In a recent conversation with hfm, Bob Kocher, MD, a partner with venture capital firm Venrock and former Obama administration healthcare adviser, said we are witnessing a revolution in the ability to understand value in health care, the availability of data, and the development of tools to make sense of the data. Now it is up to us to share those data more effectively with patients. "Providers are beginning to to realize that data opacity and information asymmetry can't be the basis for lasting success," said Kocher, a featured speaker at this year's ANI: The HFMA Annual National Institute. " Hospitals should be clear about cost and quality and compete on that basis. It would be foolish to do otherwise for much longer".


Q. A recent study found that the costs of hip replacement surgery vary widely, ranging from $10,000 to $100,000 (JAMA Internal Medicine, February 2013). What are the issues around this price variation, and how do we address them?

A. It’s difficult to imagine a marketplace where there can be a tenfold difference in value, with a patient who pays $10,000 getting 10 percent of the value received by a patient who pays $100,000 for a medical procedure. The fact that there is so much variation speaks to a massively inefficient market. I hope that as hospitals gain insights into their costing and pricing, they can determine whether the value they are offering justifies the price. They will ask themselves: Are we offering a higher level of quality, a different level of expertise, or a far better patient experience? That knowledge should allow a hospital to articulate why its prices are above or below the market price. 

I believe that patients, with or without the help of hospitals, will start changing doctors or hospitals when prices do not correspond to demonstrable value. This JAMA study has revealed that patients aren’t there yet—but they will be. So hospitals should be moving quickly to figure out, “What are we excellent at, and which of our services are worth a premium? What are the things that we’re not excellent at, that we need to improve? Are there certain services that we can’t offer at a price that makes sense based on the value we can deliver?” Hospitals also need to think about the total cost to a patient and incorporate the physician and facility fees, because that’s how patients will think about their care. 

Q. To what extent is IT part of the problem, and to what extent is it part of the solution?

A. There is no question that IT is going to be a big part of the solution, because hospitals will have to understand their costs at the patient level and begin doing accurate, activity-based accounting with fully allocated labor, overhead, and supply costs. Clearly, hospitals will need better systems to see how they are managing their resources at the patient level during an encounter. They need to know which patients are generating more cost than revenue, so they can allocate resources accordingly, too. I’m optimistic that the IT breakthroughs that have benefited the rest of the economy will be seen in health care very soon.

Q. How would you assess the healthcare industry’s progress toward greater transparency in recent years?

A. There has been a revolution in the ability to understand value in health care, in the availability of data, and in the availability of tools to make sense of the data. We have made tremendous progress, and much of that is attributable to the HITECH initiative and incentives that HHS [the U.S. Department of Health and Human Services] has implemented. Payers and providers are beginning to realize that data opacity and information asymmetry can’t be the basis of lasting success. All the attention paid to Steven Brill’s [February 2013] TIME magazine article on healthcare prices will increase pressure on payers and providers to liberate more data on price and value so patients can make more informed and rational healthcare decisions.

Q. What should hospitals and health systems be doing now to improve consumer transparency?

A. Hospitals should be clear about cost and quality and compete on that basis. It would be foolish to do otherwise for much longer. Patients need to know what they can expect to pay and why they should expect to pay it. Metrics should be transparent and conducive to justifying prices and quality.

Q. You anticipate that health care will continue to see an improvement in the ROI on IT investments. What will be the catalyst for that improvement?

A. There are two major catalysts. The first ones are the new [value-based] payment models like ACOs [accountable care organizations], the [Massachusetts Blue Cross Blue Shield] Alternative Quality Contract, and episode bundles. Every hospital in the country now has options to enter payment arrangements with shared risk. In shared-risk payment models, it will be essential to have IT systems that help hospitals calculate costs to patients and how hospitals are performing against those costs. We will need IT systems to enable us to standardize lots of care processes that haven’t been as standardized as they should have been in the past. And we’ll need IT systems to track a whole bunch of quality measures, too. Those types of IT tools are essential for entering into risk-based contracts, which in many cases are more attractive than fee-for-service contracts.

The second thing driving investments is the fact that IT has gotten a heck of a lot better. It has gotten cheaper by virtue of cloud-based software as an alternative enterprise software. And it’s easier to use. Breakthroughs in storage costs, data analytics, and visualization resulted in better and cheaper software tools.

Q. Most respondents to a survey HFMA conducted in 2012 ranked clinical performance improvement and coding systems ahead of data warehouses and costing systems. What do you see as the priorities for IT investments?

A. Activity-based costing is certainly important to succeed under new payment models. The ability to track performance measures and monitor improvement in real time is extremely important. The other priority for IT is systems that help reduce labor cost overhead. Labor productivity in health care has actually been running negative—on the order of 60 basis points annually—over the past 20 years. That trend is driven by the fact that we haven’t had aggregate productivity gains, either on the administrative side of health care or the clinical side. The easiest place to achieve productivity gains through IT is on the administrative side because it is unlikely to require changes to care delivery or put patient outcomes at risk.

Q. Providers are trying to move toward more granular costing data, but that comes at a cost. How should hospitals and health systems balance that tradeoff?

A. I don’t know how you can manage a business if you don’t know what the services that you are delivering actually cost. So I don’t see the tradeoff. It is a prerequisite that you have to actually have that level of cost data to compete in a world where bundled payment and shared risk are common. So while developing this granular data can be a painful process, it’s worth the investment. Another challenge is developing a management process that allows hospitals to act on these data once they do become available. That has been another big barrier for hospitals: How do you change the behavior of physicians whom you may not employ, or of physicians you do employ who haven’t bought into the more complex processes and larger care teams that we are moving toward, as an industry? 

