Care Management

Looking Beyond Utilization Management: Controlling Inpatient Cost in a Value-Based Environment

November 2, 2017 1:51 pm

In a value-based payment environment, physician leadership is necessary for organizations looking beyond utilization management to achieve cost control.

Since the advent of managed care in the early 1970s, physicians have been acutely aware of the need to control healthcare costs. Most physicians are aware that healthcare costs in the United States are higher than those in other countries and that there is an urgent need to control costs. However, many are not familiar with the data underlying these circumstances.

According to the Centers for Medicare & Medicaid Services (CMS), the United States spent $3.2 trillion on health care, or about 17.8 percent of the Gross Domestic Product (GDP), in 2015, and by 2025, healthcare spending will rise to 19.9 percent of GDP. a

Worldwide Cost Comparisons

A simple way to bring this into perspective is to compare our spending per person with spending in other western countries. The average annual cost per person for health care in the United States surpassed $10,000 in 2016. b That figure is far more than double the average for all member countries in the Organization for Economic Cooperation and Development (OECD). The exhibit below compares our nation’s spending per person with that of other western countries, based on OECD data.

Healthcare Costs per Capita (Dollars), 2016

The information in the exhibit may be best understood if one also considers the percentage of gross domestic product (GDP) allocated to health care. As stated above, health care represents a significant percentage of the nation’s GDP. Any dollar spent on health care is a dollar not spent elsewhere, and according to OECD data, year after year, the United States continues to outpace every other country in terms of actual spending and growth rate. c Many economists agree that this pattern is not economically sustainable and predict that, by 2024, one in five dollars spent in the United States will be on health care. d  Data show that regardless of the financial measure one looks at, the United States remains an outlier in terms of healthcare cost.

Next, let’s consider what the United States gets for the money it spends. The OECD comprises countries very similar to the United States in many ways. In the 1980s, U.S. life expectancy was similar to that in other OECD countries, but over the past two decades, our rate of increase has been slower than other countries in the group. Today our life expectancy is relatively low compared with many OECD countries, as shown in the next exhibit.

Life Expectancy at Birth, 2015

An examination of quality outcomes performed by the Commonwealth Fund exposes the same trend. e The United States ranks last overall among 11 OECD countries in the areas of quality of care, access, efficiency, equity, and healthy lives. There are parts of the country that have the highest quality care in the world, but an aggregate of all the care delivered nationwide shows a consistent picture of high cost and less-than-desirable outcomes. It therefore is reasonable to argue that the United States spends far more than necessary, and the same outcomes or better can be achieved at a lower cost. Certainly, slowing the trend of rising cost is highly desirable.

The Current Approach

Let’s take a closer look at cost. For the past 40 years, the fundamental approach to managing cost has been utilization management—primarily through controlling inpatient and outpatient volume. Hospitals employ interventions to reduce the number of admissions, the inpatient length of stay (LOS), the number of expensive outpatient interventions and tests, and the number of emergency department (ED) visits, among other measures. Other than for a brief period in the mid-1990s when the nation saw a flattening in the cost curve, these utilization management interventions have not slowed the medical cost trend sufficiently.

A comparison of U.S. utilization numbers with those in other western countries provides perspective on utilization in the United States. Inpatient utilization is especially noteworthy because hospital care represents one-third of all U.S. healthcare spending at $1 trillion. f

U.S. average LOS is 5.5 days, among the lowest for any developed country, as shown in the exhibit below. The average LOS for OECD countries with available data for 2014 was 6.6 days.  

Average Length of Stay Acute Care, 2014

Looking at discharges per 100,000 population for 2010 (the most recent year U.S. data are available), the United States is again significantly lower than the average. g

Hospital Discharge Rates per 100,000 Inhabitants, 2010

The data show that the United States has some of the lowest inpatient utilization rates in the world in terms of how often people are admitted to hospital and how long they stay in hospital. Yet this is the primary focus of most inpatient cost management initiatives. The primary focus for hospitals and health systems has been on reducing inpatient utilization. Physicians are constantly told to bring down the average LOS and the number of admissions, yet based on available data, this effort has had little effect in reducing the cost of care, perhaps because the same care is still provided, only in a shorter time frame, with the same overhead allocations applied to fewer days. Indeed, to get patients out faster, U.S. hospitals may be intensifying their service delivery, leading to higher costs in a shorter time.

The story is completely different when we consider unit costs. According to data furnished by the International Federation of Health Plans, the average cost per day in the United States is significantly higher than that of other countries. h  Moreover, the nation has significant variability from hospital to hospital: The lower 25th percentile is $1,514 and the highest 95th is $12,537. The exhibit below demonstrates how U.S. cost per day differs from that of other countries. It’s important to note that life expectancy is lower in the United States than in all but two countries in the exhibit, Argentina and South Africa.

