Exactly How Much DOES That Appendectomy Cost?

Want to know one of health care’s dirty little secrets? While we know how much the country spends on care each year, we have little understanding of what it actually costs to provide care.

Think, for example, about an appendectomy. What does it really “cost” the health care system to perform that procedure? The answer is complex, and of course it includes everyone’s time—from the surgeon to housekeeping staff—and it also includes the drugs, equipment, space, and overhead associated with your stay.

The cost of your visit will also depend on who is delivering your care. A consult with a registered nurse (RN) is less costly to the hospital than one with a physician.

Then, consider insurance. If the price your carrier pays for that RN consult is $85, but the price another carrier pays is only $65, what does it actually cost the hospital—and how do those variances affect what you pay both out-of-pocket and for insurance premiums? Moreover, health care providers are currently not trained to think about the costs of the care they provide—and often have no incentive or means to even consider those costs.

These complexities have made it difficult to reform the way we purchase and pay for health care.

We spoke with the University of Utah’s Vivian Lee, MD, PhD, MBA, senior vice president for health sciences, dean of the School of Medicine and CEO of University of Utah Health Care, about an impressive effort their health system undertook to develop a comprehensive costing tool they call “Value-Driven Outcomes.”

What’s unique about the tool is not only the detailed level at which the health system is able to understand its costs, but also that the tool was rolled out with substantial physician support and engagement—rather than being perceived as a tool that was intended to punish high-cost performance.

Q: Why did University of Utah create the Value-Driven Outcomes tool?

All of us recognize that in our health care systems, we are being held accountable for providing value, and one of the greatest challenges to this is measurement. We haven’t been able to measure value, much less put that metric in our providers’ hands to inform their delivery. I, for one, am constantly amazed at our lack of knowledge about costs in our health care systems.

Beyond tackling the costs of care, we also recognized we had little data to share with providers about their outcomes or the quality of care they were providing. A wide range of quality metrics are beginning to impact our reimbursement and our rankings, and yet providers’ ability to track their own metrics has fallen short.

Of course, the key is putting those two together—outcome and costs. In most industries, a key measure of performance is the value provided by the business. In health care, that means looking at quality (which includes outcomes and satisfaction) measured against the costs of care. Our goal was to put these measures into our providers’ hands, so they could begin to manage themselves, and we as health system leaders could roll up the data to manage the entire system.

Q: How were you able to develop the tool?

About two years ago, we launched a new project, which we called Value-Driven Outcomes (VDO). We started with our version of a “sequestration.” We put a group of our top performers and senior leaders from finance, decision support, quality improvement, biomedical informatics, and IT (among others) into a building in our University’s Research Park. We pulled them out of their daily roles three days a week for six months and gave them a challenge: Come up with a tool that would enable us to visualize our value—that is, ideally, to be able to plot our outcomes against our costs—and to do this for every patient, every provider, and every diagnosis in our system.

Critical to our success was our strong enterprise data warehouse. With a whole series of intelligent business tools, our teams extracted vital data and developed web-based user interfaces that were simple and intuitive enough for our providers to use.

This was no modest undertaking. The initial beta version of the VDO involved more than 150 million lines of code.

Q: Can you share an example of the types of costs your tool is able to capture?

The short answer: just about everything. The Value-Driven Outcomes tool starts by organizing cost type grouping, which includes laboratory, supply, pharmacy, diagnostic imaging, operating room time, hospital facility charges and others. These groupings are aggregated by diagnosis and provider groups. From there, we can drill down into each category to view costs by professional and facility direct costs. If we need to, we can dig down even further to look at each and every supply, imaging service or lab test a particular provider uses in a specific episode of care. We can even get down to individual patients. We can now see our system’s costs from 30,000 feet to below sea-level—and just about everywhere in between.

Q: What’s your sense of how common the ability to understand costs at this level is among other health care providers?

We are starting to see other systems get a better picture of their actual costs, but our sense is that such granular views are relatively new to the industry. Only a few years ago, Michael Porter, PhD, and Robert Kaplan, PhD, thrust this decades-overdue costing conversation into the spotlight with a game-changing paper, “The Big Idea: How to Solve the Cost Crisis in Health Care.” Published in Harvard Business Review, the paper zeroed in on providers’ “complete lack of understanding” about health care delivery costs. This costing void, they explained, made it nearly impossible to improve processes, eliminate unnecessary procedures, and deliver better outcomes. According to the Harvard business professors, figuring out the costs would be the “single most important lever to transform the value of health care.”

We could not agree more.

Q: One of the most interesting things about your tool was the way in which it was developed and rolled out. You speak a lot about the importance of understanding what physicians want and need when it comes to practicing care. How did you work with your providers so that everyone felt like Value-Driven Outcomes was something they owned, and a useful tool for their work? And what are some examples of how that’s playing out?

By the time we had developed a functioning VDO tool, our system already had two things going for it: engagement and process improvement training. My predecessor, Lorris Betz, MD, PhD, championed our Exceptional Patient Experience initiative, designed to engage providers in a culture shift toward more patient-centric care. In 2012, University of Utah Health Sciences became the first academic medical center in the nation to publish our patient satisfaction scores online, with complete transparency and ultimately, full engagement of our providers. The impact? Nearly half of our providers are now in the top 10th percentile and one-quarter (25%) are in the top 1st percentile in patient satisfaction compared to national benchmarks.

