Shining a bright light on the myriad components that drive patient care costs has allowed some health systems to discover more ways to lower the cost of the care they provide. 

At a Glance

To better understand true costs and use this knowledge to drive savings, health systems are:

  • Finding ways to combine clinical and financial data to identify clinical care savings 
  • Including equipment—not just care variation—when researching clinical cost drivers
  • Benchmarking to identify both relatively high-cost areas and lower-cost approaches 
  • Including nonclinical support areas when looking for systemwide cost drivers  

A range of healthcare payment and delivery reform initiatives in recent years have aimed to control spiraling costs. But some organizations have discovered that a key part of controlling costs is first understanding the totality of care costs to identify the best opportunities for savings. 

Teasing apart the various clinical and support components driving overall care costs also has allowed hospitals and health systems to target savings efforts in ways that complement higher-profile initiatives, such as accountable care organizations (ACOs).

Innovative Tools for Cost Analysis

To understand the true cost of care across clinical departments, Bellin Health System in Green Bay, Wis., identified both direct and indirect costs using a proprietary application that sits on top of its financial reporting system, called Click View. The application allows the integration of financial reporting information with other data, such as Bellin’s electronic health record (EHR) system, to examine all of the charges from various departments that have been applied to a service. Details of the application include directly costing out materials used in a procedure and using a cost-to-charge methodology to determine each department’s cost relationship. 

Click View allows Bellin to compare the same procedure across the health system to identify variation in cost among physicians as well as understand the profitability of the same procedure by payer. 

The application drills down to the patient-account level by pulling real-time data to include application of the payment against the account.

The new approach replaced a similar time- and labor-intensive spread sheet process that was “very challenging” to keep updated, says Jim Dietsche, CFO.

“This system enables our leaders to look at length of stay of cases on inpatient work, the cost of the device or the supply involved, and all of the resources that are consumed through the provision of those services,” Dietsche says. “Before this application was implemented, managers weren’t sure where to concentrate their efforts to effectively reduce costs.”

The findings of the application are disseminated through Bellin’s executive leaders and clinical leaders, who examine the findings across all services or focus on areas. Specific uses of the cost variation software, such as enabling the health system’s imaging leaders to examine imaging costs and earnings in every area where they are used, “has been very helpful for our organization,” Dietsche says.

“It’s not a true cost-accounting system, which includes time elements and other things,” he says. “This system looks at the application of a cost to charge in a way that is directionally accurate.”

Bellin accounts for support costs by applying an indirect support cost as part of its efforts to determine bottom-line profitability. Controlling support costs remains the responsibility of each support department, such as the business office or the IT department. Meanwhile, clinical leaders focus their cost-determination efforts on the services that they provide.

“We want the clinical leaders to look at the cost of care for the services that are provided, which we call brands within our organization,” Dietsche says. “We want those leaders to be looking at all of the services on the continuum of care for that patient.”

Bellin’s efforts to obtain a true understanding of its direct clinical costs include a focus on global medical supplies. Health system leaders examined variation in the cost of hip-replacement medical devices by physician and found a wide variety of devices were in use. The cost application was used to identify the cost difference among the various devices based in part on clinical outcomes data.

A value analysis team used that information to negotiate new purchasing agreements and to make orthopedic surgeons aware of the differences in cost among surgeons who performed the same procedure. The variation identified among orthopedic device suppliers led those surgeons to narrow their purchases to a single supplier and develop a new standard of care on the use of the devices. The result: $3 million in annual savings on orthopedic supplies.

The health system is using a different source to determine its nursing costs. An outside vendor provides Bellin with real-time data on the productivity metrics of its nursing units, which allow historic examinations of the cost of nursing services per patient day. An examination of benchmark information provided by the contractor allows Bellin to identify the location of the best practices.

“That direct costing methodology is directly attributable to the success that we have had in lowering the cost of our nursing services,” Dietsche says.

Over the past two years, the cost analysis has allowed Bellin to save at least $10 million in direct nursing care costs per day through various protocols, such as improved patient load forecasts that have reduced the use of overtime.

“So we are properly staffed as opposed to overstaffed or severely understaffed and facing an overtime situation,” Dietsche says.

A Comprehensive Cost-Analysis Approach

Banner Health in Phoenix, Ariz., is moving to understand the true care costs across the system. Banner began implementing a comprehensive cost approach this year that it expects to complete by 2016. 

The new cost approach was driven by a shift in Banner’s revenue model toward assuming full risk for patient outcomes. Such risk arrangements with insurers delegate the medical claims risk to Banner by allocating a set pool of funds to the system to manage all of a patient’s care for a given condition. 

