Cost-Consciousness Dawning on Healthcare Providers

The lines are blurring between payer and provider perspectives on total cost of care as healthcare's payment model shifts from volume to value. Now, using a payer's methodology, providers are mastering TCOC accounting.

For decades, commercial payers have been trying to track the total medical-services "spend" of individual beneficiaries and beneficiary cohorts on an annual basis.

Providers are catching up.

The total cost of care [TCOC] calculation accounts for a beneficiary's spending in every healthcare setting along the entire care continuum, and can yield operational and competitive advantages to those who know how to apply it.

"Payers use [TCOC] to identify their most expensive beneficiaries. They use it to evaluate how providers are performing," says Katherine Hempstead, health insurance program director at Princeton, NJ-based Robert Wood Johnson Foundation.

Under fee-for-service medicine, providers have had far less compelling incentives than payers to focus on TCOC. "As a provider, you have to be in a risk relationship for it to be relevant," Hempstead says. Growth in risk-based contracting such as bundled payments has hospitals and physician practices focusing on costs more intensely than ever, she says.

But [providers are] "increasingly involved in risk contracts. Basically, in bundling, you are bidding jobs. You have to give a number and be able to make that number; and to make that number, you have to know your costs… You don't want to be systematically losing money on each procedure."

Now, using a payer's methodology, providers are mastering TCOC accounting.

Rooted in Insurance
Founded as a health insurance cooperative in 1957 and operating today as an integrated health system based in Bloomington, MN, HealthPartners is the national leader in measuring TCOC. HealthPartners provides medical and dental insurance to 1.5 million beneficiaries in Minnesota, Wisconsin, and the Dakotas, with a seven-hospital health system serving more than a million patients.

In January 2012, the National Quality Forum endorsed cost and resource use indexes developed at HealthPartners, marking the first attempt to standardize TCOC measurement across the country.

And in 2013, the Portland, Maine-based Network for Regional Health Improvement (NHRI) launched the Total Cost of Care Pilot program, which is designed to collect TCOC information for primary care practices. The initiative started with regional partners in five states and has added partners in six more states this year. It enables participants to share TCOC information so they can compare themselves against their peers and bear down on costly elements of their practices.

"Physicians need to see where they are spending. This information helps them manage overall costs," says Ellen Gagnon, senior project and operations director at NRHI, and project leader of the Total Cost of Care Pilot program.

For primary care practices, TCOC accounting can be a powerful decision-making tool, says Meredith Roberts Tomasi, program director at Oregon Health Care Quality Corporation, a founding partner in the Total Cost of Care Pilot program. "This information can verify assumptions they already had and guide improvement efforts," she says.

For example, TCOC data can identify cost-saving opportunities for coding improvements and it can ferret out high-priced specialists. And, she adds, "accountable care organizations want to share this information to address cost variability. It's really up to the practices to decide how this information is used moving forward." 

Identifying Cost-Cutting Opportunities
Analyzing TCOC information helps primary care physicians compare their practice's costs to the average costs of other practices in their markets, allowing them to "drill down on those costs," says Doug Rupp, senior healthcare analyst at Oregon Health Care Quality Corporation. "Identifying high costs creates opportunities to reduce inefficiency and waste. When you find physicians with lower costs, we can learn from them."

The longtime secrecy surrounding healthcare-service pricing deals between payers and providers is one of the biggest hurdles in tracking TCOC, Gagnon says.

"Historically and still, what health plans pay to health systems and providers has been closely held information—confidential and protected. That has made [controlling costs] more difficult than the patient experience and quality goals of The Triple Aim… We are moving out of the infancy stage [in accounting for provider costs]. More standardization will reduce the complexity of reporting. What's really challenging is bringing multiple payer information sets together."

TCOC data can help primary care physicians benchmark costs, peg the average cost to care for a group of patients, and assess the factors that impact negotiated prices for medical services, Rupp says. "[TCOC] is different than price and it's different from what goes into services."

Intermountain Healthcare's Cost Quest
Rather than tracking TCOC to gauge the total annual healthcare spend for the patient population in their markets, a handful of health systems have been measuring and monitoring the total cost of their medical services. This form of cost accounting helps health systems track total spending by healthcare setting, as opposed to TCOC's actuarial objective to track the total spending of patients over an entire healthcare market.

Salt Lake City-based Intermountain Healthcare has been tracking the cost of procedures, materials, and patient services since the early 1980s, says Greg Poulsen, senior vice president and chief strategy officer at the not-for-profit integrated health system. He compares Intermountain's cost-accounting methodology, to supermarket pricing.

"It's like a smorgasbord," Poulsen says. By pricing out the cost of 18,000 procedures, materials, and services, Intermountain "can understand, in real time, the costs of two different physicians… We can calculate the cost of having twins rather than [the cost of] having a single baby."

For providers, there are several operational and competitive advantages to tracking costs closely, he says. "We've been doing it nonstop for 30 years. It gives good analytical capabilities and an early warning system for changes, whether they're good or bad. [Instances of] identifying new approaches have yielded cost improvements and quality improvements simultaneously."

High prescription drug prices have been healthcare-industry headline fodder since the marketing of the hepatitis drug Sovaldi in 2013. Intermountain detected the oncoming wave of costly medications at least a year earlier, Poulsen says. "We started to see the first wisps of that about three and a half years ago in some areas. Sovaldi and Harvoni are the [iconic costly drugs] now, but we saw cost increases in generic drugs. We were able to identify some of those. We identified that there were a number of drugs that had been around a long time or generic drugs that had all of a sudden become more expensive."

With a wealth of cost information stretching back three decades, Intermountain can conduct valuable analytical exercises, he says.

"We can slice it and analyze it in ways that we now know may be useful, which is what we did in the area of mental health integration [with primary care]. What the data shows is the cost of primary care goes up somewhat, not surprisingly. But hospital visits go down dramatically. The number of ER visits goes down significantly. If you look at the whole, it ends up saving thousands of dollars per year [per patient]. It's good to have real cost savings information available. The lack of this information has led to some of the strange cost anomalies we have seen, with high prices at some doctors [practices] and hospitals. That ends up in the lay press as shocking information."