What's the True Cost of Care?

By Lila Kelso for Avant-garde Health
Lila recently served as Research Associate to the Value-Based Care team at Harvard Business School

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What is the true cost of providing care to a patient? Those involved in the medical field have long struggled to answer this question. Certainly, there is a dollar amount that those involved in a patient’s cycle of care for a condition or procedure can see--what is charged for the actual procedure (i.e., the bill given to an insurance company or self-paying patient). Yet this number does not truly address what the cost of providing that care is.

As Professors Robert S. Kaplan and Michael E. Porter (2011) note in their value-based health care model, the lack of distinction in American health care between charges and costs is one of the ultimate failures in our health care system.(1) If hospitals and medical providers don’t know what it’s costing us to care for a patient, how can they accurately charge for that service?

Despite hospitals’ efforts to reduce the cost of providing care, it’s incredibly difficult to improve costs for what is not accurately measured. That’s where Avant-garde Health can help.

As payers continue to demand a reduction in the payments they must make for the provision of health care (e.g., Medicare’s emphasis on bundled payments, which set a price for a service and tie that price to outcomes), it has become increasingly important for medical institutions to understand what it costs them to provide care, in order to ensure that they are able to operate at a profit while delivering the highest quality care to patients. To gain an understanding of the true cost of care, hospital systems and providers need to be able to quantify the cost of personnel and supplies used for a patient’s care. While other products on the market largely claim that they can tell a hospital system this cost, estimates for personnel and machinery costs (i.e., non-disposable medical equipment) are often vague, and timelines over which to measure these costs are often undefined.

This is where Avant-garde Health stands apart. Rather than simply guessing at how much it costs to provide care to a patient, we utilize time-driven, activity-based costing (TDABC) in order to determine personnel and supply costs over a well-defined cycle of care. Developed by Professor Robert S. Kaplan, and adopted under the value-based health care framework, TDABC is a costing methodology that quantifies the personnel and supply resources used in a patient's cycle of care (e.g., a surgeon, registered nurse, and anesthesiologist provided care to the patient, and a spinal cage was implanted), and records the amount of time that each resource is involved in the patient’s care.

By wedding the resources used and the time for which they were used, we are able to provide hospital systems with a per-minute cost for personnel, disposable medical supplies, and non-disposable medical supplies.(2) Avant-garde Health is also unique in that we define the cycle of care that will be evaluated for a specific patient, delivering a set cost of providing care that truly covers the entire timeline of a patient’s needs.

Our team uniquely utilizes the “process mapping” approach, in which an analyst comes onsite to capture the amount of time that personnel are interacting with a patient throughout the cycle of care. Time spent with each patient is captured through a mix of personnel interviews and shadowing, and is corroborated across a wide variety of those involved in a cycle of care to ensure accuracy. We’re then able to match findings from process mapping with automatic submissions of supply data, ultimately delivering the customer the true cost of providing care.

Our close connection to the development of TDABC and its application to value-based health care (3) is garnering us national attention as we continue to expand our network of providers. By shedding light on the true cost of providing care, hospitals can truly lower costs while improving outcomes – just look at the results.

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1 Kaplan, Robert S., and Michael E. Porter. "How to Solve the Cost Crisis in Health Care." Harvard Business Review 89, no. 9 (September 2011): 47–64.

2 The per-minute cost of non-disposable supplies can be developed by calculating the purchase price for a piece of equipment, as well as it’s annual depreciation, and dividing by the number of minutes that the device is available per year.

3 See our CEO Derek Haas’ many articles in Harvard Business Review on the subject.