Healthcare Transparency Imperative Requires More Than Prices

Getting a handle on your cost structure is a meaningful first step toward competing in the future. But more is required, especially from small healthcare providers.

In the May cover story of HealthLeaders magazine, "The Great Transparency Movement?" I looked into the issues complicating the ability of consumers, hospitals, and employers to remove some of the opacity surrounding what we pay for healthcare. All still have plenty of challenges—even companies whose express purpose is transparency. One big mistaken assumption many have made in dealing with this issue is that if enough information is made available to patients, they'll choose wisely.

That question mark in the headline for the story was intentional. It's not necessarily the case that greater transparency on price will move the needle on patient involvement in their care or quality, or that price transparency by itself will make much of a dent in the unsustainable cost of healthcare.

Let's be clear: the lack of solid info for prices is a big part of the problem.

"Not only have consumers been shielded from the cost of healthcare, but healthcare leaders, physicians, and even payers have also historically been shielded," says Rita Numerof, PhD, president of Numerof & Associates, Inc., and a source for the article. Many healthcare organizations are just now trying to tackle what was resolved years ago in most other industries: what it costs to provide a particular service, product, or set of services and products. Price is usually the result of knowing what it costs to provide a service, and adding a reasonable and competitive margin, so that the purveyor can effectively compete.

But price transparency is only part of the equation that will encourage value in healthcare spending. And it's not even the first part.

Think of it this way: when a department store executive buys a load of T-shirts and finds that a batch has a defect, she knows how to get appropriate credit and replacement. When it comes to healthcare, executives historically have had no such recourse. But that's changing, and in fact has been changing for a few years now.

"That's why we need to look at transparency as more than just price," says Numerof. "We are so far from a true market-based model in healthcare delivery that it should be concerning to most healthcare leaders, because most of the money flow in healthcare has been at a gross-up level. They can't even see their cost structure from a service line perspective."

What's needed is a move toward activity-based costing, Numerof says, which means the cost of all the resources required to produce a certain service, or in healthcare, even an outcome. Without that focus, which includes calculations on the raw costs of goods and materials, some formula for overhead and indirect costs, and the amount of time to deliver that service or product, value-based healthcare is just an already-tired buzzphrase.

I'm no accountant, but activity-based-costing sounds complicated and seems to involve some guesswork. But Numerof says that even if many of the variables are approximated, "executives will be a lot smarter about what it really costs them."

One of my sources for the transparency cover story, Robert Pendleton, MD, chief medical quality officer at University of Utah Hospital and Clinics in Salt Lake City, agrees. His health system has set up a somewhat complex internal infrastructure to help them understand what it costs to provide care delivery down to the patient encounter level, as he puts it.

"Understanding costs at that level helps us learn from variation. If with Provider A it costs X dollars while Provider B costs Y dollars, you can look at the process of care delivery to understand where the price is coming from," he says. "So it allows us to really prioritize and direct improvement efforts on a system level and also provides a sense of ownership for individual providers in context of their peers."

Over the last several decades, most health systems have focused on their biggest cost, personnel, as opposed to looking and rethinking care delivery processes, Numerof says. But many more sophisticated healthcare organizations are looking seriously at activity-based costing as a starting point as they negotiate discounted rates with payers and even employers directly. Over the past several years, delivery processes have gotten increased attention in cost reduction efforts, but much more work needs to be done to eliminate waste and overutilization.

When size trumps efficiency

All the repositioning, mergers, and jockeying for position as healthcare reimbursement changes can distract from the need for efficiency. Large, dominant payers or providers won't necessarily reward those that are really seeking to add value to the healthcare services they deliver.

An example: I've heard from senior executives who complain they are the low-cost provider in their area or region, yet they're not rewarded for their cost and quality advantages—either because they don't have the heft of being the dominant local provider, or local employers won't contract with them because they're too small, or payers don't reward them for their efficiency. All of these arguments tend to begin and end with the fact that it's not a fair playing field for smaller organizations. Size matters.

Don't give up, Numerof says. "I get involved with clients who tell me they're the low-cost provider and not getting recognition. But how are you demonstrating it? Who are you negotiating with in that payer organization? Let's talk about the quality of that conversation. Payers are also under a lot of pressure to change their business model and engage with providers very differently than they have historically. This is an opportunity to do that."