Such arrangements have increased from 10 percent of Banner’s revenue a year ago to 15 percent, says Dennis Dahlen, senior vice president and CFO, and that share is expected to continue to grow rapidly. The new arrangements have created greater financial pressure to determine the most cost-efficient location for treating patients within the system.

A comprehensive cost approach can analyze cost conundrums, such as whether adding one more procedure to an existing imaging center at a hospital is better because it has a modest incremental cost, or whether capacity problems at that hospital might leave the organization better off building a storefront imaging facility with a much lower average cost per procedure and directing patients there.

“Those are the kind of decisions that we are not really able to analyze on a transactional level in a really robust way,” Dahlen says. “We are hopeful this system will cure that.”

The new system will replace the case-by-case cost analysis that Banner currently uses to drive changes. Such analysis is driving a re-examination of Banner’s imaging strategy. In the Phoenix market, Banner’s 12 hospitals have “robust” imaging. The result is not only concentrated volume, but also high expenses because of high hospital overhead. Meanwhile, the system has a “very modest presence in the storefront imaging ambulatory space,” which offers both lower costs per test on average and greater customer convenience.

“Based on the case-by-cost analysis for imaging, we’re looking to enhance ambulatory imaging access and market this to payers,” Dahlen says.

Banner also is confronting rising operational costs through benchmarking and optimization. The focus on these two approaches was driven by ongoing cuts in Medicare reimbursement and the growing difficulty of shifting those costs to other payers.

The approach used by the health care system for several years has given hospital departments the goal of performing at least at the 25th percentile compared with similar facilities in the benchmarking database. Departments that fail to perform at that level receive annual budget adjustments based on their level of deviation, which has moved them closer to the goal. 

In addition, Banner launched an optimization effort two years ago to improve the efficiency and cost effectiveness of corporate services and hospital departments. An external consulting agency provided ideas for optimization and teams of employees evaluated cost drivers for corporate services and hospital departments. They produced hundreds of possible projects, many of which were approved for implementation. By the end of 2013, the initiative produced more than $70 million in financial improvements.

One such optimization project was the opening of Banner’s own drug compounding and packaging center. Centralizing drug repackaging allows Banner to reduce labor costs, standardize package labeling, and improve the quality of the final project. Insourcing sterile and non-sterile drug compounding to a central location improves quality, lowers costs, and reduces reliance on outside vendors. 

The system hopes the use of benchmarking, optimization, and ongoing clinical improvements will reduce spending by 6 percent over the next four years, which would allow it to modestly profit from Medicare reimbursement. 

Combining Benchmarking and Centralization

Benchmarking also is a key component of Iowa City-based University of Iowa Health Care’s (UIHC) efforts to understand the true costs of care across different departments in terms of both direct and indirect costs.

The health system’s cost of care is identified through a cost accounting system, a budgeting system, and through benchmarking with the University HealthSystem Consortium.

To identify cost trends and implement corrective actions within departments, UIHC starts by generating profit-loss statements by department and service line from its decision support system. Additionally, the system examines resource consumption profiles, which look at the average resource consumption by MS-DRG and APR-DRG. Comparisons are drawn between like levels of severity among the DRGs. The result identifies the various cost drivers in each type of case.

“Many times, this review can trigger a response from physicians regarding behaviors they may not have realized were adding that much cost,” says Mark Henrichs, assistant CFO.

Next, outside metrics—like the Medicare DRG average length of stay, the Milliman length of stay, and the University HealthSystem Consortium length of stay by DRG and APR-DRG—are examined to identify areas for potential savings.

Those benchmark examinations are followed by a look at ancillary utilization within each consumption profile, such as lab utilization and implant costs. An understanding of those costs supports better physician engagement because this information helps physicians understand the costs of all the elements in a particular case and the role each element played in the quality of care provided.

“There are often choices that physicians can make that wouldn’t really have an impact on quality, but can definitely change the cost curve,” Henrichs says.

Examinations of how the service lines compare with benchmarks is an ongoing process, Henrichs says. But deep dives are conducted by each department, and over one-third of department heads have become highly engaged in the process, with more becoming more engaged each month. Involvement and education of department heads on the cost effort is a “huge piece” of effectively utilizing cost accounting systems, Henrichs says.

UIHC has targeted indirect costs through both increased centralization and benchmarking. 

The University HealthSystem Consortium is the major group that UIHC benchmarks its administrative costs against. Administrative costs are compared based on cost-per unit of service to identify efficient areas as well as those that need improvement.

“Our goal is to be below the 50th percentile of the facilities we are looking at in our benchmark group,” Henrichs says.

Departments have engaged in cost-saving initiatives, which started with internal decision support and external benchmarking reviews. Departments that have become more efficient utilizers through the review process include the kidney transplant area, which implemented strict protocols to produce savings from reduced resource consumption. Other efforts have engaged physicians to become part of the purchasing process with vendors. 

