Can Cost Accounting Save Health Care? Not Without Renegotiating the System

Dr. Barry Dorn contributed to this post.

In the September 2011 of Harvard Business Review, Harvard Business School professors Robert Kaplan and Michael Porter argue that a better understanding of the actual cost of care patient-by-patient can have a dramatic impact in the effort to control costs. They maintain that actual costs are poorly understood, that there is a mistaken belief that many costs are too complex to allocate accurately, and that there is overestimation of the percentage of costs that are fixed. They also argue that there has been an unwillingness to take the time to break down the costs of the individual components of the cycle of care.

A greatly simplified overview of their solution is that creating more detailed “patient process maps” and more accurate measurements of the time and cost of each step of that process can create a detailed picture of the total cost of a patient’s cycle of care. With this information, waste can be identified, efficiency improved, and costs controlled. We agree with this though it does not capture the complete picture.

The article makes many excellent points including pointing out the confusion between what a given procedure or test costs, its reimbursement rate, and its actual cost. Their dissection of the process of knee replacement due to severe osteoarthritis is complete and insightful. It also represents one of the easier problems to solve because of its routinized nature.

However we believe that Kaplan and Porter miss three important points that are critical to meeting this challenge:

  1. They make the common argument that better early detection and diagnosis help patients avoid more expensive treatments required if their conditions advance. This is true. What is not true is that this automatically reduces costs. Healthier patients are likely to live longer and may cost the system more over time. We are emphatically not suggesting that the system should have a goal of shortening people’s lives; long lives, however, will entail more care – and more costs – as patients age;
  2. The second mistake is to treat the health care system as a seamlessly integrated network where each step of a patient’s cycle of care can be evaluated, costed, and controlled. This may be possibl e with unifed systems such as Kaiser Permanente where all aspects of the patient experience happen under the auspices of a single organization. This is not the case for most patients. One typical cancer patient we know in Boston had a surgeon at one hospital, an oncologist from another, and a radiologist from a third. Although these three institutions are linked, the patient received separate bills from each and needed to play the role of care coordinator herself. While unified in concept and using interoperable electronic medical records, the institutions function separately in many ways. Beyond the time spent in these institutions, the patient also worked with an primary care doctor, an accupuncturist (paid privately), a pharmacy, and other providers that may or may not be willing or able to share the information necessary to create a unified view of a patient’s care cycle;
  3. The third issue, almost the inverse of #2, is that Kaplan and Porter apply a linear approach to solving a systems problem. They have a seven-step process which seeks to reduce costs by gaining an ever-more-detailed look at each of the pieces in the process. Systems thinking, however, has shown that it is the relationships between components that are most important for understanding and changing system behavior. For example, the authors do an excellent job of showing how to deliver more value-per-dollar-spent for “sick care” but not how to tranform the system to one that is focused on health. As one of the people we interviewed for our book told us, the system is great at knee replacement but not at helping patients avoid the need for knee replacement. Ultimately, helping a patient preserve the function of their original knees will give them more value, and save more costs, than even the most efficient knee replacement process. Yet the system is full of incentives that promote joint replacement rather than joint retention.

We applaud Kaplan and Porter’s efforts to bring a more coherent approach to the challenges of costs in health care. Their prescription can be useful for delivering more value when “sick care” is required and for self-contained care cycles. However it is only part of the solution to the broader issues that underlie the continued rise in health care costs. That will requiring the paradigm of the system – and renegotiating everyone’s role in it – toward the promotion of health.

Download a excerpt of Renegotiating Health Care.

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