Health Care Costs—Looking Closer than “Payments”



By William B. Borden, MD



Health care systems seeking to improve value require data.  They need data about the quality and cost of care provided.  They need those data to be valid, timely, and they need those data to be detailed enough to be actionable.   Once they have the data, health care systems require comparable data to provide benchmarks for their current performance and identify unwarranted variations in care.  Researchers at Dartmouth and elsewhere have shown that variation in utilization exists across regions without associated improvements in health outcomes.  These studies have been instrumental in focusing national attention on variation in care and in spurring policy initiatives to reduce undue variation.  These studies have generally looked at aggregate utilization as assessed by Medicare payments.


The term “payments” is often confused with the terms “charges” and “costs.”  While related, the terms payments, charges, and costs are often three very different amounts.  Economists and accountants know the differences, but with the drive for higher value health care, professionals must use the best metric to track health care utilization.  Take a knee replacement, for example.  The hospital generates charges, or what it would like to be paid, that are billed to the patient and their insurer.  The patient and the insurer transmit payments, or reimbursements, to the hospital.  It’s important to note that negotiated discounts often results in these payments being significantly lower than the charges.  The hospital cost includes everything from the actual cost of the new artificial knee, to the salaries of the nurses caring for the patient, to the cost of electricity.  The physician charges, payments and cost are separate from those of the hospital.  While charges and payments are obtainable numbers because they exist as part of an economic transaction, costs which are more reflective of health care utilization are much tougher numbers to pin down because they are completely internal to the hospital.


In our recent study, we estimated costs to examine variations in utilization for acute myocardial infarction patients in New York State using hospital-level data, drilled down to the individual cost components.  Using the charge data that hospitals report, we calculated their costs by applying each hospital’s cost-to-charge ratio.  We broke down overall costs into routine costs (which capture the costs associated with regular hospital rooms and supplies), and ancillary costs (which are the additional costs reflective of their utilization of items like x-rays and procedures).  We also followed the trail of the ancillary costs further to the individual cost centers, such as the operating room or medical and surgical supplies.  Comparing across hospitals with similar capabilities (such as those with or without the capacity to provide cardiac surgery), we found substantial variability in utilization within each peer group across a spectrum of individual departmental cost centers.  Knowing that such variation exists at the actionable department level and having appropriate benchmarks provides health care systems with the granular data with which they can drive change.

You can find the published study in the latest issue of the Journal, here. [Photo Credit: mjtmail (tiggy)]


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