To combat the harmful effects of opaque pricing and payment mechanisms, health care providers are increasingly looking for more accurate ways of accounting costs and refocusing payment models around value over volume. These efforts are related, as more transparent costs allow for a clearer alignment of costs to outcomes that matter to patients, and a better picture of “value” in the context of providing care.
Recall key aspects of volume versus value-based health care as discussed in Module 1:
This section will detail two new methods that are gaining ground in the movement toward value-based health care: one for better aligning payment mechanisms to value, and another for more accurately calculating costs.
New methods for determining more accurate measurements of actual costs are increasingly being applied in health care. For example, Michael Porter and Robert Kaplan from Harvard Business School have advocated for the use of time-driven activity-based costing (TDABC).1
With TDABC, the costs of space, non-consumable equipment, and administrative overhead are all assigned minute-to-minute cost rates that are relevant to specific processes of care. The care that is delivered over an entire episode is broken down into discrete activities or process steps, such as check-in, vitals and intake, physician evaluation, nursing care, and so on. A cost is assigned to each step by tracking who is doing the activity, what resources they use, which space they are in, and how long it takes them. Each item (personnel, resources, and space) is assigned a per-minute cost rate by bundling together all costs (fixed and variable) and then dividing by the total amount available for patient care.
TDABC requires providers to estimate only two parameters at each process step: the cost of each resource used in the process and the quantity of time the patient spends with each resource.
Payment is provided for care of a medical condition like prostate cancer, childbirth, or diabetes for a specified period of time, known as the cycle of care. This includes the initial visit for the condition, followed by treatment, recovery, and rehabilitation. For chronic conditions, this cycle may continue throughout the course of a patient’s life. For a condition like childbirth, a typical time span can be specified.
Implementing value-based bundled payments requires providers to achieve a set of outcome measures that matter to patients to ensure optimal quality of care. Charges for care are based on more accurate and detailed costs of delivering care, and not based on FFS charges. Emergency episodes or care unrelated to the original medical condition that occurs during the cycle of care would be excluded and paid for separately using different bundled payments.
These alternative payment models focus on more accurate costs assignment and paying for care in a way that awards true recovery and improved health. We will discuss a model implementation of this payment model, via Integrated Practice Units (IPUs), in a future module.