The first step involves a step-by-step mapping of each event in a patient’s complete care cycle.

By cross-subsidizing margin shortfalls in one activity with the revenues generated from others the health care industry have been able to survive economically. But the very existence of these cross-subsidies is symptomatic of deep flaws in the health care reimbursement system. As we move forward we need to be mindful of two principles that must be at the heart of any fundamental health care reform:  “no margin, no mission” and “if you can’t measure it, you can’t manage it.” As the era of health care cross-subsidization ends, these principles must guide our actions.



The University of Texas MD Anderson Cancer Center is seeking to reduce its cost structure by redesigning its health-care-delivery model to reflect the true costs of care (the early stages of the project were described in a 2011 Harvard Business Review article by Robert S. Kaplan and Michael E. Porter). To obtain an understanding of the costs, the center is applying a combination of two management tools: process mapping from industrial engineering and activity-based costing from accounting. Specifically, the center wants estimates of:

  • The costs of caring for groups of patients with similar conditions
  • The actionable cost savings from process improvement
  • The benefits from better utilization of capacity

The center will then tie the cost to patient-outcome measures, which will enable it to design a system that improves the quality of outcomes, motivates efficiency and improved capacity utilization, reduces costs, and assures patients and providers that any cost improvements will not reduce the quality of care delivered. The belief is that this kind of intelligent redesign will be less dangerous for patients than the across-the-board cuts of line-item expenses mandated by government and administrative entities.

The project requires clinicians to learn process mapping and cost-accounting tools that are not taught in medical school or residency. Intelligent redesign starts, therefore, with teams of clinicians and business analysts working side by side to examine processes of care.

The first step in the assessment of a health-care-delivery model involves a step-by-step mapping of each event in a patient’s complete care cycle. A high-level example of the output of this exercise is shown in the exhibit “New Head and Neck Patient Registration at the MD Anderson Cancer Center.”

For costing purposes, the maps must identify who performs each step and estimate the time spent by each resource (person or piece of equipment) at that step. Due to the unique circumstances of individual patients, the map includes decision nodes, which allow alternative care paths to be followed when appropriate for the patient’s specific circumstances. Each colored box in the exhibit represents a different category of health care provider. Circles indicate the time estimates for each step in the process. Diamond-shaped boxes represent steps that may or may not be needed in a process, depending on patient characteristics, and the probability estimates of the next step is indicated in the adjacent percentages.

Project team members with finance expertise contribute by supplying the cost rate for each person and equipment involved in the care processes. The direct costs of supplies and drugs are added to each process and finance team members again contribute by accurately assigning support costs that formerly were allocated arbitrarily as so-called “overhead costs.” The sum of all these elements represents the cost of each care process.

The new approach produces accurate, detailed, and transparent costs for each care process as well as the cost of all the unused capacity in the system. The results are often surprising; for example in the pilot project described in Kaplan’s and Porter’s 2011 HBR article, one finding was that most providers’ existing cost systems underestimate the cost of new patient evaluation services by 15% to 20%. And by tracing costs accurately to care processes, any improvements in a process can be easily translated into actual cost reductions. Among the improvements identified in the pilot were:

  • A process change in anesthesia assessments producing a cost reduction from about $250/case to $160/case, without adversely affecting any outcome;
  • Redeployment and realignment of personnel allowing for a 16% decrease in staff in the center
  • A 19% increase in the number of patients seen

Rather than forcing a trade-off between mission and margin, process-improvement opportunities identified through this kind of analysis usually enable the provider to reduce costs while simultaneously improving clinical outcomes and patient satisfaction through reduced wait times and more timely, higher-quality medical care.

These projects do, however, require institutional commitment because mapping clinical and administrative processes and tying each process to its resource costs are not currently part of routine business operations. Physicians, therefore, need to take the lead in unlocking the tremendous potential in these tools by collaborating with administration, finance, and performance-improvement teams to control costs, improve quality, and eliminate the waste and excess capacity we all acknowledge exists in our health care system.

Once we stop cross-subsidizing health care delivery, we can build a reimbursement system that is accurate, transparent, and a stimulus for continuous improvements. A value-based system that is based on knowledge of the efficient processes and costs incurred over an entire cycle of care will enable health care organizations to negotiate a fair price for care and be rewarded for delivering higher quality care at a lower cost.

Photo credit: Live Well Collaborative

Via Harvard Business Review