At the same time we launched the VDO project, we also began a systemwide roll-out of LEAN training in partnership with the University Of Utah Eccles School Of Business. LEAN is a production practice, mostly developed by Toyota, that we and others have adapted for our health care systems. Essentially it is a process of producing something with the most efficiency (fewer resources) and the most effectiveness (creating a better value), all the while focused on the highest level of quality. The responsibility for ensuring the best outcomes is held by the people on the front lines—in our case, all the people engaged with the patient in the practice of health care. This efficiency training and engagement has helped providers who participated in our earliest pilot projects embrace the VDO tool and enabled them to use the data, working closely with our value engineers, to drive process improvement.

We also discovered some things that we didn’t completely expect. First, we came to realize that by putting the VDO tool in providers’ hands, we tapped into a profound desire on the part of many to help be a part of the solution. Most of us entered health care to do good. Our providers now have the tools and capability to impact not only their patients, but also the ways in which we, as a system, deliver health care. We also found with our patient satisfaction initiative and with VDO, our providers’ competitive natures can be useful drivers of change. Our providers want to be the best, whether it’s in patient satisfaction or in quality and value. By making the data accessible and easy to understand, we’ve managed to engage our physicians and have real improvement to show for it.

Q: What are some of the changes and improvements you’ve seen since implementing the tool?

This process improvement has been limited to some pilot studies, and even there, it has translated already into more than $2.5 million in savings for our system and helped us pave the way to accepting more risky payment models. For example, our hospitalists have harnessed VDO to gain a view of how many tests they are ordering. This view has empowered them to change their rounding structures, create attending-approved checklists and save more than $550,000 so far this fiscal year in unnecessary tests, without diminishing patient outcomes. VDO helped one University of Utah physician group realize that a commonly prescribed bronchodilator that costs $200 delivered the same outcomes for most patients as a similar $15 drug. By switching to the less expensive bronchodilator, the group was able to save more than $200,000 a year.

All these process and care improvements stem from our new ability to quantify and continually improve the value we deliver. Specifically, VDO gives us the ability to question whether the quality and outcomes of the care we deliver to patients is worth what we, and ultimately they, pay for it.

Q: How has getting a solid handle on costs positioned University of Utah to move into a national environment that’s focused on changing the way providers are paid?

Having a solid handle on costs is the necessary first step for any health care system to be willing to become more financially responsible for our patients’ outcomes. Take Medicaid in Utah, as an example. In the past, we could care for Medicaid patients and then send a bill to the Medicaid office and expect to be paid for our services. In the past year and a half, our health plan has received a fixed amount of revenue from the state of Utah to cover all the care we deliver to Medicaid patients. This means that whether cardiac Medicaid patients, for example, receive bypass surgery or just need a coach to help them improve their diet and exercise, we are paid the same amount for their care. To be successful with these patients, we must know how effective the cost of the care we provide is for their condition.

Another model of payment we can begin to feel more able to manage is bundled payments, where insurers and employers who contract for direct payment have already started to say, “We will pay you $X, for this diagnosis.” We can engage in those new ways of thinking about medical payments if we have the right tools, and this could be a real win for businesses and employers who want to get on top of health care costs.

As a result of these payment models, health care systems will ultimately begin to share the risk for those patients’ care. This doesn’t mean we will do the least amount for them to get them home again. This means we have to be able to care for them with the greatest efficiency and effectiveness to restore their health and give them the ability to return home safely for as long as possible. In fact, if we don’t do enough, they’ll be back at our hospitals, which isn’t good for anyone.

Q: Are you seeing other examples of health systems and providers embarking on similar efforts?

We’ve heard about launches of similar initiatives from University HealthSystem Consortium, Kaiser, University of Pittsburg Medical Center and others. Harvard Business School has a tool they’ve been using with a few health care systems (MD Anderson, Mayo Clinic, Cleveland Clinic) called Time-Driven Activity Based Costing (TD-ABC), as a result of Professor Robert Kaplan’s efforts. In fact, we recently completed a University of Utah/Harvard Business School partnership project that focused on using VDO and TD-ABC data to improve processes around 4 different episodes of care and in our billing procedures.

Generally speaking though, there continues to be a lack of data about the costs of care to any level beyond the general ledger. We hope that we can share some of the lessons we’ve learned to enable others to develop tools like Value Driven Outcomes.

Q: What advice would you give to health systems and provider groups that are interested in developing something similar to Value-Driven Outcomes?

Bite the bullet and do it. And we here at the University of Utah are here to help in any way we can. This is a nationwide problem that demands a nationwide solution and we all need to work together to succeed. Understanding your costs is fundamental to business management.

Yes, the health care system is broken. Yes, each of our systems and populations is different. Yet we have to remember that our ultimate purpose is to offer value to society. To be able to deliver that value, we have to start by measuring it. It’s so basic and so clear. Don’t give up. As Colin Powell once said, “Perpetual optimism is a force multiplier.”

While the University of Utah example is compelling, we know other efforts are under way across the country aimed at helping providers prepare for a new financial environment. But those examples aren’t easy to spot, so we’re looking to you for help.

Here’s how:

Share in the comments below what you or your organizations developed to help understand the cost of delivering care. How are you sharing what you’re learning?