“One example is in the area of neurosurgery, where physicians and hospital administrators worked together to find savings of more than a million dollars in implant and supply acquisition costs annually,” Henrichs says.

UIHC also has begun to identify costs of care outside of the system through its participation in both a Medicare ACO and a private payer’s ACO. The Medicare ACO’s claims data has enabled UIHC to look beyond the narrow episode of care data available in-house to more longitudinal care experiences that include expenses incurred outside UIHC facilities.

“This effort has been very effective in engaging physicians, because they can really understand the resources utilized from a claims perspective,” Henrichs says. “They can see the whole gamut. When you are using a decision support system in-house, it is all based on activity that occurs internally, but the related care activity is not necessarily all going to occur within the confines of your own facilities.”

After analyzing the impact of cost on a longitudinal basis, ACOs should integrate EHR information with claims information to truly report quality. Given the levels of standardization required around the reporting and extracting elements of electronic medical records (EMRs), ACOs could move fairly quickly to combining claims and medical record details into quality metrics.

“Claims data gets us part of the way there, but true EMR specifics are needed to get to fully formed quality metrics,” Henrichs says.

Among the insights gained through an examination of hip- and knee-replacement surgeries were differences among physicians, procedure protocols, and post-op skilled nursing facilities (SNFs). An analysis compared resource utilization and outcomes at each stage of care. The analysis allowed UIHC to discuss improvements with its own physicians and post-acute care providers.

“With ACOs having complete claims data, we now have access to all the elements that ensure we are not missing any component of the patient activity. Ultimately, this supports our ability to create accurate population-based clinical resource groupings,” Henrichs says. “When elements of care are missing, the potential for an error in that clinical resource grouping increases.”

Clinical resource grouping provided care coordinators the information necessary to have a positive impact on care delivery, quality, and cost. The combination of these elements has reduced risk-adjusted population care costs in both the Medicare and commercial ACO populations.

Exhibit 1


Relying on Physicians to Identify Cost-Efficient Approaches

Another health system that emphasizes benchmarking in its cost accounting process is OSF Healthcare, based in Peoria, Ill. That organization compares its cost per DRG, or cost per unit of service, and clinical utilization with that of other health systems to identify areas that need cost-reduction efforts.

“Although we don’t have exacting cost-accounting methods, we do know where our cost excesses are through the benchmarking process and how we relate to other healthcare organizations of similar makeup and size,” says David Stenerson, CFO of OSF Saint Anthony Medical Center in Rockford, Ill.

OSF Healthcare spread benchmarking from a few of its hospitals to the entire system three years ago as part of an effort to standardize its approach to cost control using common technology to identify savings opportunities.

The benchmarking process is used “to drill down to the granular level”—once a broad category of focus is identified—using one of two approaches, Stenerson says. OSF identifies practice variations among uncomplicated high volume cases within a DRG. Physicians in the DRG process analyze the approaches used and identify the best practice.

“It’s about looking at the individual case details. It doesn’t take a lot of cases to see where the practice variation is and what the best practice ought to be,” Stenerson says. “By engaging the physician, we ensure that it is done properly. The clinician also has a great perspective as to how patients move through a hospital system and knowing where the touch points are to make sure the rollout is effective.”

That best practice is then deployed through a new order set or a preference list for physicians through the common EHR used across OSF.

“Those get deployed, and often there is an education process associated with it. For instance, sometimes the patient comes in through the emergency department [ED] and end ups on the inpatient hospital unit, and there are things that can be started in the ED that have an impact on the overall course of treatment for that patient,” Stenerson says.

The system allows OSF to identify areas that need improvement both within each facility and across facilities. The goal is to share knowledge by facilities that are performing better and to use this information to establish a standardized process that represents a best practice across the industry.

Through the benchmarking process, OSF has achieved its greatest clinical efficiency gains in the cardiac service line, on which OSF initially focused the effort because of its high volumes. The process enabled OSF to identify individual facilities where more efficient clinical utilization was needed within the cardiac DRGs.

“Through that service line, we were able to have an individual who covered all of the different facilities pull forward a standardized order set and clinical utilization. This enabled us to determine a best practice by conglomerating ideas from the individual sites,” Stenerson says.

OSF is looking to use the same benchmarking approach in more areas, including neuroscience and orthopedics.

“We’ve come up with a good process to initiate the dialogue, engage the clinician in the process, and come up with a better way to do things,” Stenerson says. “We’re crossing all of the service lines and all of the different entities to deploy that process across the ministry.”

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C. office. Follow Rich on Twitter.

Publication Date: Monday, March 03, 2014

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