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Obstacles to and progress in improving hospitals’ understanding of their total costs of care were explored in an HFMA executive focus group

How To | Cost of Care

Obstacles to and progress in improving hospitals’ understanding of their total costs of care were explored in an HFMA executive focus group

  • Cultural challenges are among the many obstacles to hospitals improving their understandings of their total costs of care.
  • A key area of progress is increased physician office integration into hospitals’ cost accounting efforts.
  • Expected benefits from such efforts include improved negotiating positions with health plans and reduced costs of care for hospitals’ local communities.

Healthcare organizations face challenges in identifying the total cost of care, including difficulty collecting information from service providers outside of their organizations, according to an HFMA executive focus group. The seven finance executives from hospitals and health systems of various sizes aimed to identify and compare their organizations’ approaches, plans and goals regarding understanding the total cost of care. The discussion followed a spring survey of 226 C-suite and director-level respondents by HFMA and Strata Decision Technology, which found their organizations’ cost-accounting abilities in several key areas ranged, on average, from “limited” to “moderate.” That middling response echoed the response to a similar 2011 HFMA member survey.

  • Challenges to identifying the total cost of care, according to participants in the focus group, have included:
  • Difficulty collecting information from service providers outside of the organization
  • Technical and cultural challenges to integrating clinical and nonclinical data
  • Physician preferences driving consideration of how to collect and use reliable data
  • Costs of technological solutions, including integration with existing systems
  • Cultural resistance to change
  • Difficulty in communicating the value of investing in cost of care systems

Cultural obstacles vary

One hospital finance executive said organizations are not impeded in understanding their costs for want of cost accounting technology, because such tools have been available for many years (although earlier approaches may have depended on less-reliable Medicare cost reporting logic).

“The challenge is that culture of changing people, trying to get people to change, especially physicians,” said the executive. “I feel we’re talking about pathways now, and 15 or 20 years ago in my career, we talked about pathways; and if you followed everything along this pathway, you could save money or you could reduce the variance.”

Another cultural impediment is that many hospitals feel little pressure to delve into understanding their total costs of care because they still operate in largely fee-for-service local markets. That pressure has begun to appear in some markets where health plans have incentivized value-based care and population health outcomes, said one participant.

Other cultural inertia may prevent hospitals from successfully using cost accounting to identify cost variation among a system’s hospitals or departments within its hospitals.

“But even if we have it, I feel like we’re still at a point where we just explain away the variation and don’t drive change,” said a health system executive.

Regarding the price of such cost accounting systems, one executive said, “It’s sometimes hard trying to convince people that we need to spend money to be able to save money in the future. But once they start seeing the benefits, and they see the demonstrations that we’ve done with them, it’s an easy sell from there.”

Some progress seen

A potential area of hope for getting past those obstacles is that many hospital organizations already have started the process of integrating physicians into their total cost of care big picture.

“I had one surgeon who told me he’s never gotten — no doctor has ever gotten — a bad report card,” said a hospital executive.
“When you give them information that shows them how they rank against their peers, that’s pretty powerful.”

Attendees also identified other areas of progress among efforts to understand total costs of care:

  • Most organizations understand their internal costs, within the controlled hospital setting.
  • Organizations generally are trying to improve their understanding of the total cost of care.
  • Cost of care information often is used in negotiations with health plans.
  • Such cost information is used to spur culture change, inform and drive process change and broader understanding.
  • Use of total cost of care data to lower costs helps serve local communities.

One hospital executive described how the hospital uses data on total cost of care to change the business model of its post-acute care partners from one where a facility holds onto patients until their benefits are exhausted to one where the focus is on improving the health and mobility of patients the hospital discharged to them. Those changes were credited with reducing the hospitals’ average post-acute care length of stay from 41 days to 27 days.

Where hospitals are investing

Hospitals’ technological investments aimed at improving their understanding of the total cost of care include those designed to:

  • Improve cost accounting
  • Refine reporting
  • Support predictive analysis
  • Improve consistency between diverse operations
  • Support business intelligence requirements
  • Integrate disparate systems
  • Upgrade existing systems
  • Enhance quality of care

Several executives identified “hidden costs of care” they still are trying to figure out how to include in their cost accounting. For example, many inpatients at one hospital are lower-acuity Medicaid patients, and the program averages “a couple of hundred days” in accounts receivable.

“That’s no way to run a business when they’re your largest payers, and that’s not really ever factored in necessarily in the total cost of care, but it’s definitely a line item that does need to be considered,” said one executive.

Additional key trends

Hospitals are very active in many areas of understanding, reporting and using the total cost of care because it now is viewed as a necessary component of understanding and communicating an organization’s actual experiences and needs and determining ways to improve efficiency.

That activity is driving large investments of money, time and cultural capital to understand the total cost of care.

Ongoing and future initiatives to understand hospitals’ total cost of care are expected to improve executives’ decisions. And the
positive results from such improved understanding likely will include improved negotiating positions with health plans and reduced costs of care for hospitals’ local communities.

For instance, one health system aims to identify the total cost of care through the whole treatment process to help bend the cost curve downward and garner bonus payments by having 80% to 90% of its revenue come through risk-based contracts.

“We can really be successful as an organization and drive cost down for the community,” the executive said. “That’s really what our mission is over time: to keep costs in check for the community that we serve.” 

About the Author

Rich Daly, HFMA senior writer/editor,

is a content manager in HFMA’s Washington, D.C., Office. (

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