The business focus for health system leaders has traditionally been on understanding their markets, profitability, growth opportunities, and the strategies to sustain and grow volumes. These leaders often understand less well the total costs of care in their communities, and how those costs across the continuum compare with total costs in similar communities in their states or regions, or across the nation.
In his June 1, 2009, article in The New Yorker, “The Cost Conundrum,” Atul Gawande, MD, discusses the marked cost and utilization differences between similar healthcare markets in Texas and contrasts these two markets with high-performing markets elsewhere. He observes that variability in costs and utilization—after age, acuity, and local costs are accounted for—will have potentially dire strategic implications for providers, given the expected transition away from fee-for-service to population- and budget-based payments.
It is revealing to consider the percentage variation from the U.S. average in inpatient use rates and payments made by the Centers for Medicare & Medicaid Services (CMS) for Medicare patients across the six markets referenced in the Gawande article.a One would expect that use rates and costs would vary together (i.e., higher use rates would be associated with higher costs). Such is generally the case, but there are interesting outliers. Rochester, Minn., has inpatient use rates 5 percent higher than the U.S. average, but the CMS payments for the hospital services component and total costs are well below the U.S. average (228 and 231 percent, respectively). In contrast, McAllen, Texas, has inpatient use rates only marginally higher than Rochester, but the costs of hospital services and total costs are dramatically higher than the U.S. average (25 and 55 percent, respectively).
A look of the components of the CMS costs for each market discloses that the proportion of the costs associated with each component relative to the whole varies significantly across the markets.
Movement away from fee-for-service payments to population and budget-based payments offers an opportunity for providers to benefit from cost savings generated from changing utilization and increasing operational and systemic care delivery efficiencies. However, it is important that health system leaders understand where the opportunities for cost savings lie and the levers available to achieve those savings. Understanding the cost drivers across the entire continuum of care is a strategic imperative for health system executives to position their delivery systems to prosper under the payment incentives of population- and budget-based payment systems.
This analysis was developed by Stroudwater Associates. For more information, contact Don Horstkotte, senior consultant, at firstname.lastname@example.org.
a. Population use rates are for ages 65 and older; CMS reimbursements are price-, age-, gender-, and race-adjusted.
Publication Date: Monday, October 01, 2012