How to Solve the Cost Crisis in Health Care

When two of the best-known thinkers from the Harvard Business School offer their prescription on how to solve the cost crisis in health care, it’s time to listen.

In the September 2011 issue of the Harvard Business Review, Robert Kaplan and Michael Porter 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 outcomes achieved.”

They also assert that “the potential to improve outcomes while driving down costs is greater in health care than in any other field we have encountered.”

Porter turned his attention to health care several years ago with Redefining Health Care: Creating Value-Based Competition on Results, co-authored with Elizabeth Teisberg.  Last year, he published a major article in the New England Journal of Medicine (What is Value in Health Care?) on measuring outcomes.

Kaplan’s contribution to the partnership is his understanding of cost measurement.  He’s the father of activity-based costing (ABC), a method developed in the early 80s and the Balanced Scorecard.  Recently, he and Steven Anderson introduced an extension to ABC, which they call Time-Driven Activity-Based Costing (TDABC).

The Kaplan-Porter thesis is that to reduce healthcare costs you need to understand them at the patient level, and that a system for measuring costs needs to be built around a set of medical conditions – not individual services –  because such a system allows you to compare costs and outcomes.   And, the right method to measure healthcare costs is TDABC.

Their prescription is currently being tested in several locations, with about half of the procedures focused on total knee replacements.

I believe that Kaplan and Porter picked “total knee” because it’s a common procedure and because it allows them, as detailed here, to compare processes, costs and outcomes in a rigorous fashion.

Results from one of their pilot sites, an orthopedic clinic in Germany with “an excellent departmental cost-control system,” indicate that TDABC, centered on the patient, reveals more opportunities than their current system.  By comparing results for total joints from Germany, Sweden and the U.S., Kaplan and Porter conclude that salaries are only one reason for higher costs in the U.S.: our lower productivity is the major culprit.

By digging into the details, in the U.S. as well as Europe, and coming up with an interesting initial conclusion, Kaplan and Norton demonstrate their commitment to making a serious contribution to solving the cost crisis in health care.  For this alone, they deserve our attention.

I hope they will continue to investigate the detailed differences between practices in the U.S. and the rest of the world.  We won’t get ahead by restricting benchmarking to our 50 states.