Healthcare News & Insights

Calculating costs saves one hospital big bucks

Big changes in the healthcare industry have made hospitals focus more closely on the costs of their services, especially since the feds are revamping their reimbursement policies. Several facilities are trying to get exact cost figures for the services they provide – and some are using this process to their advantage. 

177782000Hospitals haven’t traditionally focused on exactly how much it costs to provide services to patients since most of their payments come from insurance companies.

But with value-based payments putting hard caps on how much money hospitals will receive for care, there’s more pressure on facilities to find out how to deliver the highest quality care at the lowest price.

And to save costs, hospitals must first find out exactly how much they’re spending.

According to an article in the New York Times, one Utah health system has made significant strides toward pricing all its services. And its effort has already had positive results.

Software makes big difference

The University of Utah Health Care started using a software program that was meticulously designed to calculate the cost of everything that goes into running a hospital — from purchasing medications to paying surgeons for the hours they spend in the operating room.

Using the hospital’s expenditures on supplies as a baseline, researchers from the university started tracking how much these supplies cost for each patient in certain circumstances (e.g., how many bandages were used per patient after hip replacement surgery).

Further calculations were made to determine how much time each clinician spends performing procedures on each patient so the software program can break down costs by provider.

The computer program also keeps track of other factors that affect costs, including patients’ length of stay and how many times they’ve been readmitted.

Using all that data, the software comes up with a cost per minute for services provided in a variety of departments in the hospital, including the emergency department (82 cents a minute) and the operating room during an orthopedic surgery ($12 a minute).

Lab tests added up

By minute, or even by hour, costs may seem relatively small. But the University of Utah Health Care’s computer program allowed researchers to see how they added up to big bucks, and it helped them find several areas where improvements could be made to save money without affecting patient outcomes.

One significant area of savings was blood tests. Any time a patient was admitted to the hospital, residents routinely ordered a battery of lab tests, even without medical justification. Payors would only pay for tests that had proven medical necessity, so the facility would just eat the costs of any extra tests.

This practice went uncorrected because the cost for each test was relatively small, ranging between $10 and $20. But the computer program helped the hospital see the true expense of ordering these tests: Costs for lab tests alone exceeded $2 million a year.

The university’s solution? It required all residents to justify the need for every lab test ordered for each patient. Instituting this policy saved the hospital $200,000 in one year.

Reviewing providers

Data generated from the University of Utah’s computer program also helps it cut costs by comparing individual providers to each other.

If most providers have a similar cost-per-patient for their procedures, but there are one or two outliers, the software helps the facility pinpoint who they are and figure out why the variation exists. Training providers to be more efficient with their time or supplies can lead to big cost savings.

In fact, all the hospital’s efforts have caused it to have much lower costs overall than surrounding facilities. Over the past few years, other local academic hospitals have had spending rise by nearly 3% each year. But spending at University of Utah Health Care has actually decreased by half a percent per year.

Trend to watch

Other facilities are doing similar research to find out exactly how much they spend on patient care, according to the N.Y. Times article, including the Mayo Clinic and MD Anderson Cancer Center. Some of these hospitals even go as far as making clinical staff carry stopwatches to time how long procedures and patient interactions last.

As hospitals become more responsible for shouldering extra costs incurred by procedures – including treating preventable complications that arise from them – these measures will no doubt become more common for facilities.

But for now, your hospital can look a bit more closely at its actual costs to uncover any inefficiencies that may end up hurting its profitability – especially as value-based care comes into play.

Just as the University of Utah did, it might be helpful to start by reviewing your supply chain to see just how much you’re spending on common items per patient or procedure. Calculating this information can be a small stepping stone toward large cost savings.

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