Cost per Hospital Day, Various Countries Compared With the United States, 2012

The data can be interpreted in many ways, and there are clearly shortcomings to any data analysis of this magnitude. But regardless of that interpretation, the inevitable conclusion is that U.S. inpatient costs are much higher than those in other countries. When high cost is considered next to low average LOS and low discharge rates, it is clear the United States has a unit-cost problem, not a utilization problem (noting, however, that unit cost per day is partially driven by utilization of services).  

The current utilization management approach compounds this problem by encouraging physicians to have all the tests and consultations patients may or may not need performed as quickly as possible. We measure how long the patient stays in hospital and not how much is done for the patient. It’s no wonder that even as healthcare organizations initiate more stringent utilization management controls, there is no commensurate change in overall hospital costs.

The Physician’s Role

Unit cost is an aggregate of many different components, including physician costs, medication and device costs, test and imaging costs, hospital facility costs, procedure costs, and other ancillary costs. Each of these individual components tends to cost more in the United States, and collectively, they provide the greatest opportunity to reduce actual inpatient costs. Physicians working with their hospital business partners are in the best position to realize the needed cost reductions.

A 2015 study that looked at more than 3 million Medicare admissions to 4,501 U.S. hospitals found that inpatient consultations per admission varied among hospitals from 0.93 per admission to 3.4 per admission, with an average of 2.6 per admission and no appreciable differences in outcomes. i  The study concluded that hospitals exhibit marked variation in the number of consultations per admission in ways not fully explained by patient characteristics.

The more consultations a physician obtains, the longer the patient’s LOS and the more tests and interventions are performed. As a result, the number of consultations per admission has a direct impact on inpatient unit cost in terms of the actual cost of the specialist consultation as well as the additional tests and time resulting from the consultation. Given the amount of variability around the number of consultations per admission, it seems that there may be opportunities to reduce cost without affecting quality. However, physicians must work together to be able to address this area without having an adverse effect on quality—for example, by working to develop guidelines for the use of inpatient consultations instead of referrals to specialists following discharge, depending on the acuity of the problem requiring specialty follow up.

Joint replacement. There also is significant variability in the cost and types of devices used by physicians. Almost every high-cost procedure monitored by the International Federation of Health Plans costs the most in the United States. And the high cost is driven much more device and drug costs that by utilization, as discussed above. For example, a hip prosthesis costs, on average, $12,222 in the United States, compared with $2,682 in Spain.

Hip Prosthesis: Devices, Various Countries Compared With the United States, 2012

There also is significant variability in the cost of the prosthesis in the United States, ranging from $6,895 to $27,497. The cost of the prosthesis is almost half the cost of the procedure. Therefore, the opportunity for cost reduction is simply negotiating down the price hospitals pay for the device.

Total Hospital and Physician Cost for Hip Replacement, Various Countries Compared With the United States, 2012

It is interesting to note that the United States is not an outlier when it comes to the number of hip replacements performed as compared with other western countries. j   The same can be said for most other high-cost procedures. The opportunity lies not in reducing utilization, but in negotiating down device and equipment costs.

Childbirth. Childbirth provides another example to support this argument. As with many procedures, the average cost for a normal childbirth in the United States far exceeds the averages in other countries.

Total Hospital and Physician Cost for Childbirth, Various Countries Compared With the United States, 2012

About 99 percent of all births in the United States are delivered in hospitals, with about 85 percent of all hospital births attended by a doctor of medicine. k  As a point of comparison, a 2009 report found 8 percent of U.S. births were attended by midwives, while another study found that, as of 2014, the percentage was 68 percent in the United Kingdom, where the maternal mortality rate was one third of the rate in the United States. l    

Moreover, in some U.S. hospitals, each patient has her individual obstetrician-gynecologist (OB-GYN) deliver her baby, so there could be several physicians delivering babies the same night in a single hospital. And the infant mortality rate in the United States also is comparatively high, although a portion of that difference may be due to differences in the methods of reporting. m

A 2014 study by the U.K. National Institute for Health and Care Excellence found that a healthy woman with a low-risk pregnancies can give birth more safely under the care of a midwife than under a physician’s care. n  Physicians working with clinical leaders, and healthcare organizations working with health plans, to offer more women alternatives to OB-GYN delivery could reduce cost of routine delivery while increasing satisfaction for the same or better outcomes. There are many factors other than the mother’s choice that either prevent or discourage mothers from using a midwife. For example, many insurers do not have independent midwives in their network, or midwives cannot get hospital privileges. However, as part of their population management/global health initiatives, hospitals and systems can hire midwives and provide access, addressing those issues and giving mothers the choice.

