By Jeremy Fisher, Definitive Logic Corporation

In light of the impending movements in healthcare away from “fee for service” and toward “pay for value” models of care, the importance of accurate cost analysis for healthcare providers is extremely important. Linking the financials to the operational data and down the line to patient outcomes is the key to operating an effective healthcare operation whether it’s based on “fee for service” or “pay for value”. This article provides background on the waste created by today’s fee for service healthcare cost and reimbursement framework in comparison with the new pay for value models. We also take a look at strategies, processes and tools to institutionalize cost analysis and deliver accuracy and profitability over the long term.


Case level waste accounts for about 50% of the total waste.
Experts estimate that of the $3 trillion spent on healthcare in the US each year over $1 trillion is wasted through production, case, or population level inefficiencies or duplications. According to these experts, production level waste accounts for 5% of the total waste and can be characterized as inefficiencies in producing units of care such as drugs, lab tests, x-rays, hours of nursing support, and other cost items used in the course of medical treatment. Case level waste accounts for about 50% of the total waste and is defined as unnecessary or sub-optimal use of care in a treatment episode such as duplicate diagnostic measures such as x-rays or lab tests when the care provider can’t find the results of the previous items or does not know that one was already administered. Population level waste accounts for 45% of the total waste and it involves medical treatments for a given patient population that are unnecessary or preventable such as end-of-life intensive care administered to people who have expressly asked not to receive it, elective surgical procedures that patients would not elect to have if better information was available, and specialized care or hospital stays that could be avoided with timely or cheaper outpatient care. The current “fee for service” healthcare framework for reimbursements drives much of the waste as a result of the healthcare providers being reimbursed for all activities and supplies utilized in providing the care, regardless of whether the care is necessary or not. This opens the door for unintentional waste as well as fraudulent reimbursements from federal agencies and commercial insurers. From the healthcare provider standpoint, there is very little incentive to eliminate waste because all activities and supplies ordered by the providers are reimbursed.

To address this glaring flaw in the current model, the healthcare industry has been evaluating many options for new models of care and appears to be gravitating towards “pay for value” frameworks. One particular variation of the “pay for value” frameworks that is gaining momentum is population based payments which provides a fixed dollar amount per person to cover all health care for a period of time which is modified for each patient’s needs based on their specific health profile with consideration for special conditions. This fixed amount would be determined based on statistically calculated amounts based upon a population of patients with similar profile. This model of care incentivizes healthcare providers to attack waste internally and optimize care regimens to exactly what is needed to produce a positive outcome for the patient. Using this approach, not only would the providers be incentivized to eliminate wasteful and unnecessary procedures but they would also likely adopt more innovative methods of providing quality care. In order to provide innovative methods of quality care, the healthcare providers would logically invest in research and development activities to drive additional innovation to drive their costs down and improve outcomes.

So, how does cost analysis play into this discussion?

Most every healthcare provider does some level of cost analysis on their costs and reimbursements to understand at a basic level if they are profitable, and at an advanced level to identify methods for optimization or cost avoidance without degradation in the quality of care. When implemented effectively, a good cost analysis program provides a basis for decision making over several key aspects of the future of the enterprise such as strategic planning, capital investment planning, budgeting, insurance contracts negotiation, coding, and reimbursement strategies, etc.

Effective tracking and profiling of direct costs per procedure, patient, physician, department, and facility leads to the ability to link that cost data to indirect costs and other key operational data such as nursing units, pharmaceuticals, and durable medical goods. Once the linkage between financial and operational data is made, the outcomes from each procedure can be derived from the information stored in the electronic health records system. Together, this data provides an end to end decision support system for effective executive and business line decision making based on the data currently available in most enterprises.

The truth is cost analysis will change each time the model of care changes.
Many of the large hospital software system providers equip their systems with capabilities that satisfy some subset of these financials to operations to outcomes tracking requirements. Many of these systems pigeon-hole the healthcare provider into doing cost analysis according to the way their software systems are designed.  The truth is cost analysis will change each time the model of care changes. Based on the uncertainty of the future in terms of how health care models will morph, it makes sense for healthcare providers to select cost analysis tools that are built for universal cost analysis scenarios to enable the appropriate measure of flexibility for change. The ultimate flexibility lies in a generic tool that can collect data from the appropriate systems, augment that data set with data entry, package the data set into a work package for workflow approval processes, and provider powerful and flexible reporting on the data. One such implementation was completed using Oracle Hyperion which is a leading planning, budgeting, and forecasting solution whose primary purpose is to integrate financial and operational planning processes and improve business predictability. This tool enabled the creation of data sets that were modeled directly after the business operating environment and provided a native method for working with the data inside of Excel which is a familiar environment for most people. In addition, a powerful set of dashboards and reports were provided to enable cost analysis at the procedure, patient, physician, department, and facility levels. Since Hyperion is a leader in the planning and budgeting arena, it also provides a strong platform for managing the strategic planning and budgeting processes. Together, these features provide the ability to institutionalize cost analysis processes by accurately merging/managing the data, producing the right analysis of the data to drive the right business conclusions, identifying opportunities for cost avoidance, bringing discipline to budgeting processes, and enabling highly effective strategic planning to tackle the ever changing landscape of healthcare.

jeremy-fisher-headshotJeremy Fisher is a founding partner of Definitive Logic Corporation (DL) and continues to manage the company’s operations and growth. As a co-founder, Mr. Fisher oversees all aspects of DL’s business and has led the growth of the company from its inception to today a 105+ employee $20M/year revenue business providing Health IT, Financial Management, and Real Estate Solutions to Federal and DoD clients. DL’s Health IT Practice delivers insight, time savings and optimization to clinical operations using advanced data management and analytics techniques.

Definitive Logic Corporation (DL) is a privately-held management consultant and systems engineering firm located in Arlington, VA, with multiple project locations across the country. Our highly-skilled, technology-focused professionals provide Information Technology (IT) services to federal Government and Commercial organizations. We specialize in the design, development, implementation and maintenance/sustainment of business process-enhancing software and database applications. We focus on understanding the operational context of information systems in order to fully support current and future needs and to anticipate the environmental impacts on enterprise systems from evolving interfaces, technologies (hardware/software), security and standards. We provide our customers with the full range of our services including consulting, process management, application development, system integration, software engineering, network administration, business intelligence and reporting. Our business processes and practices are guided by industry best practices for Quality Assurance (QA) such as ISO 9000:2001, CMMI and Lean Six Sigma (LSS).


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