Harvard Business School Profs on the Healthcare Crisis

Most of us can fathom the cost structure involved with our daily purchases. The food we eat costs what it does because we pay someone to grow it, process it, package it, transport it, and sell it. (Of course, you can cut out several of those steps if you buy locally … but I digress). But when it comes to healthcare, the entire pricing model is essentially based on one premise: Smile and nod and take this pill and you’ll feel better. Oh, and the bill? It’s in the mail. Is it really any surprise that healthcare costs are skyrocketing?

Thankfully, the case for bringing much more transparency to the actual cost structure of healthcare is made in the this month’s edition of the Harvard Business Review. Authors Robert S. Kaplan and Michael E. Porter, both professors at the business school, argue that instead of looking for reasons why costs are going up (e.g. our population is older or we’re not doing enough to support preventative medicine) we need to consider how we measure exactly what we’re paying for. They write:

[F]ew acknowledge a more fundamental source of escalating costs: the system by which those costs are measured. To put it bluntly, there is an almost complete lack of understanding of how much it costs to deliver patient care, much less how those costs compare with the outcomes achieved.

The piece is a dense read, but it’s a good one. It proposes implementing “time-driven activity-based costing” (TDABC), which they break down as “the cost of each of the resources used in the process and the quantity of time the patient spends with each resource.” Um, what?

If I understand it correctly, that means essentially taking the annual salary paid to each doctor, plus their a share in all of the additional resources that they need to do their job (rent for the building, electricity bills, IT costs, etc.) and crunching the numbers until you come up with what they call a “capacity cost rate.” In their case study, that rate for a doctor is $300/hour, and according to their TDABC plan, a patient should be expected to pay a percentage based upon the amount of time they spend with the doctor. So if you’re only with the doctor for 15 minutes, in theory, you should only be expected to pay $75. Factor in the same cost capacity rate for the time you spend with the nurse, and the assistant that checks you in, and that should all add up to be the cost of your bill.

It actually sounds kinda simple when you think about it. And actually thinking about it far better than just smiling and nodding, isn’t it?