Palliative care. According to CMS, 28 percent of all Medicare dollars are spent on beneficiaries in the last year of life. Studies show that 60 percent of Americans die in acute care hospitals, yet 80 percent of Americans say they want to die at home. o   The system is geared towards admitting dying patients. Providing the infrastructure that allows patients to successfully choose were they want to die and supporting them in their choice will improve satisfaction with care and reduce cost.

These are just a few examples and opportunities for hospitals to work with physician leaders to begin to aggressively address inpatient unit cost while maintaining or improving quality and satisfaction. The opportunities will vary by facility and will require extensive analysis at the facility or system level.

The Government’s Role

CMS and the federal government can help in cost containment efforts by negotiating prescription drug and device costs; however, hospitals should not sit idly by and wait for progress in these areas. Instead, hospitals should work with physicians and their patients to pressure state legislators to help address the cost of pharmaceuticals and devices. For example, in a state like Maryland, where the Health Service Cost Review Commission already determines inpatient fee schedules for all insurers and all hospitals are not-for-profit entities, it is possible for the state to get involved in such negotiations.

Cost containment efforts such as those described above will be challenging and likely meet with significant resistance from some stakeholders. Success depends on physician buy-in and meaningful involvement at the highest levels of leadership. As provider revenue increasingly is tied to risk-based payment methodologies, and as healthcare organizations continue to get diminishing ROI from additional utilization management activities, exploring new ways to contain costs is not only the right thing to do but also a necessary strategy for ensuring organizations can thrive.

In sum, physician and hospital leaders should look beyond utilization and work together as partners to address unit-cost drivers of care. The focus for hospital administrators should be on obtaining physician buy in and leadership in this area, which will be required for real progress to be achieved because most opportunities will involve changes of complex clinical processes. 

Olakunle Olaniyan, MD, FHFMA, MBA, FACP, FACPE, is president, Case Management Covenants LLC, Columbia, Md.


a. CMS, National Health Expenditure Data, Historical and Projected, pages last modified Dec. 6, 2016, and March  21, 2017, respectively.

b. Bloom, E., “ Here’s How Much the Average American Spends on Health Care,” CNBC, June 23, 2017.

c. OECD (2017), Health spending (indicator), doi: 10.1787/8643de7e-en (Accessed on 27 October 2017). (Under “Perspectives,” select “% of GDP”; Under “Time,” it is possible to view multiple years of data by clicking on the left and right arrows.

d. Mangan, D., “ $1 of Every $5 Spent in U.S. Will be on Health Care,” CNBC, July 28, 2015.

e. Davis, K., Stremkis, K., Squires, D., Schoen, C.,  Mirror, Mirror on the Wall, 2014 Update: How the U.S. Health Care System Compares Internationally , Exhibit ES-1: Overall Ranking, The Commonwealth Fund, June 16, 2014.

f. Centers for Medicare & Medicaid Services, “ National Expenditures 2015 Highlights,” 2015.

g. OECD (2017), Hospital discharge rates (indicator). doi: 10.1787/5880c955-en (Accessed on 24 October 2017)

h. International Federation of Health Plans, 2012 Comparative Price Report: Variation in Medical and Hospital Prices by Country , 2012.

i. Stevens, J.P., Nyweide, D., Maresh, S., et al., “ Variation in Inpatient Consultation Among Older Adults in the United States,” Journal of General Internal Medicine, Feb. 19, 2015.

j. Statistica, “ Number of Hip Replacement Surgeries in OECD-countries as of 2013 (per 100,000 Population) ,” 2017.

k. Martin, J.A., Hamilton, B.E., Osterman, M.J.K, Curtin, S.A., and Mathews, T.J., “ Births: Final Data for 2013,”  National Vital Statistics Reports, Centers for Disease Control and Prevention, Jan. 15 2015.

l. Friedlander, K., “ A Better Way to Give Birth,” CNN, May 11, 2015.

m. Kamal, R., Gonzales, S., “ How Infant Mortality Rates in the United States Compare to Rates in Other Countries,” Peterson-Kaiser Health System Tracker, July 24, 2015.

n. Tanday, S., “ Midwife-Led Units Safest for Straightforward Births,” National Institute for Health and Care Excellence, Dec. 3, 2014.

o. Stanford School of Medicine, Palliative Care, “ Where Do Americans Die?” 2017.


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