High Quality and Lower Cost in Health Care
I recently came across an interview with James Cleverley, consultant for Cleverley & Associates group. This interview appeared in the July 21st, 2010 Healthcare Fianancial Management Association newsletter called Leadership. In the article they were asking him about the recent 2010 Community Value Leadership Award. What I found interesting were his comments around cost vs. quality vs. operating margin. In today’s healthcare debate, we continually hear of the need for providers to increase their charges.
The real question we should be asking is if there is a focus on quality, shouldn’t your cost structure reduce and thus improve operating margins? We see this in any basic business model. I continue to hear arguments from the healthcare delivery side that says “well that might be true for them, but this is a hospital and we must continually increase our fees. When you read this interview, you see there are innovative healthcare systems that are focused on quality and as such, their costs go down and margin improves, so the need to increase prices to make up for their inefficiencies is null and void.
We believe in order to change the healthcare system from the facility side of the equation you must start with what it is “costing” to deliver services and from that develop a margin on top of the cost. Unless we do this, we are just rewarding inefficiencies and the consumer ends up paying for this. Congratulations to those hospitals committed to quality. You are making a difference in “bending the cost curve” and more importantly delivering superior health outcomes.
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The following is an excerpt from the July 21, 2010 HFMA newsletter called Leadership:
Leadership talked with James O. Cleverley, consultant, Cleverley & Associates, Inc., to learn more about hospital performance on the cost and quality dimensions of the index.
How did top performers on the 2010 Community Value Index achieve this ranking? What are they doing right?
Cleverley: The top-performing hospitals tend to have higher margins, lower debt, and greater levels of reinvestment. So they are very strong financial performers.
On the pricing side, these top performers tend to have lower inpatient and outpatient charge structures. Even top-performing hospitals with less favorable payer mixes (i.e., a higher number of Medicaid patients) are able to maintain reasonable charges, which I think is remarkable.
They achieve this primarily by keeping costs low. These organizations are so efficient on cost side that they are able to maintain lower charges and still generate a reasonable margin.
Have you dug deeper into the cost data to see where these top performers are saving dollars? For instance, are they keeping labor costs low?
Cleverley: We essentially look at the total cost per patient encounter. We use two measures to assess cost structure: Medicare cost per discharge (adjusted for case mix and wage index) and Medicare cost per visit (adjusted for relative weight and wage index).
However, if you drill into any top performing hospital’s detailed cost data, you will likely find variation. For instance, one hospital may have higher nursing salaries, which contributes to a high cost per nursing day. But that same hospital might be very good at managing patients, which contributes to a low length of stay and a low overall cost structure.
So there are variances. Hospitals can achieve lower costs in different ways, whether it’s a lower cost per unit, a lower utilization, or both.
But there is still room for improvement in terms of quality?
Cleverley: Yes, there are outliers. In many cases, hospitals are not necessarily performing poorly, but their scores are lower than the U.S. average for many of these metrics. Some hospital leaders are surprised to learn this. They’ll look at the data and say, “We didn’t realize we were below the national average. We thought we were in a good place. But now we know we need to do better.”
So examining how you compare on these quality metrics can give you some tangible areas for improvement. (The quality data, including U.S. averages, is publicly available on the Hospital Compare web site.)
Yet, you did find greater variation on the cost and price metrics in the Community Value Index.
Cleverley: Yes, we saw much wider variation in hospital cost and charge structures. Everyone is driving at very consistent quality scores. But some hospitals are able to provide that care much more efficiently. At the end of the day, a hospital may have the same quality scores as another hospital. But that hospital will be better positioned for success if it can provide that level of care more efficiently.