Exploring the Cost Per Unit of Care: Organizational Strategy
By Eric Schulz, MBA
At DataDx, we are approached every day by providers, practice administrators, and other healthcare leaders to give our guidance around strategic problems they are encountering. Our clients contact us to help with their strategic planning because they know we have seen their strategic issues before. Often, we have worked with other healthcare organizations struggling with the same type of strategic dilemma. However, I assure you, every healthcare organization is unique, and it requires building a strategy around the unique attributes of that particular organization.
To build a unique strategy with our clients, we must know them intimately. We need a clear picture of their culture, resources, facilities, staff, specialty, governance, finances, operations, reimbursement, and patients. From there, we dive deeper into areas that are directly related to the problem we are developing a strategy to address. We build this intimate knowledge of the organization through interviews, surveys, reviewing governance documents, assessing financial statements, and much more. In short, we start by gathering data. This data paints a picture of the problem we are developing a strategy to solve, and the organization with whom we are working.
WHY IS DATA NECESSARY?
Without data, the foundation for a strategic plan is as sturdy as sand. Feelings and beliefs are all that is left. We have all heard a colleague say, “The docs over at Clinic XYZ just built an ASC. I hear their revenue is up 25% over last year. We need to build our own ASC, or we’ll be left out.”
This statement isn’t data-based and could lead the organization to build an ASC that does not deliver care that is needed by the surrounding community. It could even cause the organization to operate at a loss. Feelings and beliefs should be the ignition for further exploration, but without data, the strategy is likely to be flawed.
WE GET LOTS OF DATA POINTS, BUT A KEY ONE IS OFTEN MISSING.
We use many data points to paint our picture of the organization and the problem we are developing a strategy to address. However, almost all medical practices are missing a key piece of data. How much does it cost to deliver the care needed to treat their patients? In healthcare parlance, we call that the “Cost per Unit of Care.”
Why can’t medical clinics calculate this important datapoint? Our clients’ income statements can tell us the various amounts and categories of expenses. Payroll and timesheet data can tell us how many hours various staff members work during a given period. Claims data can tell us how many and what kind of patient visits or procedures our clients perform. However, those three data streams live in separate systems: the accounting system, payroll system, and production system (the EHR).
These disparate systems have much of the data we would need to calculate the Cost per Unit of Care. However, these systems don’t “talk” to one another. It takes entire departments at health systems and hours of independent practice administrators’ time to weave this data together into reports that are likely inaccurate and will change as soon as the next drug is approved, or clinical pathway developed.
Even time and activity studies performed for the gold standard Time-Driven Activity-Based Costing will likely be outdated by the time they are complete. It is not to say these studies aren’t valuable or that they are unable to drive positive change. They are pictures, and we need movies if we are going to solve the strategic problems that healthcare organizations must address.
WHY IS THIS COST PER UNIT OF CARE ESSENTIAL WHEN BUILDING A STRATEGY?
Let’s consider a common strategic problem we encounter with our clients. Frequently we are asked to help the organization decide whether to open a new site. The new site may be across town, or it may be office space on another floor of their building. Either way, there will be opportunities presented by this new site that will be balanced by new or different costs.
As we gather the needed data for the clinic to decide on this new site, cost is one of the critical data points. While the one-time development costs are essential to consider, they are just that, one-time. They are an investment that will be made and then depreciated. However, the ongoing costs of the new site will drive the profitability of the decision.
That profitability will not only determine the ability of the organization to provide ongoing care; it will inform payor negotiations. Ultimately, this affects premiums, employer costs, and patient out of pocket expense. With the advent of High-Deductible and Consumer-Driven Health Plans, this affects the ability of consumers to access care that can decrease costs further down the road. Reducing access is the exact opposite of what an organization is attempting when they open a new site.
As described above, we need systems that provide us the motion picture of the Cost per Unit of Care for our clients to make the best strategic decisions possible. To start, they can be black and white silent films. However, to build truly successful strategic plans, we need high definition, 3-D, surround sound movies for the Cost per Unit of Care. With this data, we will develop strategies that address not only new clinical sites, succession plans, or opening new lines of service. We will create strategic plans that address the most pressing issues of our day, such as providing cost-effective behavioral health, ending homelessness, and making cancer an affordable chronic condition.
WHAT DO MEDICAL PRACTICES NEED?
To develop strategies that address our most pressing healthcare needs, technology directed at medical practices becomes essential. Hospitals have developed cost accounting systems that begin to address the issues described above. However, even the most advanced medical practices continue to live in the era of snapshot reports that require hours of work to produce.
Medical practices must know how much it costs to provide the care that solves the health problems affecting their communities. To build innovative strategies, applications that link these disparate systems to produce real-time, meaningful reports are essential. Those applications must be inexpensive, accurate, and deliver the information in ways that inform visions for the future and empower the missions of our healthcare organizations.
WE CAN DO BETTER.
Companies like DataDx are working to break down the walls that prevent disparate technologies in medical practices from efficiently working with each other. With the right technology, our primary care physicians and specialists can continuously know what it costs to see a patient or perform a procedure. This vital data point will drive more effective strategies and more cost-effective care. Understanding the Cost per Unit of Care is imperative for medical practices to develop strategies that will promote the health of the communities we serve now and in the future.
Eric Schulz, MBA has over 20 years of experience in the healthcare industry. He is recognized as a healthcare leader who is committed to organizational development, improved services, cost controls, and operational efficiency. Eric received his Bachelor of Science from University of Oregon and a Master of Business Administration in Healthcare Management from OHSU. He has served as Adjunct Faculty for OHSU and Portland State University where he taught healthcare executives in both the MS and MBA in Healthcare Management Programs. Contact Eric at: firstname.lastname@example.org