As the healthcare industry migrates toward becoming a value-based system, it is vital for provider organizations to understand costs. However, that can be a significant challenge for healthcare organizations that haven't had to discern cost information for the past 50 years.
At the Becker's Hospital Review 6th Annual Meeting in Chicago, Dan Michelson, CEO of Strata Decision Technology, said that not understanding costs "is no one's fault but everyone's problem." He said one core issue that is causing confusion around healthcare costs is a lack of information.
Mr. Michelson referenced a Health Affairs report from 2014 to highlight the importance of understanding cost, and the significant space that still needs to be covered in that area. Physicians, with their decisions, control 80 percent of the spend in U.S. healthcare. However, the Health Affairs report revealed only one in five physicians could correctly estimate the cost for common orthopedic devices, even when estimates within 20 percent of the actual cost were considered correct. However, 80 percent of physicians said cost was a key criterion in the selection of a medical device. The solution to that problem is "providing clinicians with contextual cost data," said Mr. Michelson.
Using a quote from legendary NCAA basketball coach Bob Knight, Mr. Michelson provided a lesson in overcoming the barrier of lack of information. Quoting Mr. Knight, he said, "Most people have the will to win, few have the will to prepare to win." Although Mr. Knight was talking about basketball when he said those words, Mr. Michelson said they are valuable for healthcare as well. He said it is information/preparation not intention that matters most in healthcare.
Along with having access to information on cost, providers also need to make sure their information is accurate. Mr. Michelson expanded on this point by sharing a cartoon of SpongeBob he saw on his daughter's Instagram account. The picture was of SpongeBob and his friend Patrick, a starfish, staring at what appeared to be thousands of mattresses. In the cartoon, 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." The cartoon reminded 
Mr. Michelson of healthcare. "In the absence of accurate information, any number will do," said Mr. Michelson.
In contrast, when healthcare providers have good cost data it can help them do a number of things, including the following:
- Compare/reduce unnecessary variation in cost per case per physician
- Identify opportunities to streamline administrative processes
- Understand labor cost/requirements to care for patient populations
- Manage populations/resources effectively across the continuum of care
- Negotiate favorable contracts
- Drive accountability for measurable results
The need for accurate cost information in healthcare is clear, and Mr. Michelson pulled a quote from a 2013 Harvard Business Review article to drive this point home. Michael Porter, PhD, an economist and a professor at Harvard Business School wrote the article. He said, "The absence of accurate cost information in healthcare is nothing short of astounding." He continued, "Healthcare organizations are flying blind in deciding how to improve processes and redesign care."
Healthcare organizations need to implement advanced cost accounting to ensure their information is correct, and linking clinical and financial information is vital, said Mr. Michelson. He highlighted a few success stories organizations have had linking clinical and financial information, including the one at Yale New Haven (Conn.) Health System. By zeroing in on quality variation improvement, Yale New Haven Health System achieved an estimated $125 million in cost savings, or about a 20 percent reduction in cost per case. However, Mr. Michelson pointed out there is still a lot of work to be done, as only 10 percent of health systems have an advanced cost accounting solution.