There Has Been an Outbreak of “Cost Disease”: Are Hospitals Ready?

The reappearance of inflation has taken many economists and policymakers by surprise. Although prices were expected to rise as a result of the COVID-19 pandemic and its concomitant supply chain disruptions, the belief was that the inflation would be transitory. Unfortunately, the inflationary surge is not a blip on the radar. Intervening world events—Russia’s invasion of Ukraine, in particular—have further aggravated inflationary pressures.

The average U.S. citizen sees inflation’s effects at the grocery store and gas station as prices rise. To the extent possible, people modify their behaviors to ameliorate inflation’s adverse impacts on their budgets. Organizations will also modify their behaviors to manage inflationary pressures. However, some types of organizations find the ability to reduce costs in the face of inflation far more difficult than others do. For organizations with fixed labor structures—such as educational institutions and health systems—reducing costs quickly is nearly impossible. They suffer from a chronic illness known as the “cost disease.”

The cost disease concept was put forth by ^{Baumol (1993)} and is commonly used to explain the financial obstacles that labor-intensive sectors such as healthcare face. Specifically, the cost disease states that there is an inevitable escalation of real costs that cannot be offset by technological gains in efficiency. As productivity in other industries rises, wages rise across all sectors. This means that health systems must deal with increasing wage costs but cannot achieve similar cost-cutting productivity growth. Clearly, the cost disease dilemma faced by health systems is exacerbated by both inflation and wage rate increases.

It is a significant challenge to follow other sectors and increase the productivity of health systems through technological innovations. What is to be done? Automate the doctors and nurses? Speed up the patient’s recuperation time? These are the largely immutable, fixed costs that make health systems function.

The other alternative to address inflation is to rapidly raise prices in an effort to keep pace with costs. As mentioned earlier, prices at the grocery store and gas station can rise continuously to reflect costs. Health systems do not generally have this tool available to them, as insurance contracts are negotiated on a multiyear basis. In the short term, health systems must weather the storm and absorb the added costs. In the long-term, dramatic increases to contracted rates will occur to offset the new cost structure. These significant healthcare charge increases will draw the ire of consumers, employers/payers, policymakers, and perhaps most importantly, the media. Balancing the near- and long-term financial well-being of a health system is one of the many challenges facing administrators.

IN THIS ISSUE

Speaking of health system administrators, it was my great privilege recently to interview Callie C. Andrews, FACHE, senior vice president, Wellstar Health System, and COO, Wellstar hospitals, in Marietta, Georgia. Ms. Andrews is the 2022 recipient of ACHE’s Robert S. Hudgens Memorial Award for Young Healthcare Executive of the Year. She has achieved remarkable success in a highly competitive market, and her story is inspiring.

This issue’s featured column is provided by Christine Pitocco, PhD, research professor and codirector of the undergraduate business program at Stony Brook University. How can healthcare organizations improve performance and meet future workforce challenges? As Dr. Pitocco explains, systemic outcome measurement may hold the key.

The first of our peer-reviewed articles is by Soumya Upadhyay, PhD, University of Nevada, Las Vegas; Robert Weech-Maldonado, PhD, University of Alabama at Birmingham; and William Opoku-Agyeman, PhD, University of North Carolina Wilmington. Their research looks at the impact of cultural competency leadership and training (CCLT) on financial performance. They found that CCLT improves the employee relations component of costs.

Dennis Scanlon, PhD; Mark Sciegaj, PhD; Laura J. Wolf; and Jocelyn Vanderbrink, Center for Health Care and Policy Research, The Pennsylvania State University; Bobbie Johannes, PhD, Population Studies Center, University of Michigan, Ann Arbor; Bethany Shaw, Kassidy Shumaker, and Diane Farley, Center for Health Care and Policy Research, The Pennsylvania State University; Erin Kitt-Lewis, PhD, The Pennsylvania State University; and Lisa Davis, Pennsylvania Office of Rural Health, The Pennsylvania State University describe the special challenges in implementing a global payment program for rural health systems. The lessons they share can help others make the transition from volume to value.

The next article also concerns socially vulnerable populations. Alexandra L. Hanlon, PhD, Virginia Polytechnic Institute and State University, Roanoke; Mark V. Pauly, PhD, Wharton School at the University of Pennsylvania, Philadelphia; Liming Huang, PhD, University of Pennsylvania School of Nursing, Philadelphia; Alicia J. Lozano, Virginia Polytechnic Institute and State University; Karen B. Hirschman, PhD, and Kathleen McCauley, PhD, University of Pennsylvania School of Nursing; Matthew Press, MD, Perelman School of Medicine, University of Pennsylvania, Philadelphia; and Mary D. Naylor, PhD, University of Pennsylvania School of Nursing examine the mediating effects of social vulnerability on health outcomes. Health systems seeking to reduce costly care can use their results to estimate savings in the treatment of patients with high social vulnerability—before they get chronic conditions and later as they seek care.

Research on COVID-19’s impact on healthcare providers is just now starting to emerge. Jeffrey Sonis, MD, and Donald E. Pathman, MD, University of North Carolina at Chapel Hill; Susan Read, PhD, American College of Physicians, Philadelphia, Pennsylvania; and Bradley N. Gaynes, MD; Courtney Canter; Patrick Curran, PhD; Cheryl B. Jones, PhD, RN; and Thomas Miller, MD, University of North Carolina at Chapel Hill found that applying tangible, positive support policies and avoiding punitive ones may help to reduce adverse mental health outcomes and attrition among physicians.

Another aspect of the provider experience during COVID-19 has been the rollout of vaccination mandates. Megan Mahoney, MD, Stanford University and Stanford Health Care, Palo Alto, California; Marcy Winget, PhD, and Cati Brown-Johnson, PhD, Stanford University; Lindsay de Borba, Lucile Packard Children’s Hospital, Palo Alto; Darlene Veruttipong, Stanford University; Jacklyn Luu, Stanford School of Medicine; David Jones, Stanford Health Care; Bryan Bohman, Stanford University and Stanford Health Care; and Stacie Vilendrer, MD, Stanford University use mixed methods to study providers’ confidence levels in vaccines. The findings reflect potential strategies that healthcare organizations can use to overcome barriers to vaccine confidence.