Who's to blame for the mess healthcare is in today? According to the finance leaders surveyed in the HealthLeaders Media 2012 Industry Survey, the lion's share of blame goes to the government. Fortunately, survey respondents think they know who's going to fix the situation: hospitals. If that's the case, then I have a suggestion for how healthcare organizations can go about doing that: change your entire cost model and find out exactly what your true costs are.
According to survey respondents, the government (48%) and health plans (21%) are both at fault for where we are today in healthcare. It's a point finance leaders feel more strongly about than any of their C-suite peers who were surveyed.
"There's no other answer than the government is to blame for where we are today," says Ann Pumpian, senior vice president and CFO at Sharp HealthCare, a not-for-profit integrated regional healthcare delivery system based in San Diego, in the survey report.
I agree that the government and health plans are responsible for the current state of things, but let's not forget that some of the blame also rests with healthcare organizations. After all, it's not as if healthcare has been ultra-progressive, especially in terms of adding and using technology or finding better ways to be efficient with resources.
And isn't that what drove up costs and ultimately sparked the need for legislation to begin with?
Sharp HealthCare comprises four acute care hospitals, three specialty hospitals, two affiliated medical groups, and a health plan. Pumpian adds that with Medicare and Medicaid reimbursement cuts and initiatives such as value-based purchasing hitting this year and coming to a head in 2013, finance leaders need to adjust their priorities to keep their respective organizations in the black.
This year's survey shows that finance, leaders rank their priorities as
- Patient experience/satisfaction (58%)
- Cost reduction, process improvement (49%)
- Payment reform, reimbursement (39%)
This order of priorities speaks to the unsettled state of the industry. When healthcare financial leaders are more focused on HCAHPS than on cost-reduction efforts, I think something is askew.
Finance leaders who do want to get serious about cutting costs, may be interested in a different approach to cost modeling called process-based cost modeling. Finance leaders use various terms regarding costing models, so arriving at an exact definition for PBC is challenging, explains Paul Selivanoff, CPA, vice president of finance at the 150-bed St. Helena (CA) Hospital–Napa Valley, part of Adventist Health.
I spoke with Selivanoff while researching a story about PBC in this month's HealthLeaders magazine. Selivanoff has written extensively on the topic and helped implement it at Catholic Health Initiatives hospitals prior to joining St. Helena. He is putting this cost system in place across the three campuses of his organization.
Selivanoff defines PBC as a type of cost accounting that offers CFOs a tool to better understand the resources consumed by tracking all resources used in providing the organization's products and services. It tracks direct costs and allocates indirect costs of processes and services.
Overhead is spread across all billable services without regard to the relationship of the overhead within a specific procedure. Process costing is used to ascertain the cost of a product at each stage of the process.
I can already hear CFOs objecting: "This is full cost accounting; is she nuts? That's hugely time-consuming."
Indeed, PBC and similar variations of this model do require every resource in a service to be manually tallied and updated annually, including the quantity of labor, frequency, supplies used, and unit cost. So, yes, it's a large undertaking. But it is worthwhile.
Keep in mind that healthcare reform will have a big impact on your hospital costing systems regardless of whether you change or not (though not doing so could prove detrimental over time).
If organizations are going to truly ferret out waste and reduce the cost of healthcare, then it's crucial to know the true cost of treatments and procedures.
Organizations will no longer be able to risk slim margins on the previously reasonable guesstimates that come from using ratio of costs to charges and relative value units.
"There's a heightened sense that we need to know what we can and can't afford to do. We need to know what our costs are, what the cost variations are between physicians, between patient populations, and why those costs are occurring," says Selivanoff in the article. "By applying this cost model, we can understand if the services we offer are value-add or not."
Micro-costing wasn't needed in healthcare until now, but healthcare reform makes it essential. It can be daunting to think about making another large change at your organization, especially after adding an electronic medical records system and preparing for the ICD-10 transition. Waiting to make these changes will not, however, diminish the degree of challenge.
Selivanoff suggests concentrating on high-volume procedures first to get at some swift savings, and then incrementally rolling out the program on a larger scale. There is some good news, though, for those organizations already operating under Lean and Six Sigma. This type of approach will dovetail nicely with your pre-existing pursuits to uncover process inefficiency and will help you find and trim more waste.
No one disputes that the current state of healthcare is a mess, but at this point, deciding who's to blame is less important than finding solutions. Healthcare leaders already know where to look: within their own hospitals.
Applying a new approach to cost accounting isn't going to be easy. But it won't be optional for much longer. Like it or not, changing your cost model is an idea whose time has arrived.
Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
