The changing healthcare business model and the goal of improving health in individual communities are among the factors motivating healthcare providers to adopt a broader view of cost.

From our sponsor, Kaufman, Hall & Associates, LLC

For hospitals and health systems, cost management has traditionally focused largely on a small subset of the factors driving total healthcare spending—controlling labor, overhead, supply, and capital costs within the organization. Although this approach made economic sense under fee-for-service payment, the industry’s transition to a value-based business model requires organizations to embrace much broader efforts to reduce the total cost of care in their regions, addressing cost drivers such as duplicative services, unnecessary utilization, and clinical variation.

Why Provider Organizations Have Not Tackled Total Cost

Hospitals are understandably wary about undertaking activities that threaten the current revenue model. Even as value-based payment gains traction, the speed of adoption and future manifestations in each market remain unclear, raising questions for providers about which value-oriented strategies to develop and when to roll them out. In addition, while traditional cost management has proven difficult, addressing total cost requires an even more daunting level of change.

Finally, implementing these broad total-cost-reduction strategies requires outside support. Employers and public agencies should play a role to help create the incentives, structures, and processes to monitor consumers’ health status, identify at-risk segments, manage and coordinate care, and intervene to prevent the need for more acute and expensive care. Payers that are willing to be true partners in total cost reduction can also play a key role.

Components of Total Cost
What Makes Up Total Cost

Why Providers Should Tackle Total Cost

Despite the daunting nature of the total cost challenge, the reasons to take action are more compelling than the countervailing forces.

Alignment with mission. This approach to total cost reduction is grounded in improving quality, improving health, meeting public needs, and providing a positive healthcare experience. In short, it is closely aligned with the mission of not-for-profit healthcare providers to improve the health of their communities.

Health care’s business model change. Total cost reduction and the value-based business model are two sides of the same coin. Under fee-for-service payment, the sphere of influence for hospitals and health systems is limited to the areas under their direct purview—they are rewarded for increasing patient volumes and for reducing patient care costs. Under the value-based model, the health system’s sphere of influence broadens considerably to include the entire continuum of care, as well as activities designed to keep people healthy. Value-based payment rewards providers for helping a defined population to avoid the need for care or to receive care in the least expensive, most appropriate setting.

Successful precedents. Organizations have demonstrated success in broadening their approach to encompass total cost reduction. For example, a coalition of providers in Camden, N.J., delivers intensive care management to primary care patients identified as high utilizers of hospital emergency and inpatient services. After six months, patients in this program had a 46 percent reduction in average hospital admissions (Geisz, M., “A Coalition Creates a Citywide Care Management System,” Robert Wood Johnson Foundation, June 13, 2014).

Geisinger Health System’s patient-centered medical home initiative, which focuses on prevention, chronic disease management, and comprehensive care management, showed cumulative cost savings of 7.1 percent in its first four years (Maeng, D.D., Graham, J., Graf, T.R., et al., “Reducing Long-Term Cost by Transforming Primary Care: Evidence from Geisinger’s Medical Home Model,” American Journal of Managed Care, Vol. 18, No. 3, March 2012, pp. 149-155).

Increasing scrutiny. As the Centers for Medicare & Medicaid Services and others continue to release information about healthcare spending and as regional and local variations are revealed, scrutiny will increase. Hospitals and health systems will need data to explain their cost position and will need to articulate a strategy to positively influence community and regional healthcare spending.

Regional economic benefit. Traditionally, charity care has been a key way that not-for-profit healthcare organizations demonstrated their community benefit. As the uninsured population decreases, providers may increasingly devote more resources to broader community health improvement activities that would reduce the total cost of care for a community and in turn produce real regional economic benefits.

As pressures to control costs increase, health systems will have little choice but to address total cost if they want to remain relevant. Organizations should decide whether to wait until external forces compel them to act or to act from a position of strength while they still have time to develop a thoughtful, tailored plan. Although the total cost approach requires a major organizational commitment and is not without risk, as an investment in the organization’s future success and in the community’s health and economic well-being, it is the right thing to do.


James W. Blake is managing director, Kaufman, Hall & Associates, LLC, Skokie, Ill., and is a member of HFMA’s First Illinois Chapter.

Publication Date: Tuesday, December 08, 2015

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