The Real Reason Healthcare Costs Are Elusive

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There has been a lot of press over the last few years about healthcare costs. Most of these articles refer to one of three things:

  1. increasing costs,
  2. variability in (or the flat out absurdity of) “costs” for procedures/medications, or
  3. lack of price transparency.

Some of the coverage, including Steven Brill’s 2013 article in TIME, “Bitter Pill: Why Medical Bills Are Killing Us,” and his 2015 book “America’s Bitter Pill,” has done a great job calling out deficiencies in healthcare pricing or cost, but it has completely and utterly confused the masses on what cost is.

There are a few ways of looking at cost depending on who you are and what kind of story you are trying to spin:

  1. Cost to the patient. This is often the infamous charge master for uninsured patients. Or it’s the negotiated rate for insured patients. (Side note: in a hospital setting the negotiated rate is often 60 to 80 percent less than the charged amount.)
  2. Cost to insurers. This is what most people refer to when they discuss the use of claims data for costing. It is what the insurance company pays out to healthcare providers.
  3. The true cost of providing a service. This is how much a health system spends to give a patient a new knee (or provide any medical service) regardless of how much it charges or gets paid by insurance.

The first two views on costing are simply estimates that use charge or payment data to approximate costs but have very little relation to the true cost of the services provided (especially at a patient or procedure level). This differentiation is extremely important because the ability for providers to understand and use accurate cost data is paramount to bending the cost curve in healthcare. It starts with these providers. The consumers of healthcare won’t see any significant change until health systems, the providers of care, are able to take on meaningful risk and reap the benefits of lowering the cost of care. The insurance companies most definitely won’t lower premiums or out-of-pocket expenses out of kindness—they’ll make their money regardless.

If a hospital system doesn’t know how much something truly costs, it will struggle mightily to take on risk or expose accurate price estimates. But it simply won’t survive if the health system’s leaders can’t make intelligent decisions when it comes to risk-based contracts (although I’m a believer that healthcare is “too big to fail” in the U.S.; that’s a separate topic).

The Real and Not-so-real Reasons for Elusive Healthcare Costs

I’ll get to the point: why is it so hard for healthcare providers to know how much something costs? There are a variety of theories floating around—some are legitimate and some are not:

Bogus Reasons:

Hospitals Are Hiding Something: Nope. Hospitals are just as confused as patients. Tracking costs is a skill they haven’t had to worry about historically. Hospitals have been able to avoid sophisticated cost management for so long because they have survived by relying on volume to drive profitability at a global level. We are approaching a critical turning point where that costing that is “good enough” in that world won’t suffice.

Declining inpatient volumes, decreasing reimbursement, evolving payment models, and a push for price transparency are going to force this change. And while I say healthcare providers aren’t hiding something (and they aren’t), I do think there is a growing sense of fear related to price transparency. The movement toward high deductible plans has quickly driven consumers of healthcare to become price sensitive. And that’s a good thing in many regards, but the problem is that patients don’t have all the information needed to make informed decisions. For example, Clinic A might cost more than Clinic B because Clinic A employs a care coordination team, spends extra time with patients, and has better outcomes. Until the industry can globally define and standardize “value” as it relates to medical services, consumers won’t be able make meaningful healthcare decisions. And many patients will default to making decisions based on price alone. I hope we get a standard definition eventually; in our current state it’s easy to see why just throwing out prices would be a valid concern for any business.

There isn’t enough data: I oftentimes hear that even with the flux of data from EMRs, we just don’t have what we need to cost accurately. That’s flat out wrong. I assure you that I am as disappointed with EMRs as anyone could possibly be, but the more we get into EMRs, the more we find that there is plenty of useful data. As an industry, healthcare has historically failed to leverage that data and accurately combine it with cost data in a scalable and actionable manner. The EMRs definitely weren’t set up for ease of costing, but they are a rich source of information that can be used to measure cost. (There are thousands of tables with billions of rows of data in large EMRs. Some of that data is worthless for this purpose, but plenty of it is not.)

Now, I’m not going to say we have all the data I would want to cost out healthcare. Fragmentation in healthcare and the unknown costs of services provided outside a hospital’s four walls is a critical deficiency (see legit reasons below for more on this). We need a better understanding of the great work that nurses do (and how much time is spent on certain tasks) so we can identify high-cost/low-value activities and improve processes.

We also lack detailed or useful insights in physician clinics. Due to differences in workflow, cost structures, etc. there is less useful data in the clinic setting. As volume shifts to the outpatient world, we must gain deeper insights into these operations, costs, and processes so we can evolve how we incentivize doctors to better align with the goals of expanding access, improving care, and increasing patient satisfaction.

We certainly can’t paint the perfect cost picture until the right technology at the right price can be passively integrated with care delivery, but we have plenty of data to do a pretty darn good job without major disruption.

Legitimate Reasons

Healthcare is complex: Very rarely are two office visits or procedures the same. We are dealing with people here—the drivers behind healthcare utilization are far more complicated than almost any other industry. Capturing all the nuances between cases without burdening healthcare providers or patients is a challenge. There are so many variables involved, both controllable and uncontrollable, that lead to variation. That being said, with the data available, solid costing processes, and some simple statistics we still should be able to tell someone 25th, 50th, and 75th percentile costs for a specific procedure or diagnosis with reasonable accuracy. (Understanding the various insurance contracts and how that impacts a patient’s specific case is another issue. But in general, healthcare truly is an extremely difficult beast to cost.)

