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For hospitals, a model to stabilize spiking costs

'Unit of care' may better define payment, but requires coordination

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Barry Ostrowsky, president and CEO,
Barnabas Health
Barry Ostrowsky, president and CEO, Barnabas Health

Hospital executives struggling to remain fiscally sound are hoping a down-to-basics examination of costs can help them survive the challenges of changing reimbursement models.

One approach is determining the cost of a "unit of care" — the term being used to describe what one treatment costs, such as care for a patient who needs stitches. It's going to become a critical calculation as the industry adapts to payment models based on lump sum — or bundled — reimbursements from the government.

"The world is moving towards two things: population-based health — so you're responsible for the health of a whole population — and episodes of care," said David Knowlton, president and CEO of the New Jersey Health Care Quality Institute. "Cutting the cost per unit of care addresses both those things. You can't get there unless you attack the cost."


But for a basic unit, it's not an easy one to calculate. The costs associated with a unit of care include concrete things, like bandages and medicine, as well as costs that need to be spread over multiple units, like doctors' salaries. The next building block is the episode of care, which is made up of units of care. A knee replacement episode, for example, might include units such as physical therapy, diagnostics, surgery and rehabilitation. All of the providers involved in that episode of care will be given one lump payment to be disbursed through previously made agreements.


Part of that challenge is determining when the care episode began, according to Barry Ostrowsky, Barnabas Health president and CEO, who said it can be very different for managing a chronic illness than it is for a knee replacement.
"One of the problems we have as institutions generally is we tend to define the episode is when the patient is encountered by us — but to a certain extent, the patient's treatment may already have begun," Ostrowsky said. "The direction in which it's being pursued may already be set, and we have no control over that."


That creates a different kind of challenge in determining what the elements of a unit of care would cost, since "one entity or one provider doesn't really have control over all of that," he said. "You have to piece together where those costs are occurred … from providers who have historically been disconnected from each other."


At Raritan Bay Medical Center, President and CEO Michael D'Agnes said cost accounting isn't magic, but requires physicians who are willing to standardize their payments for procedures. That's how the hospital is able to publicize prices for bariatric surgery on its website.


D'Agnes said the price for the procedures is inclusive of all units of care surrounding the surgery — a full episode — so patients do not get trapped in the "black box" of unknown care costs.


"This is sort of a precursor for what Medicare will probably be doing under accountable-care organizations, where you would get a single payment and you need to work with everybody else, so that everybody gets what they feel is appropriate," he said.


D'Agnes said being inclusive in determining the bundled price, and the bundled payment, is about calculating surgeons, anesthesiologists, radiologists and other providers' costs, based on estimated length of procedure. He said anesthesiologists already bill in 15-minute units, standardizing their cost per procedure.


"You can put a unit of cost to each unit of time that person is going to spend with that patient," he said.


D'Agnes said, once the labor cost is calculated, Raritan Bay adds the supply cost and a margin to reach the price on the website. Eventually, the hospital will add pricing for other procedures in an effort to drive business through transparency.


Ostrowsky warned, though, that cost and price can be confused. Differentiating between the two has made assessing the true costs of a unit of care more difficult. Knowlton, meanwhile, said many hospitals have "muddied the cost world" by setting rates for all payers based on an inflated cost of care reported to the government, because the hospitals know the rates "are going to be discounted."


Aggregating all the data on procedures also is a time-consuming process, one that Carl Underland, president and CEO of Carlisle & Associates, in Voorhees, is trying to better facilitate. Carlisle, a consultancy, creates products and negotiates contracts between payers and providers to help the two sides partner.


Underland said his company has spent more than six months creating a model for payers and providers to calculate costs and reimbursement rates that are fair to all sides, and Carlisle often provides the technology to make those calculations work for an entire population of patients.


"The hospital industry is in need of development of a true cost accounting system, because historically, the cost accounting has been driven by reimbursement realities," Underland said. "Under the present accounting tools and resources, and the existing reimbursement environment, it has made true, accurate, timely cost accounting very challenging."


E-mail to: melindac@njbiz.com
On Twitter: @mcaliendo33

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