Anyone who has run a company knows that paying close attention to expenses is critical to the business’s long-term survival. Let’s take a coffee shop as an example. The owner must know the monthly rental fee, the prices of his supplies, such as coffee, pastries, and cups, and his employees’ wages. With this information, the owner can know if the prices of his sale items are too high or too low. To survive long term, the owner requires revenue from sales to exceed total expenses. That makes sense. Well, what about healthcare providers? As you can guess, healthcare is a bit more complicated.
While hospitals may know the list price of their services, they will only know what they will collect from patients for those services after the services are delivered. Therefore, providers deliver services without knowing how much they will be paid for their work. The amount they collect will vary depending on who pays, whether group health insurance, the government, or self-pay patients.
Amazingly, the hospital has only a rough idea of how much total revenue it will collect, and little initial insight into the revenue associated with each episode of care delivery.
Now let’s look at the expense side, the cost of care. Hospitals need a better grasp of the actual cost of delivering services. There are too many variables, and tracking every mediation, syringe used, or clinician encounter is difficult. Therefore, hospitals, not knowing the actual cost of care nor their payment for services, are managing their organizations without the most basic financial information. It is easier to successfully lead an organization when you can understand both your organization’s revenue and expenses.
Investment Responsible Cost
It is best to focus not on the cost of care but on the investment-responsible cost of care. Are we getting commensurate value from the investment of financial resources? If the answer is yes, then the cost of care is reasonable. If the answer is no, we must rework processes and workflows to improve outcomes. This will increase value and help put it in balance with the cost of care. In every other type of commercial transaction, we compare value to cost. When considering the resources we expend on patient care, we must also compare value to cost.
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