Q. Do you expect hospitals to be leading the charge on managing the most expensive patients with chronic conditions?

A. Hospitals haven’t cracked that yet. While it’s not hard to predict which patients are going to get sick, it’s difficult to manage these patients so they actually use less health care. This is particularly hard because these patients often need lots of outpatient and community resources that are not typically owned or managed by hospitals. Still, it’s hospitals and, increasingly, hospital-led systems, which employ the physicians who care for these patients, that are best positioned to coordinate care to manage these populations. 

Q. How will healthcare reform—both the Affordable Care Act (ACA) and payment reform, in general—change relationships between physicians and hospitals?

A. The ACA has done a lot to move us toward more organized systems of care, because it’s pushing Medicare toward payment models that offer upsides for care coordination and shared savings. That means hospitals will care a great deal more about what happens to patients when they leave the hospital, because they don’t want readmissions. They’re going to want to share in the quality measure improvements. Physicians will also be working with hospitals to manage patients in ways that maximize savings and quality. We’re seeing a real trend toward more physicians being employed by hospitals, which offers the potential for better care coordination. Employed physicians can broaden the services they can offer patients through teams and access to hospital resources like IT and decision support, which independent physicians usually can’t afford.

Q. In the past, you have talked about the challenges that result when incentives are not aligned with performance. There are so many different incentives in the marketplace now. What is the role of the Center for Medicare and Medicaid Innovation (CMMI) in this regard? 

A. The CMMI is an $11 billion venture fund within Medicare that has the latitude to do many more demonstrations and pilots than Medicare could ever do before. It has given Medicare the authority to take anything that works well and scale it up without having to ask Congress to pass a law. So Medicare will have the potential for much more rapid cycle improvement and will be able to test a lot more things. In the short term, they will likely be focusing on making bundled payments work, refining the ACO program, and making medical homes work even better.

Q. How can hospitals and health systems shape the implementation of the ACA?

A. By taking part in Medicare and Medicaid demonstration projects and programs, hospitals and health systems can gain firsthand experience and give feedback to CMS [the Centers for Medicare & Medicaid Services] on how these things are working. Hospitals and health systems can also shape reform by embracing data transparency and the fact that patients are likely to be shopping for health care based on value. Hospitals should also be thinking about how to compete in a market where new tools and technologies are continually being introduced. Every day, I hear about new start-ups that are looking for hospital partners to validate these ideas and tools. Hospitals that embrace and learn from start-ups, their performance data, and Medicare demonstrations are likely to gain share and do better as our healthcare system reforms.

Q. You said recently that changes that are happening in health care will make it more fun to be a physician. Tell us more about that. 

A. As a doctor, there is nothing I want to do more than help a patient get better. All the time I spend coding, collecting, revenue cycling, filling out forms, dealing with insurance companies, and tracking down other doctors and clinicians is painful—and it’s not helping patients. With the advent of larger health systems where we can work together on a team, and with the advent of risk-based payment models, I have more flexibility in how I practice medicine. I envision a future where insurance can help patients actually ascertain value and go to providers that specialize in what they need. The future of health care is going to be much more focused around care delivery that consistently creates great clinical outcomes, with highly differentiated patient experiences, and care teams that are dedicated to helping each patient do well. When a patient does better, we will all do better economically, because we will have a shared savings incentive around that patient doing better. To me, a system like that would be a much more fun, rewarding, and interesting system to work in, because I would have more of an opportunity to focus on each patient, and I would do better financially when the patient does better, not when the patient gets sicker.

Q. Will it also be more fun to be working in healthcare finance? 

A. I think so. When your financial performance is linked to patients getting better, as opposed to being sick, that strikes me as a more rewarding job. I’m excited because I think health care is going to get better sooner. I appreciate the leadership that healthcare finance professionals are providing to help make their institutions better. A world where we’re competing on the basis of value, where we’re focused on helping patients avoid complications to achieve the best clinical outcomes, and where we spend more time working in teams is a better world. I’m excited about our prospects for achieving that. I hope that others share that enthusiasm and work hard to help us get there.


About Bob Kocher, MD 

Kocher is a partner at the venture capital firm Venrock, where he focuses on healthcare IT and services investments. He currently serves on the board of Castlight Health and the advisory boards of Harvard Medical School Health Care Policy Department, USC Leonard D. Schaeffer Center for Health Policy and Economics (where he is also a senior fellow), National Institute of Healthcare Management, and ChildObesity180. He is also a nonresident senior fellow at the Brookings Institution Engelberg Center for Health Care Reform and co-chair of the Health Data initiative, a joint effort of the U.S. Department of Health and Human Services and the Institute of Medicine to release healthcare data to spur private sector innovation to improve healthcare cost and quality. 

Prior to Venrock, Kocher served in the Obama Administration as special assistant to the president for healthcare and economic policy on the National Economic Council. In that capacity, Kocher was one of the shapers of the Affordable Care Act, focusing on cost, quality, and delivery system reform and health IT meaningful use policy. Prior to serving in the White House, he was a partner at McKinsey & Company, where he led McKinsey Global Institute’s healthcare economics work and Center for U.S. Health Reform. Kocher received his medical degree from George Washington University and completed his internal medicine residency training at the Beth Israel Deaconess Medical Center and the Harvard Medical School. 


Hear Bob Kocher at ANI: The 2013 HFMA National Institute, June 16-19, Orlando. Visit

Publication Date: Monday, April 01, 2013

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