Cost Analytics: The key to sustainability in value-based care

If the diversity of blogs and commentary on the topic is any indication, perceptions on the impact of value based care and reimbursement vary greatly within the healthcare industry. Many contend that the multiple paths to quality-based care via Alternative Payment Models (APMs) and the minimal requirements for compliance will make it difficult to benchmark and determine if real value is being achieved. Many remain unclear on what the definition of “value” really is.

While measuring progress may be muddled in the minds of many stakeholders, the objective of value- based care is to meet the Triple Aim of improving patient experience, improving the health of populations, and reducing the per capita cost of care. When viewed as a value proposition, healthcare value is a function of three main components: quality of care, patient experience and cost of care to the consumer. Notwithstanding this relationship, for providers and hospitals, the added component to ensure sustainability is the cost to provide care.

The goal of managing the health of a population is not a new concept. Attempts to do so have existed for over 30 years through managed care, global cap arrangements, and Medicare Advantage Plans. Traditionally, achieving population health goals hasn’t been feasible for organizations lacking the scale or means to proactively manage a total patient population. However, recent advances in healthcare IT (computing power, storage capacity and interoperability) and clinical analytics are breathing new life into the prospect of activity-based costing.

At the corporate or organizational level, it is predicted that value based care will cause a drop in patient care revenues. CMS’ intention is for providers to move away from fee-for-service, whereby you bill for intervention, and move to fee-for-value, whereby providers will ultimately be paid on achieving an agreed upon outcome, regardless of the interventions necessary to achieve it. Efforts to derive better patient outcomes while reducing costs means providers may be facing reduced revenue potential per patient case. If patient care revenues are declining and quality expectations are staying constant or increasing, then effectively managing costs is the only lever providers have to ensure sustainability. Lack of flexibility on outcome and price make it prudent for hospitals and providers to develop a more accurate view of cost per case. 

The use of a top-down approach for cost estimation has persisted for close to 30 years. Although this has merit, it is at odds with efforts to more effectively manage cost at the individual case level in a fee-for-outcome environment. Fortunately, today’s providers are better prepared for success given the strides the industry has made to establish an IT infrastructure that enables more granular cost analytics.

If cost is the only lever to maintain profitability or an operating surplus, then it will be imperative to understand the exact cost of care to rein in and most effectively channel spending going forward. Data-driven cost management and care coordination initiatives will be the driving force through which providers find clinical and financial success under new value-based payment models.


About the Author: Jon Melling is a management consultant with over 30 years of experience working in health informatics. Mr. Melling is a leading authority in planning for and implementing ICD-10, as well as health information exchange and interoperability strategy.