Why It Matters
Before settling the details of their bundled payment contracts, providers should understand the actual cost of the care they provide. But determining the real cost of care is not easy.
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True Cost Methodology: How to Find the Real Cost of Care

By Tony Digioia | Thursday, June 30, 2016

The True Cost Methodology

Bundled payment is an increasingly common form of health care cost reimbursement. Clinicians, hospitals, and health systems who agree to bundled payment arrangements assume financial risk for the cost of services, as well as costs associated with preventable complications. Consequently, it’s important they know how to adapt to this model.

Participation in bundled payment programs accelerates the need for care providers to quickly shift from volume-based care to value-based care. (Note: Value = Outcomes/Cost). Before settling the details of their reimbursement contracts, providers and health care organizations should understand the actual cost of the care they provide. With margins in flux, knowing the true cost of all resources (personnel, consumables, equipment, and space) across the full cycle of care is essential for negotiation, financial strategizing, and minimizing risk.

But determining the real cost of care is not easy.

The True Cost Methodology (TCM) is one way to determine the actual cost of care. I developed TCM with my team at the PFCC Innovation Center of UPMC in Pittsburgh, Pennsylvania. We based TCM on the Time-Driven Activity-Based Costing (TDABC) approach developed by Robert S. Kaplan and Michael E. Porter. Building upon the basics of TDABC, we incorporated Shadowing, a real-time, low-cost, high-impact observation tool. Shadowing involves following along in a patient’s footsteps, noting the details of the experience, and recording observations. It offers a real-time view of what patients and families encounter along their health care journey. It also allows quick, efficient, and accurate identification of the resources that are part of any care experience.

By integrating Shadowing, TCM takes advantage of the patient’s position as the only common denominator across all silos of care delivery and over the full cycle of care. Shadowing links experience, outcomes, and costs.

Shadowing provides a way to assess the current state in any care setting. Shadowers identify detailed information on the types, utilization, and cost of each resource and the duration of the activities for each step of care delivery. TCM also takes into account “back office” processes, including billing and central sterile activities, and provides the information caregivers need to determine the true cost-per-minute of all resources. 

As you employ TCM, you can:

  • Define accurate care pathways — Shadowing determines the clear beginning and ending of each pathway (e.g., 30 days pre- to 90 days post-hip replacement surgery).
  • Identify the resources (personnel, consumables, equipment, and space) used throughout the care pathway.
  • Track the time used by each resource per activity, per segment of care, and in total; Shadowing captures time data, then TCM translates the data into a cost-per-minute value for each resource.
  • Calculate the actual cost of these resources by activity, segment of care, and total cost over the full cycle of care.

Not only can TCM provide an effective mechanism to facilitate process improvement (e.g., determining whether all caregivers are working to the top of their license), it can also identify opportunities for thoughtful cost reduction without sacrificing quality outcomes, safety, or patient experience.

Here are some examples of how hospitals have implemented TCM to identify variations in care and drive the adoption of best practices:

  • Magee-Womens Hospital of UPMC used TCM during the pre-operative testing portion of the total joint replacement care experience. The hospital learned that all patients obtained a chest x-ray prior to surgery; however, chest x-rays were not necessary for all patients. The organization developed a new protocol, and there was a 70 percent reduction of chest x-rays, which added up to approximately $7,500 annually per surgeon — a significant savings when spread to multiple surgeons. In addition to cost savings, this change improved the patient experience by eliminating unnecessary radiation exposure and reducing testing time.
  • The total joint replacement service lines of four surgeons at both urban and community-based hospitals used TCM to compare their processes. Their analysis showed variations in care pathways, resource costs, and total costs. Notable differences that influenced actual costs included pre-operative testing protocols, operating room time, types of personnel (e.g., the degree to which they used mid-level providers and the types of support staff involved throughout the full cycle of care), follow-up visit protocols, discharge disposition (home versus SNF/Rehab), and number of outpatient therapy sessions.

TCM offers organizations the unique capability to deliver value by determining true cost. All of these benefits will contribute to achieving the Triple Aim.

Anthony DiGioia, MD, is Medical Director of the Bone and Joint Center and The Innovation Center at Magee-Womens Hospital of UPMC. Dr. DiGioia’s colleague, Michelle Giarrusso, will serve as faculty for the IHI Virtual Expedition: Bundled Payments — Transitioning to Value-Based Care.


You may also be interested in:

Applying Value Management to Health Care seminar - November 2-4, 2016, in Washington, DC.

PFCC Innovation Center Go Guides

WIHI: The Meaningful Methodology of Patient- and Family-Centered Care

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