In his now classic article in The New England Journal of Medicine Michael Porter points out that in healthcare, the “stakeholders have myriad, often conflicting goals, including access to services, profitability, high quality, cost containment, safety, convenience, patient-centeredness, and satisfaction. Lack of clarity about goals has led to divergent approaches, gaming of the system, and slow progress in performance improvement.”
How do we find a common purpose? According to Porter: Achieving high value for patients must become the overarching goal of health care delivery, with value defined as the health outcomes achieved per dollar spent.
Because value depends on outcomes and is centered around the patient, Porter’s formula is a unifying purpose for all stakeholders involved. But Porter goes further. Outcome measurement and costs should be measured separately – he emphasizes, because we actually know very little about cost from the perspective of examining the value delivered for patients. The problem according to Porter:
Understanding of cost in health care delivery suffers from two major problems. The first is a cost-aggregation problem. Today, health care organizations measure and accumulate costs for departments, physician specialties, discrete service areas, and line items (e.g. supplies or drugs). As with outcome measurement, this practice reflects the way that care delivery is currently organized and billed for. Today each unit or department is typically seen as a separate revenue or cost center. Proper cost measurement is challenging because of the fragmentation of entities involved in care. Entities such as rehabilitation units and counseling units are all but ignored in cost analyses. Costs borne in outpatient settings, particularly within primary care practices are often not counted. Past efforts at cost reduction reflect the way costs are accumulated. The focus has been on incremental steps and quick fixes. Payers have haggled over reimbursement rates, which are not the true underlying costs.
Past efforts at cost reduction reflect the way costs are accumulated. The focus has been on incremental steps and quick fixes. Payers have haggled over reimbursement rates, which are not the true underlying costs. There are efforts to raise the efficiency of individual interventions rather than examine whether there is the right group of interventions. Considering drugs as a separate cost, for example, only obscures the overall value of care and can lead to misplaced efforts to reduce pharmaceutical spending, rather than more holistic approaches to improving efficiency over the full cycle of care. The net result has been marginal savings at best, and sometimes even higher costs.
There are no simple solutions. Porter tells us that the full reimbursement for a total joint replacement in Germany or Sweden is approximately $8,500, including all physicians’ and technical fees and excluding only outpatient rehabilitation. The comparable figure for the United States is on the order of $30,000 or more. Why? Because most physicians and provider organizations are not aware of the total cost of caring for a particular patient or group of patients over the full cycle of care.
Now, for the first time, the Centers of Medicaid and Medicare Services (CMS) have released comprehensive data on the costs of the 100 most common inpatient procedures performed in 3000 hospitals and medical centers across all 50 states.
At the Physician Leadership Institute, we went through the data on joint replacement surgeries without medical complications and co-morbidities, i.e, reasonably healthy patients who undergo knee or hip surgery for degenerative joint changes. The baby boomer generation entering their 6th decade is the quintessential demographic for such surgeries with an assurance of a good quality of life thereafter. No small wonder orthopedic surgery is the top earning specialty in hospitals and medical centers. However, costs fluctuate wildly between states, intra state, and even within hospitals located within a stone’s throw from each other in the same city. In a southern state like Alabama the average covered charges of such joint replacements works out to $52,613. In California, three time zones away, the average charge was almost twice as much, at an average of $90,000. Within Alabama, for example, Stringfellow Memorial Hospital at Anniston was the most expensive charging $141,035, while 106 miles to the northwest, Parkway Medical Ctr. in Decatur would set a patient back the least at $21,006. In Birmingham, the most populated state city, the six hospitals listed varied in price from $31,093 at St. Vincent’s East to $89,408 at Trinity Medical Ctr. The difference was more than $60,000 within a few miles, or to put in a different perspective, the cost of three such surgeries in Decatur.
That phenomenon is repeated in California with an eye popping $223,373 bill for a hip replacement at Monterey Park Hospital, Monterey but within the same county, Kaiser Foundation Hospital at Downey charging $32,358, or the difference of nine such procedures in Decatur, AL.
What about the vaunted University of California medical system? Surely, their costs would be reasonable. At an average of over $95,000, they were anything but. Curiously, such costs remained impervious to socioeconomic conditions as the average cost of joint replacement cost an average of $87,000 in cash strapped Bakersfield-Modesto-Fresno, one of the country’s poorest metros where almost one in four live below the poverty line.
There are two ways to interpret these variations in pricing:
(i) Pricing in healthcare is not market driven where consumer and competition sets price. This is what CMS is trying to influence by releasing the information.
(ii) Pricing of procedures was “cost plus” i.e. every organization knows exactly what it cost them to provide the service then mark it up for margin, then we could interpret these charge variations as an indication of lack of efficiency. The more expensive you are, means you are not efficient in your procedure thus costing a lot more than others. Historically, organizations charge as much as they can, even though reimbursement was much lower, thus writing off the difference.
Interestingly, no such ambiguity remains when we scored Kaiser Permanente hospitals vs rest of California as the figure above illustrates. A shade over $40,000 and tightly clustered pricing between the least and most expensive ($7000) compared to the vast variation in the rest of the state. What sets apart Kaiser, a non-profit health organization from the rest of the hospitals and university medical system is the tight co-ordination and integration of primary, secondary, and tertiary levels of services, putting a strong emphasis on prevention, and extensive and detailed electronic medical documentation. All of which keep costs down while ensuring quality care; Kaiser delivers value, as defined by Porter.
As Hal Wolf, senior vice president and chief operating officer of the Permanente Federation, explains, the organization delegates overall health care to its patients to primary care physicians.
Dr Jill Steinbruegge, MD, is Kaiser’s point person in developing capable physician leadership: “ The need for superior physician-leaders was identified as a critical success factor for the Permanente Medical Groups as well as for Kaiser Permanente (KP) as a whole.
Kaiser’s leadership building focuses on 4 domains: Sharpening the focus, building commitment, driving for results, building capacity.
Kaiser is also aware leadership does not operate in a vacuum; it must permeate through the organization.
Wolf: “Each person—whether delivering primary care, secondary care, pharmacy management, or something else—must ask: what are our goals for this patient?” Kaiser Permanente uses care pathways where physicians are aligned with the organization’s goals of providing the best possible care to their patients and also incentivized to achieve those goals. Performance data is shared with physicians providing them with the knowledge of their actions getting the desired results. These goals are decided by physicians.
Wolf :“The physicians sit down as a group to pick the targets they want to achieve and the metrics that will be monitored.” Physician leadership meets patient empowerment.
From The Economist to the New York Times, the Kaiser model is viewed as a leader of the future of healthcare in the US.
Where does your organization fit in? In future blog posts, we’ll look at the value equation more closely, as well as models to assess and measure the quality of service delivery.