Escalating healthcare costs has long been on the minds of policy makers, hospital administrators, businesses, care providers, and patients. No one escapes the consequences of an unhealthy health care system; it affects not only individual health but the collective economic health of a nation. When healthcare takes up 17.5% of GDP, everyone wants to improve the system. How you do that is debatable, but some business analysts believe the first step to fixing the system is understanding it.
The Complexity of Healthcare Costs
The medical profession is both business and art. Take your general practitioner who tends to your family’s health. The doctor is busy seeing patient after patient, playing musical rooms to squeeze in as many patients a day to bill a third party, often an insurance company, to cover not only the doctor’s fees but the cost of running a practice: administrators, nurse practitioners, physician’s assistants, equipment, corollary services like hazardous waste management and a host of other costs to running a practice. An office fee is calculated to cover costs, like overhead and the doctor’s income.
But the art of the profession is the doctor’s education, judgment and propensities in diagnosing and treating any particular ailment. There is room for like medical minds to disagree. Physicians take different approaches, some leaning cautious and others more aggressive in treatment, for example. Treatment for the same illness may differ from practitioner to practitioner, specialist to specialist.
Compounding the problem, healthcare is unlike most businesses in that there are so many moving parts and interrelated deliverers of care from x-ray technicians, emergency care, therapists, pharmacists and more. The coordination of these services is critical to both patient health and each unit’s business health. Oftentimes, there is a tug of war in reimbursement and cost displacement between these various entities, leading to chaos and further fragmenting in an already fragmented system, until recently.
Historically, healthcare providers are reimbursed by third party payers like insurance companies and governmental agencies such as Medicare or Medicaid for specific procedures. Reimbursement is set at a going rate scheduled by these companies and agencies. The budgeting of all costs and expenses based on third party and consumer payments not only causes administrative nightmares but incentivizes higher paying services more often than less lucrative services.
This has been the existing fee-for-service healthcare system. What is missing from a fee-for-service delivery system is the patient. Outcomes–health, recovery, and survival–are not necessarily dependent on procedures that are most cost effective or lucrative in terms of any one business, i.e., radiological services, test labs or physical therapists. In fact, duplication, delay and unnecessary testing deeply affect patient health and satisfaction outcomes.
Many agree that fee for service has led to runaway healthcare costs at the sacrifice of quality care. And cutting expenses or lowering reimbursement alone doesn’t solve the problem, only compounds it with lower care quality and supply. Many professionals agree that the transition to fee-for-value service is lowering healthcare costs while increasing quality care.
Fee-for-value encompasses a holistic approach to patient care from “cradle to grave,” taking each patient’s condition from onset to treatment and beyond when calculating care and cost. It accounts for a coordinated team approach motivated by the best care for the best price. Here, third-party payors incentivize healthcare providers to deliver the best value based on successful outcomes.
Four basic models to value-based care responsible for patient outcomes include:
- Accountable care organizations (ACO) – an affiliation of health care providers and facilities that team up to coordinate the best possible patient care at the lowest cost through smart management and motivated personnel.
- Patient-centered medical homes (PCMH). a primary care physician leads and coordinates patient care teams to promote efficiency and quality, allowing for easier individual patient access to a doctor.
- Pay for performance (P4P). an incentivized program to keep doctors and hospitals motivated to improve quality and cost efficiency by keeping rates lower.
- Bundled payments. a system in which third party payors make a single payment to doctors and/or facilities for all services associated with a specific one-time procedure, such as a hip replacement, including possible complications.
These new models of care and reimbursement are data driven to measure the true costs of healthcare delivery, not just the costs of running a department. The approach examines a patient’s condition over the full care cycle, including probable further treatment, to calculate costs not just specialized fees. And the aim is to garner the most value per dollar to the patient, not to perform the most procedures.
So, take someone treating for diabetes. The costs attributable to this patient are calculated not only for treating the condition, including specialist’s fees, lab fees for blood analysis and pharmacy costs for medication, but also projected costs due to conditions the best data and medical knowledge indicate are common consequences of long-term diabetes, such as kidney disease. Patient-centered costs from prevention and treatment to maintenance are calculated, including all resources the patient accesses in the cycle of care.
This takes motivated providers with supporting efficiency teams to study and provide continuous feedback necessary to integrate all those resources effectively. With the aid of growing technologies to accommodate speed, complexity and access, team strategies that lower costs and improve services are assisting healthcare achieve success–measured, in part, by reduced readmissions, less redundancy and better medication management.
So, the biggest difference between fee-for-service and fee-for-value is reimbursement. In the former, providers get paid based on services, regardless of patient improvement. In the latter, reimbursement corresponds to patient outcomes. Patients matter in value-based approaches–throughout the healthcare system.