Posted by Bill Sandweg on 12 November 2018.
In August I wrote a post about why our health care costs keep going up and up and up. We don’t dictate pricing to hospitals, we rely on the market to set a fair price using supply and demand. Hospital consolidation, lack of transparency, and the existence of health insurance all contribute to prevent market forces from acting to drive prices down. Our market based system is broken.
Now it develops that there is likely still another reason why costs keep increasing: Even hospitals don’t know what it costs to perform a procedure. In an article which appeared on the front page of the Wall Street Journal a few weeks ago, the Journal reported on a hospital that had been estimating its costs for knee replacement surgery and basing its list price on the estimate. Of course, the hospital’s list price is just a starting point. Hospitals and insurers or other interested parties negotiate down from the list price.
The hospital decided to find out what it cost to perform a knee replacement procedure, an operation done hundreds of times a year at this hospital. It had efficiency experts monitor every step of the procedure from the time the patient arrived until the patient was discharged. It learned that its actual cost was a little over $10,000. Its list price, which had been based on an estimate, was a little over $50,000. Significantly, the hospital discovered many inefficiencies in its process which were driving costs up.
For example, sometimes a bed on the orthopedic floor was not available following surgery and the patient had to be kept in the Post-Anesthesia Care Unit (“PACU”) until a bed became available. The cost to the hospital of keeping the patient there was much greater than the cost of a bed on the orthopedic floor. Furthermore, when the patient was in the PACU, the physical therapist could not come and begin rehabilitation exercises. The sooner a knee replacement patient is up and walking, the lower the pain and the more quickly he or she can return home. By keeping the patient in the PACU, hospital stays were being increased by a day.
The hospital discovered other places where it could be more efficient and implemented changes. It was able to reduce its costs for performing knee replacement surgery by 18% and provide a better outcome for the patient in the process. Truly a win/win.
It is a telling commentary on our broken system that even the hospital does not know what it actually costs to perform a procedure. While this hospital now knows what it costs to do a knee replacement, it is still in the dark about its costs for the many other procedures performed under its roof. A business that does not know what it costs to produce its product cannot set its price in a competitive marketplace. Fortunately for this hospital and others, the lack of competition in offering surgical services means that there is no competitive marketplace. We poor Americans just go on paying more than the rest of the modern world for exactly the same procedure. It is time for a change.