The Price, Cost, Reimbursement, and Value quandary

Michael Porter and Robert Kaplan have written a piece on the Harvard Business Review entitled "How to solve the cost crisis in health care". http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1 The concepts cut to the basics of economics; scarce resources, optimal allocation, and incentives. One of the most basic tenants of business management is knowing what it costs to deliver a product or service. The health care is not equipped with the tools needed to really understand the costs of health care delivery.

Porter and Kaplan outline multiple reasons why this is the case, the major one being that health care accounting confounds charges with actual costs. While this approach worked OK when margins were huge and there was enough money in the system to allow for massive cross subsidies, we are no longer in a position to run such an increasingly expensive endeavor without  knowing what it costs to deliver any given service. Furthermore, any real attempts to actually measure value must take into consider actual costs of service delivery. It is easier for low cost interventions to meet the value bar than high cost ones. When you don't know the cost figures, any attempt to assess value is doomed from the start.

It seems remarkable that such an industry consuming more than 15% of GDP of the US can operate with such a rudimentary understanding of cost. From my perspective, this is a product of a mindset which permeates medicine which I can best term Medical or Health Care Exceptionalism. What I mean by this exceptionalism in health care is that it has been viewed as an industry that can and should operate outside of basic economic principles.  This perspective is deeply flawed. While the great wealth generating engine could spin off so much wealth in the US in the second half of the 20th century, we could live under this delusion. We now are faced with reality. Scarcity matters in all human endeavors, including health care. The health care industry, like all industries, requires resources, including people, who have choices and need to be given appropriate incentives to utilize scarce resources prudently. 

Porter and Kaplan's analysis also reminded me of the analysis of another Harvard Professor, Dr. Hsaio, developer of the resource based relative value scale (RBRVS). Both use a system of measuring inputs in order to accomplish some end in health care delivery. However, there is a huge difference in how they seek to deploy their information.  Hsaio developed the RBRVS as a tool to set payments to physicians. He conflated costs of inputs with actual value to patients. Porter and Kaplan promote cost analysis as an essential tool to define resources used, not value delivered. They look to use cost information to better utilize scarce resources, not administratively set prices.

Whether cost analysis is an essential step in defining value depends upon who pays for the services and what they are trying to achieve. In my opinion, value always needs to be defined by those purchasing the services. In the health care three way transactions, it will always be fuzzy as to who is the customer and who will be most pressed to measure value and deliver value. However, we should be in agreement that actual cost to deliver a service does not equal price of that service which does not equal the value delivered to the patient. If we can get past this confusion, we can  get our bearings and start to move in a direction away from the financial abyss.