What SpongeBob can teach us about the cost of healthcare

My 14-year old daughter made a huge mistake, which would horrify any teenager: She gave her father access to her Instagram account. As a tech geek, my real goal wasn't to check up on her (I swear), but rather to see whether the hype of Instagram matched the utility.

Instead what I found was the answer to a different and much more important question — why healthcare costs are such a mystery.

And here's the other twist. The answer came from one the last places you would think — SpongeBob SquarePants.

One of the pictures on my daughter's Instagram was a cartoon of SpongeBob and his starfish friend Patrick staring at a ton of mattresses stacked as high as you can see in a never-ending warehouse.
SpongeBob says to Patrick, "Wow Patrick, look at all of these mattresses! How many do you think there are?"

Patrick replies, "Ten."

SpongeBob responds, "Cool."

While it was clear that there weren't only 10 mattresses in the warehouse, likely closer to 10,000, to SpongeBob it didn't matter.  He asked for an answer and he got one. That was enough.

Then it hit me. This was the exact same conversation that happens in healthcare everywhere, every day.

The cost of healthcare is such a mystery that when you ask "what does it cost?" any number will do.

We have all heard stories where the price of a biopsy is $8,000 at one provider and only $800 at another. While that is uncomfortable to address, as price becomes transparent and reimbursement becomes more fixed, what is making providers more nervous is that they aren't able to answer whether or not they are making money in either scenario.

In other words, if they don't know their own cost they don't know their margins either, which makes it impossible to price with any level of confidence.

Why is this so confusing?

There are really two core issues — a lack of definition and a lack of information.

Issue No. 1: We have no idea what each other is talking about
All experienced stakeholders know that cost is the elephant in the room, but the topic is incredibly confusing.

Here's how it plays out in the hospital setting. When administrators and clinicians are discussing cost, some are talking about charges, some price, some reimbursement and some real, true cost. To make it even more challenging, each one of those definitions would differ dramatically if patients or payers were in the room.

For payers, you could be referring to Medicare/Medicaid vs. private pay. Within private pay, of course, there are hundreds of insurance plans and then within each plan are many different options. And for patients, once an option is selected, when one talks about cost, they could be referring to their payroll deduction, deductible or co-pay.

If you were to create a matrix for what I described, you would have to fill in a few dozen boxes, each with a different definition, and then agree on the one you are talking about.
Because of this complexity, the subject of cost is often misunderstood or ignored altogether.

The simple recommendation is to clearly define what element (which box in the matrix) you are talking about before the conversation begins. At the very least, SpongeBob and Patrick were looking at the same pile of mattresses. In that light, they were one step ahead of U.S. healthcare.

Once you implement a clear definition of cost, you will realize you now have a bigger problem — a lack of accessible, reliable cost data. That's where SpongeBob and Patrick fell short, and this brings us to the second issue.

Issue No. 2: Reliable cost data doesn't exist in healthcare — we're "flying blind"
Following the recommendation to focus on just one aspect and one definition of cost, let's focus on cost from a provider's perspective. As confirmed in a recent study by the Health Information Management Systems Society, the cost of healthcare has now become the No. 1 strategic priority for providers.

And this is a problem because most providers have no access to reliable cost data. As outlined in a recent article in the Harvard Business Review by Michael Porter, "When it comes to the cost of healthcare, providers are flying blind."

What's driving the need to understand and take action on cost data? The primary driver is the shift toward capitated or bundled payment models. A fixed payment structure is flipping the business model for healthcare upside down. As the top line becomes fixed and costs continue to rise, providers are shifting their focus to the bottom line, from a clinical and a financial perspective. Margins now matter.

This is where real cost comes into play as healthcare providers now need to understand their margins like any other business. The uncomfortable question that is making the knees wobbly of every CFO is, "When you go to negotiate a bundled care agreement, do you know if you are making or losing money?"

The answer for most is that they really don't know. And even when they think they know their cost, they are typically referring to charges. They are truly "flying blind."

A recent survey of finance executives from over 200 hospitals in over 30 states by Strata Decision Technology found less than 10 percent of hospitals have timely access to accurate and complete cost data. Clearly this is a black hole that needs to be filled, which is leading many organizations to implement advanced cost accounting applications.

Clearly 10 mattresses was not accurate, but SpongeBob accepted that answer. In the bottom of the ocean, this might be okay. However, with $3 trillion in the mix and one-third of hospitals operating with negative margins, administrators and clinicians can't fly blind any longer. They must demand access to accurate cost data. Otherwise they will be deep in the ocean and they will drown, as many are already experiencing right now.

While cost accounting applied correctly will give providers the data they need, many believe that even if clinicians were given that information, they wouldn't understand it or use it. Turns out, that is a myth.

Dispelling the myth: Doctors actually want and will use cost information

As the bias goes, doctors don't care about cost and won't take action if they had the information. The data says otherwise.

A recent study was published in Health Affairs where 503 orthopedic surgeons and residents at Duke University, Harvard University, the University of Maryland, Mayo Clinic, the University of Pennsylvania, Stanford University and Washington University in St. Louis were asked to estimate the costs of 13 commonly used orthopedic devices. If their response was within 20 percent of the actual cost (a pretty large variance), the answer was considered correct.

Physicians responded correctly only 20 percent of the time, as they lack access to that data. However, 80 percent of these same physicians indicated that they thought cost should be considered in the decision-making process for devices. Clearly there is an opportunity to fill that gap with real and actionable data.

Another study, conducted at the University of Miami and published in Archives of Surgery, helps dispel the myth that if doctors had cost data they won't do anything with it. In this study, a weekly announcement of the cost to non-intensive care unit patients for lab services during the prior week was sent to surgical house staff and attending physicians. The end result was a 25 percent reduction in the volume of routine blood work.

So, while it is easy to dismiss this interaction between SpongeBob and Patrick as a nothing more than a cartoon, it is better used as a cautionary tale. All providers need to ask themselves if the conversation SpongeBob and Patrick were having at the bottom of the ocean is really any different than the ones about the cost of care we are having in healthcare every day.

Providing timely access to accurate and complete cost data will unleash an opportunity for all of us to be better stewards of our significant yet finite resources and build a better system of health and healthcare.  

Dan Michelson is the Chief Executive Officer for Strata Decision Technology.

Image source: Buzzfeed

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