Share Podcast
What Health Care Really Costs
Robert S. Kaplan, Harvard Business School professor and coauthor of the HBR article “How to Solve the Cost Crisis in Health Care.”
- Subscribe:
- Apple Podcasts
- Spotify
- RSS
Featured Guest: Robert S. Kaplan, Harvard Business School professor and coauthor of the HBR article How to Solve the Cost Crisis in Health Care.
SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. These days, everyone’s worried about spending, and at the top of that list is health care spending. So today we’re talking about the cost of health care, why it’s so high, and what we can do about it. I’m here today with Harvard Business School’s Robert S. Kaplan, who is well known for his work on activity-based costing and the balance scorecard. He’s now working on the health care dilemma with Michael Porter. Their article, “How to Solve the Cost Crisis in Health Care,” appears in the September issue of HBR. Bob, thanks much for joining us today.
ROBERT S. KAPLAN: Glad to be here with you.
SARAH GREEN: So the piece, you start by saying, and this is a quote, that there’s almost a complete lack of understanding of how much it costs to deliver patient care. How can this be? How can we have no idea what it costs to deliver patient care?
ROBERT S. KAPLAN: Well, the health care sector just kind of split off from the rest of any other sector in developing a peculiar set of structures and policies for measuring cost. The only way I can describe this is that when I encounter the costing systems in health care institutions, I feel the way Darwin must have felt when he first came across the Galapagos Islands, that here was this land that used to be attached to the mainland, but then split off, and as a result of splitting off, ended up developing its own peculiar set of species that were completely unaffected by any of the mainstream developments on the mainland.
And health care just lived in this peculiar own internally focused world of how to measure cost. and they measure it based on how much they get paid over how much they’d like to get paid, their charges. And they’ve been completely almost oblivious to the innovations in costing that has occurred in the past 25 years, principally through activity-based costing.
And the focus has been how to measure their cost in ways to maximize their reimbursements firm various third party payers, but not to really understand the cost of the resources that they’re using to treat patients. And so it ends up in this really peculiar situation where they may be able to measure cost in some ways by departments or procedures, but they have absolutely no way of knowing what a cost to treat a patient from admissions and intake all the way through final completion of care for the patient’s medical condition.
SARAH GREEN: So you would argue then, and you do in the piece, that you have to tie the cost more concretely to the outcome. Is that right?
ROBERT S. KAPLAN: Yes. Well, it turns out that the biggest problem this sector has, and why it’s been so resistant to reform, is they have two critical missing measurements that virtually any other sector has, which is, what are the outcomes you’re producing, and what are the costs you’re incurring in order to produce those outcomes? And both of those are missing.
And my co-author and colleague, Michael Porter, has been working on how to measure the outcomes for at least the past 10 years. He came to me about 18 months ago and said that that’s only half of the solution. The other half is to be able to measure the cost.
And it turns out, even if I had introduced the costing innovations that we’ve done, without the outcomes, that wouldn’t have worked, because any attempts to reduce cost in this setting would have been criticized, because you would say you were putting the outcomes at risk. And so you actually need both sets of measurements. You need both the outcomes you’re producing for treating a patient through a medical condition, and you have to know the cost that you incurred during that treatment.
SARAH GREEN: So I’m glad you mentioned that, because I think some of the skittishness that people feel about attempts to reduce health care costs is they worry that you get what you pay for, and if you pay less, you’ll get less. But it’s sounding like you’re saying that actually the costs and the charges are totally unrelated to each other.
ROBERT S. KAPLAN: They are. And because the health care has been measuring their costs the wrong way, once you measure them the correct way, the opportunities for lowering your costs without compromising your outcomes, and in fact, often improving the outcomes, are just very apparent. There’s lots of low-hanging fruit sitting there, waiting to be plucked, that will enable health care institutions to simultaneously lower their cost and improve the outcomes that they deliver, just by eliminating inefficiencies, and redundancies, and poor handoffs from one part of the care process to another.
SARAH GREEN: So is there any sort of case study or example of a hospital or clinic that has sort of started to do this, where you can see some of the positive outcomes?
ROBERT S. KAPLAN: Well, for the last 15 months, we’ve been working with 4 pilot sites, not complete hospitals, but focused units within the hospitals that had already been working with Michael Porter on outcome study. So we wanted to build upon the outcome study to add the cost component.
And so the four pilots sites from which we got the confidence that this approach will work, as well as ideas and examples of how it’s working, are the MD Anderson Head and Neck Cancer Center, the plastic surgery unit at Children’s Hospital in Boston, that does cleft and lip palate surgeries on infants, the knee replacement unit at the Brigham and Women’s Hospital here in Boston, and also a similar knee replacement unit at a German hospital, the Schon Klinik. So those are the four units that have been going through the procedures that are described in our paper. We’re, as I say, getting the confidence that this can and will work, and getting the insights from them. We’re currently talking with quite a few other institutions that we are now in contact with, and also want to start implementing this approach in their hospital setting as well.
SARAH GREEN: So I have a bit of a cynical question for you now. Say I’m a hospital CEO, and I’ve bought in. I see the results of the pilot projects you’ve been working on. Why would I pass on the savings to the end user? Why would I not just improve my own profitability, and then maybe increase my own salary, or increase the salaries of my best doctors?
ROBERT S. KAPLAN: Well, I mean, they’re welcome to do that. And actually it’s a little surprising more hospitals have not had that kind of incentive to do their processes more efficiently, and process more patients with the same resources under the existing system. But the more important driver is that the external pressure on the sector is just increasing enormously. I mean, society can no longer spend this much money on an inefficient system that cannot document the outcomes that it’s producing. And so you can already see the pressure coming in.
