To improve health care value, we need to know what we are paying for

Along with improving quality, cost containment is vital to redesigning American health care to increase value. The problem of uncontrolled costs was highlighted recently by reports that a couple was charged $40 for simply being able to hold their newborn “skin-to-skin” after a caesarian delivery. While the charge was explained as being for the nursing labor needed to monitor the baby and mother, it ignited widespread indignation and underscored the difficulty of understanding the complex world of medical costs.

For policymakers and health care leaders, the story emphasized how more accurate “costing” of care is needed to shift towards a more value-based system that patients are able to navigate.

Hospitals have historically linked the costs they charge to those services they can bill for. This approach distorts hospital incentives, because some resource-intensive activities are not reimbursable, and some highly reimbursed services do not require heavy resource commitments.  It also fails to account for the costs of non-billable services, which hospitals often arbitrarily allocate to billable events.

Even when hospitals can bill for a service, the figures they use to determine costs are often inaccurate. Costs are typically based on aggregate estimates for entire departments, not on estimates for individual patients. The true cost of a service depends on the resources that are actually required to provide it (e.g., equipment, labor), not on aggregate estimates based on the bills it can generate.

However, simply reducing reimbursement could harm patients if it impairs the ability of hospitals to provide high quality services. Understanding when reimbursement cuts appropriately remove waste and when they inappropriately harm quality requires knowledge of the actual cost of delivering each kind of care. We may “hit the mark but miss the point” by focusing only on reimbursement reductions without paying attention to the actual costs of providing care.

Thankfully, things are beginning to change. Some hospitals have adopted a “time-driven activity-based costing” approach that assigns costs to individual patients based on the duration and intensity of resources required for their care. Medicare has introduced voluntary and mandatory bundled payment programs that hold providers accountable for the quality and costs of care, prompting them to begin adopting more accurate costing approaches.

Continued progress in costing will benefit patients and providers. It can help patients to better understand the rationale behind medical costs, which can ultimately enable them to make better-informed decisions about their own care, and enable providers to identify strategic opportunities to improve value. It can also guide policymakers in determining how and when to adjust reimbursement to encourage better outcomes at lower cost.

Health care will become better and higher value all-around, if we know what we are paying for.

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Joshua M. Liao, M.D., is an internal medicine physician and health policy fellow in the Division of General Internal Medicine at the University of Pennsylvania School of Medicine.

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Editor's note: Cross-posted on the HealthPolicy$ense blog of the Leonard Davis Institute of Health Economics of the University of Pennsylvania.

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