"estimate the economic life of the machine, the cost of labor (someone has to operate the machine and actually interpret the images), other variable costs such as power usage, maintenance and repairs on the machine, interest paid on the financing of the machine (or foregone investment income), et cetera. And even if we calculated this accurately, we would only estimate the cost per some period of ownership (e.g., the cost per month, or the cost per day, etc.)."
The key contributor to understanding the declining healthcare costs for Utah health care was their computer programming system, which is still a work in progress. In one aspect of the computer system, there are 200 million rows of costs for items like drugs, medical devices and doctor’s time in the operating room. There are also efforts to track outcomes such as days in the hospital and readmissions and a dropdown menu that compares each doctor’s costs and outcomes with other’s in the same department. Through this method, the hospital has been able to calculate multiple items, including cost per minute in the emergency room ($0.82), in the surgical ICU ($1.43) and operating room for an orthopedic surgery case ($12).
Through researching costs, the hospital also noticed inventory and physician trends that allowed them to evaluate who was spending what and determine where to cut costs. Dr. McCarthy describes looking at supplies costs as a good example of where hospitals can begin to better understand their actual costs:
"I’ve worked on similar projects trying to help the hospital estimate their costs of blood per surgery, or their costs of bone graft materials for spine fusion surgeries. Why don’t all hospitals know how many bandages their using per surgery or how many units of bone graft material? One general reason is that, historically, hospitals haven’t had to know these things. With fee-for-service reimbursement and minimal patient cost-sharing, hospitals have little or no efficiency incentives. They had no need to track their costs particularly closely. So the problem is, at least in-part, derived from decades of operation in which costs just weren’t a factor."
Dr. McCarthy’s explanation is shown in the statistics. In the past, patients have had less out-of-pocket expenditures (copayments, deductibles, coinsurance) and physicians were reimbursed for each service. Now, our health system payment system has become more complex as more and more people want health insurance and the political climate of the Affordable Care Act (ACA) has changed the framework of healthcare.
As our healthcare system adopts the ACA, Dr. McCarthy describes how it would be informative to understand how the new healthcare law would help or hinder the implementation of the Utah model and for cost programs across the nation:
"I think the Affordable Care Act definitely introduced incentives for hospitals to start managing their costs – for example, the Value Based Purchasing program, as well as some of the pilot projects surrounding accountable care organizations and bundled payments. So in that way, the ACA will help the implementation of the model as there is now a financial reason for hospitals to care about costs."
For a quick summary, Value-Based Purchasing is part of the Centers for Medicare & Medicaid Services effort to link Medicare’s payment system to a value-based system to improve healthcare quality including the quality of care provided in the inpatient hospital setting. For those interested in learning more about Accountable Care Organizations and Bundled Payments, please refer here and here. These three models place more emphasis on quality of care, a large move away from the fee-for-service model that has been prevalent in this country.
With the success of the Utah system, the next step is to ask whether their methods can be applied to a more national scale to cut healthcare costs. Different hospitals have unique patient populations and relationships between physicians and insurers, but hospitals can look to Utah Health’s cost-cutting techniques for guidance. Dr.McCarthy’s suggestions, coupled with the success of Utah, include identifying what are the most expensive procedures, most areas of waste, and how this waste is quantified. The changes in the Utah Health System show that hospital systems can successfully measure and identify areas of high costs and implement ways to reduce and monitor these costs.