And I think any leading hospital administrator is feeling those pressures, that the days of being able to incur any of their costs and be able pass them onto their payers is ending. And so I think the payers are demanding this new form of accountability, both document the outcomes you are producing, as well as what is it costing you to deliver these outcomes. And so I think that type of external pressure will motivate them to get ahead of the curve on this, and start working within their system to put in the process improvements, and the better cost measurements and cost discipline that will be required.
What that also will enable them to do it, and this is the proactive part, is to think of new forms for reimbursement that will reward them for delivering better outcomes at lower cost. Right now, because they’re measuring neither outcomes nor cost, they can’t contract on that. And the only thing they can contract on is, we did this procedure for this patient. Pay us. So they’re contracting on things that they do, and if they have to do multiple procedures because the patient comes back for readmission, they actually get paid multiple times for doing that. Now we think with this new information that they can produce, they can come up with better ways of being paid for delivering health care that rewards people for doing it both effectively, delivering good outcomes, and efficiently, doing these outcomes with a lower commitment of resources.
SARAH GREEN: So I want to back up a little bit, and talk a little bit more about what the impact on the so-called end user, the patient, in this case, would be, because one of the things you mentioned in the piece is something we all know reduces costs in the long run, is when people can get in to see this doctor, the specialist, sooner. But now we have, for instance, these long waiting times and stuff like that. Would improving the incentives and the cost structures affect other things like that? Would there be ripple effects down the line for patients in other areas, beyond just the pocketbook?
ROBERT S. KAPLAN: Absoultely. When I talk about low-hanging fruit, I mean these are all win/win situations. The current way we deliver care to most patients is they have to move from specialty to specialty, or from one department to another. And that means there are these multiple handoffs. There are delays. There are redundancies. The patient signs in multiple times. New sets of vital signs are taken each time. New little bits of medical histories are taken, These will both introduce delays in treating patients, opportunities for bad handoffs, where things get lost in the transition, and it’s higher cost, because you’re doing things multiple times that you don’t need to do multiple times. You should only do it once.
And so if the hospitals organize much more according to the flow of activities that has to be done for the patient, then the patient goes through the system in a much smoother fashion. The redundancies are eliminated. The handoffs are minimized. And the amount of time the patient spends in the system is lowered, which both lowers the cost of treating the patient and likely also improves the medical outcomes.
SARAH GREEN: Well, I’m glad that you mentioned there some of the obstacles, because I think these are ideas that have really taken off in other parts of the private sector, and have delivered great value and savings there. And at the same time, we’re talking about a sector where, as you mentioned, there is a lot of external pressure to reduce costs. So what are some of the other obstacles as to putting this into practice? Because I think if it makes sense for patients, it makes sense for doctors, why would this not just sort of catch hold tomorrow?
ROBERT S. KAPLAN: It’s a change in the mentality of the way they deliver care. Right now doctors are often organized by specialties, and the patient has to pass from specialty to specialty. And now, to achieve the efficiencies and outcome improvements, you have to organize by the patient’s medical condition, not by your specialty. And so surgeons, or radiologists, or anesthesiologists get dispersed into various patient-facing units where they will be needed to give that complete cycle of care for the patient. So I think it’s a change in the organization with which we deliver medical care.
And some of the other resistance is the dark side from process improvement. Everyone says, oh, I’ve got process improvement. It’s great. Let’s be more efficient. But at the end of the day, if this is going to save money, we have to have fewer people in this sector. And so if we want to reduce the percentage of GDP that is devoted to health care, we have to have fewer people, and less equipment, and fewer facilities devoted to that sector. And the pain of shrinking the workforce, or shrinking the number of facilities, will be real. But it’s essential if we are going to be spending less to deliver the same quality of medical care to our populations.
SARAH GREEN: So in that case, the analogy there would be, as we’ve seen in some other sectors, where technological improvements and accounting improvements have led to cheaper products, higher quality products, but fewer jobs involved in making those products.
ROBERT S. KAPLAN: Yes. I mean, basically whether you’re doing it with automation or process improvement, you’re trying to deliver the same or better outcomes with fewer resources. Resources is a polite way of saying people, equipment, and facilities.
SARAH GREEN: So what do you say to the people, then, who say, well, that’s all well and good for a company that manufacturers sofas, but health care is just too complicated. It’s just too complex to accurately measure all those costs.
ROBERT S. KAPLAN: This can be done. It looks complicated just because the way we currently deliver medical care is complicated, with patients following many different types of paths through multiple resources through the system. And we first have to capture how we’re doing things today and assign the cost. And in the pilot sites, as they did this, the insights became obvious. Look, why are we doing this process, or why are we doing it in this sequence, or why are we using this level of medical professional to do this particular process? So the opportunities for simplification and cost reduction almost leap off the page at you as you go through it.
And the things we’ve learned at the pilot sites is, it does take time, and it does take a dedicated project group to do it, but it’s not complicated. It’s not rocket science. At the end of the day, it’s pretty simple, straightforward, and transparent, and you just need the patience and the commitment to do it. And the benefits, we are confident, are going to be many, many multiples of whatever the front end cost is to first set up the system.
SARAH GREEN: Well, it is a fascinating topic. And I’m glad that we have some of our best minds focused on solving this problem. Thanks so much for talking with us today, Bob.
That was Robert S. Kaplan of Harvard Business School. The article is in the September issue of Harvard Business Review. For more, visit HBR.org.