Tools and Technology
Spectrum Health is working to deliver the right care, at the right location, at the right time, and for the right cost by means of an initiative called “systemness.”
A single electronic clinical and financial platform for management and stewardship of all patient information is a building block of systemness. Having one electronic health record (EHR) systemwide is fundamental to removing technical barriers and enabling Spectrum Health to deliver exceptional care and achieve the greatest degree of coordination.
In the past, extensive variation across the system included ten EHRs, more than 1,200 order sets, eight processes for patient movement, and 86 revenue cycle add-ons for 38 vendors. As an integrated health system, Spectrum Health had an opportunity to create more value and ensure safer, higher- quality care with a tool that enables the various parts of the system to work in sync. Today, there are approximately 400 order sets (instead of 1,200) and 218 standard work documents.
Spectrum Health recently transitioned to Epic as its systemwide clinical and billing platform. The organization now has both a foundation to understand episodic care and data to eliminate inefficient variations in care. Epic also enables access to data that can be integrated with cost accounting systems. Previously, Spectrum Health relied on time studies and other manual processes to estimate cost. Now, electronic time stamps, real-time cost data, and other procedure-specific information are available to decision makers, including physicians.
To skillfully manage transitions of care, clinicians who define workflows must strive toward the ideal patient journey to reduce waste in transitions and handoffs. Although no two cases are identical, most should be very similar. Spectrum Health differentiates three levels of transition management protocols (high-, medium-, and low-risk) to support individual medical needs as well as common concerns such as social determinants of health, behavioral health, and integrated plans for multiple chronic diseases.
Also, a high-performing postacute care network delivers excellent service while reducing avoidable readmissions and getting patients back home.
Success: Improvements from Structural Alignment
As part of its systemness initiative, Spectrum Health is aligning clinical and administrative functions across the enterprise to ensure both quality improvement and cost reduction. The rehabilitation department is the first area to implement this alignment and is achieving positive results.
The project began by addressing span of control to achieve consistency and eliminate overlap. Managers at different sites were working in silos, with different standards and expectations. Because patient demand was not spread evenly across the system, productivity, efficiencies, and consumer convenience were not optimized. As the initiative took hold, employees identified ways that standards and expectations regarding branding, dress codes, and pay rates could be made consistent across all sites to support reliability.
A well-developed leadership structure overseeing more than ten sites and supervisors working side by side with therapists has led to less variation and more coordination of services. This effort improved operational metrics within 18 months of implementation at each site. Spectrum Health achieved the following results over the past five years:
- Productivity has risen 21 percent.
- Volume has increased 28 percent.
- Patient experience has improved 7 percent.
- Team engagement has increased 77 percent.
- Cost savings of nearly $600,000 (18 percent) have been realized.
As a result of this work, prices for patients were cut by 20 percent.
Although eliminating variation can result in both better outcomes and reduced costs, this is not a one-size-fits-all proposition. A value-based model that eliminates waste, unnecessary utilization, and variation can be effective, but an approach that works well in one of Spectrum Health’s larger hospitals with 600 beds may not be as effective in one of its smaller community hospitals with 50 beds.
Accessibility and Engagement Drive Better Health
An abundance of potential in healthcare lies in smartphones, tablets, and personal computers. As consumers have learned about the convenience of and easy access to important information offered by consumer-based health technology, its popularity has grown: Spectrum Health’s web-based MyHealth patient portal has 608,000 accounts and 150,000 people using it each month as of October 2018. To keep up with these trends, Spectrum Health has targeted four areas: appointment scheduling, patient engagement, bill simplification, and anticipation of consumer wants and needs.
- Appointment scheduling. MyHealth users have immediate online access to their physician’s schedule and thus do not have to spend time calling for an appointment. If their preferred time is booked, they can put themselves on a “Fast Pass” waiting list that will notify them if an opening occurs. In the near future, Spectrum Health will also provide patients with directions to the facility and traffic-related alerts.
- Patient engagement. Meaningful engagement is needed to connect the care team with patients and families when they are not at Spectrum Health facilities. In 2017, Spectrum Health launched Find-a-Doctor, a web-based tool that allows consumers to find a match by exploring physicians’ biographies and ratings and viewing short videos. More than 90,000 patients have posted comments about and ratings of physicians, and searches for services have grown exponentially: Find-a-Doctor now generates more than half of the health system’s internet traffic. In the future, MyHealth will alert patients with allergies when the pollen count is high, integrate with fitness tools, and provide wellness assistance.
- Bill simplification. MyHealth offers a detailed billing statement and can answer questions online, improving the patient’s experience and clarifying out-of-pocket expenses. In addition, patients who are Priority Health members can view their deductibles, copays for specific services, and other specific benefit information in the MyHealth portal. We anticipate incorporating information from other insurers in the future.
- Anticipation of wants and needs. Digital engagement and feedback allow Spectrum Health to gain insight into consumers’ expectations. In 2019, patients will be able to send data to Spectrum Health from their wearable devices so the system can better track their fitness activities, eating and sleeping habits, and general condition. The health system can then follow up if this information raises red flags.
An effective value-based payment model requires a clearly defined accountability framework, which includes a target (value definition); individuals accountable for the targeted results; value-based initiatives; and key metrics, purposeful data, and analytics to support the work. Moreover, understanding the true cost of care and implementing price transparency are essential to creating an effective value-based care delivery model.
Your hypothetical uncle described earlier will be able to make informed decisions about his care as a result of Spectrum Health’s improvements in price transparency and reductions in the cost of care. He can obtain a price estimate for his outpatient rehabilitation so he can better manage his health savings account. He may even receive PriorityRewards if he selects a facility that charges a fair market price.
Spectrum Health has learned what it takes to move beyond the status quo: Culture is critical, change is challenging, and the complexity inherent in healthcare slows the process. At the same time, Spectrum Health has been a pioneer in innovative programs and services, such as its home-based primary care program, telemedicine service, cost estimator, and a new systemwide EHR that serves as the cornerstone of a structural reorganization. All these efforts advance consumer-first strategies.
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.