Why Quality Assurance Doesn’t Save Much Money

Today’s Managing Health Care Costs Indicator is 30%

A perspective e-published by the New England Journal yesterday asks a challenging question:

Why haven't nearly two decades of work on improving health care quality had a measurable effect on health care costs?

The article answers the question, too. 

The authors note that truly variable costs like supplies and medications – which are saved if utilization decreases – are pretty small.  While economists and accountants frequently say “there are no fixed costs,” that is over a long time horizon.   Today and tomorrow, there are many costs that are fixed in health care.  We can’t close hospital real estate or fire clinical and nonclinical personnel based on just a LITTLE less utilization – we need to have a LOT less utilization to get rid of many of the costs of our system. Quality improvement can lead to small incremental decreases in utilization, but these are often not enough to let us diminish the underlying cost of delivering care.

Let me give two examples.

If a quality assurance program keeps a patient out of the emergency department – what cost savings would you expect to receive? All numbers are illustrative only.

-        $1000 (likely charges for an emergency department visit)

-        $600  (average allowable cost of an emergency department visit)

-        $400 (average allowable cost of a lower intensity visit that is preventable)

-        $100 (cost of the time that the nurses and physicians spend with the patient)

-        <$5 (cost of the electricity used, tylenol dispensed and the wax paper from the exam table)

The emergency department would have been there, as would the doctors and nurses, regardless of whether that patient was seen unnecessarily.  So it’s only fair to credit the quality assurance program with a small amount of “real” savings.

Here’s another example.  Many have suggested that electronic medical records will decrease the duplication of laboratory tests.  This is a good idea – people shouldn’t be stuck with needles because we’re bad at keeping track of lab tests!  But if a physician doesn’t order an unnecessary blood count, what will be the savings?

-        $50 charge

-        $12 allowable

-        <$0.50 cost of reagent to perform the test.
 

The real savings are probably under a dollar - unless a LOT of blood counts are eliminated. 

I’m told by my friends in hospitals that the marginal cost to deliver additional hospital services is generally about 30%.  (This is assuming there is some surplus capacity in the system, which is usually the case.)  That means that preventing overutilization might decrease billings and decrease the amount paid by health insurers. But the nasty secret is that lowering this utilization only lowers the actual resource cost of hospitalization by about 1/3 of the amount of saved billings.

The authors of the article are skeptical that the time-defined activity based costing suggested by Kaplan and Porter can significantly lower health care costs.  I'm more optimistic that engineering studies of health care can save dollars. If TD-ABC is really effective, organizations could diminish more of the formerly-fixed costs.  But that’s a hypothesis – and we need to measure true cost savings carefully before we prematurely declare victory over the high cost of medical care.

Time Defined Activity Based Costing

I wanted to spend a bit more time talking about a thoughtful piece in the September Harvard Business Review http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1 by Robert Kaplan, who originated the Balanced Scorecard, and Michael Porter, business strategy guru, and author of Redefining Health Care.

The cover of HBR points to the article’s debunking of reviews three myths about health care costs

1)     Charges are a good surrogate for actual health care costs

2)     Hospital overhead costs are too complex to allocate accurately

3)     Most health care costs are fixed.

I think the real insight of this article is that it’s hard to get more value out of health care if we don’t know what the real resource cost is.  And let’s be honest – we almost never really know what the resource cost of a service is.   Beth Israel http://managinghealthcarecosts.blogspot.com/2011/08/bundled-payment-matters-beth-israel.html physicians are walking around with a price list – but that’s the price charged –not the cost to deliver the service.  The actual marginal cost to perform an upper airway endoscopy is the physician’s time (less than 10 minutes) and the cost of sterilizing a machine – not the $1000 price tag!

Activity based costing is painfully difficult to implement – essentially someone has to stand around with a stopwatch and do “time and motion” studies.  As you can imagine, physicians aren’t thrilled with that approach, and it isn’t cheap to implement.  Kaplan has developed a wonderfully intuitive short cut – time-driven activity-based costing (TD-ABC) which uses standardized time units. 

The authors give a number of examples of health care providers who have implemented this, and decreased their resource costs while likely improving quality and reliability. The case studies include MD Anderson Cancer Center in Texas, Children’s Hospital and Brigham and Women’s in Boston, and Shon Klinic in Germany.  The examples are generally around procedures more than cognitive services- but this approach should work for cognitive services as well.

The most difficult element of implementing TD-ABC will be that it requires process maps for each activity that will be assessed.   Physicians are notoriously unwilling to standardize processes – and developing a process map requires this.  TC-ABC fits very well with LEAN and Toyota process improvement other techniques seeking to reduce waste- and gives executives a better way to measure waste.

I believe there will be unprecedented pressures over the next years to lower medical costs. Lowering prices alone won’t be sustainable – hospitals and physicians will have to figure out how to actual lower input costs. TD-ABC give hospitals and physicians a powerful accounting tool to be sure that they know where they can cut actual expenses to be able to continue to meet their mission of providing high quality health care. 

TD-ABC is also further evidence of the need to standardize medical care delivery.