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Uncovering True Costs

Karen Minich-Pourshadi, for HealthLeaders Media, February 13, 2012
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"We realized how costly our implants were in our orthopedic service line. Our manager leveraged that data in the negotiations to get a 30% price reduction from one vendor on implants," she says. Using the cost data VMH was also able to demonstrate to one of its largest payers the actual costs of certain high-volume and high-cost procedures, helping it keep current contract terms in place instead of having to accept a deeper discount from this payer.

Internally, Koenig was able to use PBC to also look at payer mix and labor costs. For instance, the general surgery service line's 10 most common procedures were analyzed by cost, but also by cost per physician and profit based on payer mix.

"Our surgeons each had very different costs, and they were intrigued to see the data and ask why. One physician didn't realize he was taking more Medicaid and self-pay patients, and he became more open to the idea of discussing prepay plans with patients," she says.

The first thing the organization did, however, was to assess its noninvasive cardiology department, where it found untapped profitability. "We could tell that the highest-volume outpatient service was also the one generating the lowest average profit per patient. We determined that we should consider a price increase on this procedure to improve profitability," she says.

The data also revealed that only about one third of patients eligible to receive this service were actually receiving it. "We could see from the model data that we had the capacity to increase patient volume with minimal increase in costs," she says.

The hospital team predicts that the combination of pricing increase with departmental changes in work flow and staffing means the potential increase in profitability of more than 500% with a minimal (approximately 10%) increase in cost.

Though VMH is a small facility, it was able to realize returns from micro-costing within a year of making the switch. The same can be true for larger organizations, though the overall implementation process is longer, says Selivanoff.

In 2002, Catholic Health Initiatives made the leap to micro-costing and, to varying degrees, has been doing PBC across its network of 73 hospitals. However, in applying micro-costing, the organization found one area where the model didn't work—the supply chain, explains Anil Dewan, the organization's director of decision support.

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