The U.S. healthcare spending as percentage of Gross Domestic Product was 18% in 2018, which is the highest in the world. Per the Institute of Medicine (2013), “If home building were like health care, carpenters, electricians, and plumbers each would work with different blueprints, with very little coordination. If shopping were like health care, product prices would not be posted, and the price charged would vary widely within the same store.” Per this report, cost inefficiencies are estimated to be in excess of $765 billion nationally. Measurement of cost of care in healthcare is highly variable across the industry, making it difficult to compare and benchmark different institutions. Traditionally, costs in healthcare are calculated as direct costs and indirect costs. Although the concept of total cost per unit produced exists in other industries, the awareness that this concept is valuable in healthcare industry occurred only in the last decade. Some innovative healthcare organizations are leading the way by developing definitions and methods of calculating total cost of care and informing public policy. This approach may be critical to healthcare reform efforts and bend the cost curve.

In healthcare, the payer defines the price or cost of care by setting a target price for healthcare provided, and it is not defined from a healthcare provider’s perspective (i.e., how much it costs the provider to deliver a particular service. The prices from the payer and provider perspectives are connected because providers that can deliver services at a lower cost may be able to offer lower prices to payers. Smith and Keckley argue that the current level of healthcare spending is unsustainable and that the total cost of care concept helps hospitals and health systems measure their spending per patient. The healthcare industry is paying close attention to innovative healthcare organizations engaged in developing methods to measure total cost of care and the results of managing costs using this approach.

Lee and colleagues (2016) in University of Utah implemented a value-driven outcomes program between 2012 and 2016 and calculated total facility expense per case mix index (a measure of severity of illness) adjusted discharge. Their organization has about 34,000 patient discharges and 1.7 million total patient visits. They defined total cost of care as the sum of costs associated with facility utilization, radiology imaging tests, laboratory tests, therapy services, administered medications, supplies used, and total professional fees. By calculating these costs for all their patients and presenting the costs of care by department (e.g., internal medicine, general surgery, neurology), they informed cost efficiency improvements throughout the organization. Compared with the initial baseline year, mean direct costs were 7% lower during the implementation year and 11% lower in the post-implementation year.

In addition to the University of Utah, organizations like the Network for Regional Healthcare Improvement in Minnesota, Maine Health Management Coalition in Maine, Midwest Health Initiative in Missouri, and Oregon Health Care Quality Corp. in Oregon have implemented total cost of care programs. HealthPartners organization has been developing health care cost of care and resource use measures since 1995. They published a total cost of care and resource use framework and toolkit on their website. The National Quality Forum, the organization that approves metrics for the Centers for Medicare and Medicaid Services (CMS), endorsed the measures that they developed, i.e., total cost index and resource use index, in 2012 and re-endorsed them in 2017.

The CMS utilizes these metrics to benchmark organizations on cost of care, and for their innovative bundled payment models that they are testing in selected organizations throughout the nation. Currently, the CMS is testing bundled payments for 90 days following the first hospitalization or clinic visit for each of these clinical conditions – spine surgery, knee replacement, hip replacement, stroke, sepsis and congestive heart failure. These costs cover the costs associated with inpatient admissions, office visits, readmissions, skilled nursing facility stay, home health services, rehabilitation facility admissions, laboratory costs, radiology costs, durable medical equipment and hospice. This model shifts the focus of healthcare from volume to value and the hospitals and healthcare organizations are incentivized to improve cost efficiencies and quality of care. The potential benefits of these payment models are yet to be realized per analysis by Smith (2017) and colleagues. They analyzed the results of forty-three ambulatory care programs funded by the first round of the Center for Medicare and Medicaid Innovation’s Health Care Innovations Awards and measured the innovations’ impacts on total cost of care. They found that the overall benefits were yet to achieve statistical significance, although savings were also relatively large in programs that targeted clinically complex populations at risk for disease progression. While the magnitude of these effects was often. They made the case for meta-analyses of a larger number of delivery system innovations to establish their potential for patient care cost savings more clearly.

The necessity to measure and manage the total cost of healthcare is now an inescapable reality from the national healthcare reform perspective as well as healthcare organizations’ perspectives. Although the concept of total cost of care is a recent healthcare ‘innovation,’ there are some ways hospitals and health systems are already feeling the impact of how much it costs the healthcare organizations to provide care. The hospital value-based purchasing programs utilize a surrogate measure of total cost of care called medicare spending per beneficiary and rank hospitals based on this measure. This measure significantly contributes to a weighted rank that allows the CMS to hold back 2% incentive payments for hospitals in the worst performing quartile. This medicare spending per beneficiary measure is also publicly reported by the CMS on its hospital compare website. Accountable care organizations as well as participants in the medicare shared savings program and CMS innovative payment models utilize metrics that are close to total cost of care measure. Provider sponsored health plans (e.g., Parkland Health Plan, UT Connect) and state and regional health system improvement efforts utilize these measures to drive down costs of care.

New risk-based payment arrangements are making hospitals and health systems even more accountable for a broader range of healthcare spending. This makes it imperative for all hospitals and health systems to prepare for measuring total cost of care if they have not yet begun this ‘journey’. The key considerations and actions to take as part of the preparation are the following per Smith and Keckley (2017). Firstly, healthcare leaders need to understand the organization’s capabilities to track and monitor their total costs. The costs are drawn from various sources, and organizations need to ensure that proper infrastructures are in place to support the articulation between different sources of data and ultimately support proper synthesis of the data. Secondly, claims data need to be obtained from payers directly or through all-payer claims databases. Thirdly, collaborations are critical because they provide a useful platform to drive improvements. Without have the ability to change and improve outcomes, measuring total costs of care is meaningless. Lastly, healthcare organizations need to be prepared to make local and regional observations, analyze key drivers for total costs of care, and innovate.

The need for innovation in measuring and monitoring total cost of care and correlating with quality of patient care outcomes has never been more important. Future iterations might include spending on community-based social services and community outreach programs that reduce complications such as emergency room visits and readmissions. Spending on emergency room visits might be an element of total cost of care that needs to be included. The time period that is most relevant for measuring total cost of care – 30-days, 90-days, or a different time interval, needs further study. Studies to standardize definitions of this measure are needed. Additional studies are also needed if measuring and improving total cost of care at individual health systems does indeed roll up to bending the cost curve at the state and national level. Above all, all these improvements and research studies require leadership and stewardship at every level in healthcare.

Measuring how much healthcare services are costing the healthcare providers overall and for select conditions like chronic diseases and major surgeries is necessary in order to understand and manage the costs. Newer payment models make it necessary for hospitals and health systems to manage their total cost of care. Before embarking on the path to measure total cost of care, organizations need to understand and if necessary, improve their ability to track costs and claims data, engage in partnerships with other organizations and prepare to innovate. Additional research is needed to understand the impact of managing total cost of care on patient care outcomes.

Additional References:

Institute of Medicine. 2013. Best Care at Lower Cost: The Path to Continuously Learning Health Care in America. Washington, DC: The National Academies Press.

Lee VS, Kawamoto K, Hess R, et al. Implementation of a Value-Driven Outcomes Program to Identify High Variability in Clinical Costs and Outcomes and Association with Reduced Cost and Improved Quality. JAMA.2016;316(10):1061–1072.

Smith KW, Bir A, Freeman NL, Koethe BC, Cohen J, Day TJ. Impact of Health Care Delivery System Innovations on Total Cost of Care. Health Aff (Millwood). 2017 Mar 1;36(3):509-515.