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Column | Cost of Care

Healthcare’s top area of vulnerability: cost effectiveness

Column | Cost of Care

Healthcare’s top area of vulnerability: cost effectiveness

Cost effectiveness is a weak spot for hospitals and health systems. That’s what nearly 80% of CFOs surveyed for HFMA’s “Healthcare 2030” series told us. In fact, cost effectiveness was healthcare’s No. 1 area of vulnerability to disruption, according to the survey. Let’s peel back the layers of the cost effectiveness onion.

Pricing is the outermost layer. In many instances, what people outside of healthcare circles view as cost effectiveness is actually pricing. HFMA has been encouraging the development of a rational, defensible pricing system since at least 2007, when we published Reconstructing Hospital Pricing Systems. But nearly 15 years later, the chargemaster system, which was built for a previous era, is still firmly entrenched. And while the regulatory mandate to publish chargemaster prices may provide fodder for investigative journalism, it does little to promote meaningful price transparency for consumers.

Go a layer deeper and that brings us to costing. To improve cost effectiveness, it’s vital to have a contemporary cost accounting system that enables providers to know how much it actually costs them to deliver a service or provide an episode of care. As a first step, the open-sourced L7 Cost Accounting Adoption Model enables providers to assess their current cost accounting model methodology and understand the level of accuracy of their cost data.

Understanding costs is the prerequisite to meeting care purchasers’ expectations that providers reduce the total cost of care while maintaining or improving healthcare quality. That’s what HFMA’s research on delivering high-value healthcare is all about. And it’s where the ongoing outpatient shift and the more recent expansion of virtual care and hospital-at-home care models come into play.

The next layer brings us to the level of the fundamental hospital business model. As one CFO in the “Healthcare 2030” survey wrote: “The most promising innovations are the ones that will keep patients out of the hospital. That may be somewhat incongruent with long-term financial viability of some hospital services.”

Well put. And — while perhaps counterintuitive to historical bottom-line management — quite necessary.

Finally, we get to the core of the onion and here’s what we find: In essence, we must concern ourselves not only with the cost effectiveness of healthcare but also with the cost effectiveness of health. Here’s why: As a society, we are spending 90% of health-related dollars on healthcare, not on the social determinants of health and behavioral factors that largely determine an individual’s health status. And most of those healthcare dollars are spent on chronic conditions — even though many such conditions are linked to social determinants and behavioral factors. This resource allocation is not sustainable on a societal level. It’s not going to yield the improvements in outcomes that care purchasers expect and deserve.

So where do we go from here? What are the implications for healthcare stakeholders?

Last spring, we hosted  a conference that addressed exactly this question. We recently wrapped up a two-day meeting of thought leaders that explored cost effectiveness of health further. And we have a track dedicated to it at the HFMA Annual Conference. Stay tuned for more.


About the Author

Joseph J. Fifer, FHFMA, CPA,

is president and CEO, HFMA, Westchester, Ill.

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