Fragmentation: It’s hard to comprehend how fragmented healthcare is. Going in for a surgery could result in costs from one, two, three, four, or even five separate organizations. Hence, patients get a dozen bills from five different places. A patient will get a hospital bill for his stay in the facility. If the surgeon is not employed by the hospital, he’ll get a separate bill from her (and even if she is employed, the patient probably get a separate bill for her work). In many instances the anesthesiologists and radiologists aren’t employed by health systems, so he’ll get separate bills from each of them. Does he need rehab or follow up with his current physician? Yep, one or two more bills. Now, it’s plausible for each of the respective provider organizations to be able to cost out their individual pieces of the puzzle, but imagine the coordination required to understand the TOTAL cost for that encounter across all these organizations? Good luck. And by the way, that’s what providers have to do if they are part of a bundled payment initiative.

Data governance: Now these legitimate reasons are not to be overlooked. They are very real barriers to accurate costing, but in my mind the most significant and least discussed/understood challenge is data governance.

According to TechTarget’s Essential Guide on Search Data Management, data governance is the overall management of the availability, usability, integrity, and security of the data employed in an enterprise. A sound data governance program includes a governing body or council, a defined set of procedures, and a plan to execute those procedures.

Yep, I said it. The secret’s out. It’s kind of embarrassing to admit, but the real reason cost in healthcare is so elusive is something as simple as this. Not a lack of data, not the complexity of healthcare but the lack to govern our own data—something we control.

If you knew me, you would know that I despise data governance. I can’t imagine anything more awful than having to go to a committee about adding a transaction code to my patient accounting system or a naming committee to change the name of a reporting grouper. It makes me ill to even think about it. I just like getting stuff done without any red tape. However, I have been beaten into submission by the hundreds of data integrity and usability issues I have had to deal with over the years. I have come to appreciate the importance of data governance as it relates to analytics and insights. I realize now that it made me ill because it’s really hard. Execution of a comprehensive data governance strategy is complex. It requires dealing with political, technical, and change management issues that are deeply embedded in healthcare organizations.

At this point you might be wondering what data governance has to do with costing. Well, the answer is everything. The crux of costing any product or service is the ability to easily and appropriately marry expense data from the general ledger (and other systems like payroll, supply chain, etc.) with disparate data sources that drive costs–and data governance is the foundation of that capability.

We can and will build the software tools to cost accurately with scale, but without solid data governance those tools are useless. Without data governance, we will always be stuck with: a) a very generic, and likely inaccurate, set of costs, or b) an army of people working around the clock to clean up all of the data so it’s somewhat usable and nobody actually doing anything useful with the data.

The Challenge of Data Governance

Data governance is especially troublesome in healthcare for a couple of reasons.

  1. The massive consolidation in healthcare combined with high adoption of EMRs over the last few years has forced rapid integration of multiple IT systems. But given the pain and high cost of conversion it’s easy to see why many healthcare organizations didn’t address data governance as well as they would have liked.
  2. This hasn’t been a priority for most health systems. Even in organizations with a single EMR and general ledger it’s obvious that they weren’t thinking about data governance across IT systems during implementation and beyond (or didn’t have it in them to wage war on this sensitive issue).

Addressing Healthcare Cost with Data Governance

So where does an organization start? Here are a handful of specific data elements that require diligent governance for effective costing:

  1. EMR data to general ledger crosswalk: Who in the organization knows which pieces of data from your EMR and departmental sources align with which cost centers? This might seem simple, but there’s more to it than meets the eye when getting into very detailed and precise costing that uses more than just charge data.
  2. Supply chain: Does the organization have a centralized source of truth for supply chain costs? Are the correct items available in the EMR and easily linked back to accurate supply chain data? Does the organization have standard units of measurement across the health system so everyone enters the same unit of measurement for drugs for ease of costing and comparative analytics? And the list goes on…
  3. Personnel (including physicians and other providers): This is a really difficult one to manage, but necessary to have more direct and precise labor costs and link individual efforts to cost and quality outcomes. The organization should be sure to broadly link employees from payroll to the EMR and other departmental sources.
  4. Patient: Does an organization want to get a holistic view of patient and episode costs across the system? Well, it better have an Enterprise Master Patient Index (EMPI)—and preferably an upstream process to address the issue rather than a downstream “fuzzy logic” assignment.

Now there are plenty of other areas that impact cost and cost analytics such as standardizing transactional systems, personnel training for consistency in data entry, diagnosis, payer, etc., but the list above is what we have identified as highly related to improved accuracy and ease of costing.

We won’t solve the cost problem in healthcare until we take data governance seriously–and it needs to come from the top down. The good news is that it’s in our hands to solve this, and there are health systems out there that have proven it can be done. Now is the time to suck it up and clean up shop. It will be painful and difficult to unwind the years of negligence, but it must be done. So, what’s stopping us?


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