During the dot-com boom in the late ‘90s, many new companies based their business plans on the volume of website visits. This revenue model assumed that by capturing the attention of users as measured by clicks on the company website, the organizations would generate wild profits; however; when these companies went public, they assumed very high valuations without generating revenue. These companies never thought through their business models, nor understood their real costs.
For more than a half century, the healthcare industry applied the same confidence in similarly flawed models. Volume-based reimbursement tied revenues to volume, so organizations that maximized volume, in turn maximized profits. There was little incentive to focus on costs because organizations just inflated their charges to account for what they calculated as a rough estimate of their costs. If their calculations proved wrong for a particular line of business, they just upped the fees the following year to make up for it.
Recent reports from New York State Health Department, detailed in a December 9, 2013, article by journalist Nina Bernstein in The New York Times, show how variable and out of control healthcare costs are. The report listed hospitals with their charges and costs for a variety of conditions from 2009 to 2011. According to Bernstein, prices ranged from an $8 bill for treating a case of gastritis (cost: $2) to a $2.8 million charge for a blood disorder case that cost $918,462.
Without even knowing the details of the case, it is hard to believe the $8 bill for gastritis is correct when the cost of the treatment was only $2 – same must be said for the blood disorder case.
How does an industry survive—and how can our society expect healthcare costs to be reasonable—when hospitals do not know their costs of production or reasonableness of the bills they send to patients and insurance companies? How do organizations realistically set prices, compete in the marketplace, and accurately plan for their own survival and growth?
Excerpts from: At All Cost. PSQH, January/February 2014