Healthcare Cost Control: Practical Recommendations
The following is a transcription of a panel discussion from the Fall of 2021. This is a partial transcript of the discussion focused on healthcare cost control. A recording of the full discussion titled “Avant-garde Health Fireside Chat with Trevor Fetter and Suzette Song” can be viewed at the bottom of this page.
- Trevor Fetter: Former CEO, Tenet Health
- Suzette Song: Vice President of Medical Affairs, OSS Health
- Danny Yagoda: Vice President of Client Success; Avant-garde Health
- Derek Haas: CEO and Founder; Avant-garde Health
Healthcare Cost Control – Setting the Stage
Suzette Song: I'm very curious about one of the courses you lead currently, right? Financial reporting and cost control, right. Control, really?
Trevor Fetter: It's described as an accounting course. If it were an accounting course, I wouldn't be teaching it. But it's really a course about the job of the CFO and control refers to how do you control a business and literally it does have some accounting in it. So essentially, it's a very managerially-oriented course. It is the only course with accounting in it that the students are required to take. Because it's a required course, there are 10 of us who teach it, each taking a different section. In fact tomorrow, our case is on Boston Children's Hospital and applying Time-Driven Activity-Based Costing in a healthcare environment.
Trevor Fetter: So it's very timely that we're having this discussion. If you apply these healthcare cost control disciplines, how do you measure performance? How do you analyze the performance of a firm, either from the inside or the outside? And then the cost control part really gets to the management and governance of the organization. And there are different ways of thinking about this question of cost control:
- It could be management systems and levers of control for managing the latitude that people have within the firm to make decisions and drive performance.
- It could be measurement and incentive systems that you have within the firm.
- Or even the governance with external regulators, markets, boards of directors, auditors.
All of this sort of infrastructure within corporations in our capitalist economy essentially enables people who have savings, to trust somebody else with their money to actually go and do something with it.
Trevor Fetter: And that is the essence of that course. So it's really about management, but it's also about learning the language of business, which is essentially accounting and financial statements. And, just by way of example, this case discussion that we're going to have tomorrow is within a hospital setting where the management of the hospital is looking at different procedures they perform and they're having difficulty figuring out the cost and profitability of the different procedures. Are they charging enough? Should they be charging more? Should they focus on reducing costs? Something's wrong and they're trying to figure it out. And all they have going into this is a method in which they're using a very primitive ratio of cost to charges, presumes that every type of procedure has the same cost structure as expressed as a percentage of what they're getting paid to do it. Which obviously just doesn't make any sense to anybody.
Trevor Fetter: So in their quest for cost control they start to examine the resources that go into the procedures and they come to some interesting conclusions about the relative profitability of the different services. Not that they're going to stop doing the unprofitable ones, because it's a children's hospital. They have a mission they're performing such as life changing surgeries on child patients. But it gives them insights into how they might change the utilization of resources. This is what I'm talking about - it’s at the heart of what Derek pioneered, and for our students, it's quite eye opening.
Derek Haas: Actually earlier this year, I had a related personal experience at Boston Children's Hospital. My one-year-old son had a flat spot in the back of his head. And so we went into Boston Children's and went through the process to get a helmet fitted for him and then go back for multiple visits. And so, it was kind of surreal to be living that experience after having been teaching that case previously.
Trevor Fetter: And were you keeping track of how much time the clinicians were spending on your son and what that might be costing or were you more concerned about something else?
Derek Haas: I must say they were pretty efficient, so I was excited to see that they have a well-oiled machine at this point in time.
Healthcare Cost Control – Using Data to Drive Meaningful Improvements
Trevor Fetter: Well, Suzanne, you have a lot of experience in these settings. How much does healthcare cost control really figure into the equation of when you're thinking about the procedures that your organization is performing and what you ought to be charging. And one of my beliefs about hospitals in general is that there are sort of limitless opportunities to reduce cost and approve efficiency that's good for the patients, but you're putting that into practice every day, on the ground, in a real setting. Maybe you could speak about that.
Suzette Song: I’ve got to tell you it's huge and we run our own hospital, but we also we also practice at multiple other hospitals. And one of the most unique things to me, or one of the differences is we all have value analysis teams. So, when you want to do a new procedure, or you want to use an expensive dressing for your total hips say, the steps are the same, you go through this committee, right? And the committee tries to look at research and tries to get an idea of how big is that spend going to be? Are we going to allow the doctors to do this? The doctors all speak fast and we try to really be very convincing on how this is necessary for our patients.
And one of the knocks on physician owned hospitals is always that we're going to make undisciplined decisions and we're going to just do what the doctors want to do, because it's our hospital. I find that we're so much more physically sound and logical really having a big part of the cost structure. Right? Certainly if you ask a physician, do you really need to use this dressing, this certain knee implant for your patient? You can easily go into, look if this was my mother, my son I would use this, this is the best, this is the quality and you can always talk about patient safety, right? But when you look at it from a perspective based on data, then you can make better decisions. And when the physicians are part of those decisions and see the data, we can really make improvements that matter.
Suzette Song: So definitely having the data for making comparisons is key. I understand that dressing is better. Is it 10 times better? Is it $300 better? Is it $50 better? Because a lot of times we just don't know how much things cost. And we can use our judgment a little bit better when we have that data and I think we tend to be more responsible when it's our hospital than when it's some billion dollar system where we also operate.
Trevor Fetter: Well, I think part of the success of the ambulatory model is because it was built in partnership with physicians, they are equity owners. They tend to be as a result, very focused on healthcare cost control and profitability. So they're always eager to understand where is waste and to get rid of it. And where there are opportunities to drive a harder bargain with the managed care payers and there are plenty of valid criticisms of that model as well, but it has proved to drive substantial efficiency.
Healthcare Cost Control and the Challenge of Inflation
Trevor Fetter: There could be disruption in in politics. We saw 180 degree course changes between the Obama administration and the Trump administration. And now we're back cause sort of closer to the strategic interests of the Obama administration, but healthcare providers are still being whipsawed. So hospitals and other provider organizations feel inflation immediately, but they don't have an opportunity to inflate their own prices through increases either with government programs or very frequently with managed care plans. So there are plenty of risk factors and reasons to be focused on controlling costs in healthcare. They've done pretty well so far.
Healthcare Cost Control – A Case Study
To learn how one provider is successfully achieving their healthcare cost control objectives, we invite you to review the case study on Penn State Health Milton S. Hershey Medical Center. They are using advanced analytics to expose the true costs of orthopedic care inside the hospital, as well as the spending for patients post-discharge. With these insights they have achieved:
- 10 % Lower costs for surgical supplies
- 44% Reduction in length of stay
- 49% Reduction in post-acute care costs
- 86% Reduction in 90-day readmissions