Why Is It So Difficult To Reduce The Cost Of Care?

By refusing to pay for readmissions within 30 days of discharge from a hospital, Medicare has sent a strong message across the healthcare industry: < 30 day readmissions should be avoided at all costs. As a result, providers and vendors are doing everything in their power to avoid < 30 day readmissions.

This seems like a simple way to reduce costs, right? Well, not quite…

The vast majority of costs of care delivery are fixed: capital expenditures, facilities and diagnostics, 24/7 staffing, administrative overhead, etc. In other words, it’s extremely expensive just to “keep the lights on.” There are some variable costs in healthcare delivery – such as medications and unnecessary tests – but the marginal costs of diagnostics and treatments are small relative to the enormous fixed costs of delivering care.

Thus, Medicare’s < 30 day readmission policy doesn’t really address the fundamental cost problem in healthcare. If costs were linearly bound by resource utilization, than reducing readmissions (and thus utilization) should lead to meaningful cost reduction. But given the reality of enormous fixed costs, it’s extremely difficult to move down the cost curve. To visualize:

Screenshot 2014-04-14 23.46.37

Medicare’s < 30 day readmission policy is a bandaid – not a cure – to the underlying cost problem. The policy, however, reduces Medicare’s outlays to providers. Rather than reduce (or expand, depending on your point of view) the size of the pie, Medicare has simply dictated that it will keep a larger share of the metaphorical pie for itself. Medicare is simply squeezing providers. One could argue that providers are bloated and that Medicare needs to squeeze providers to drive down costs. But this is intrinsically a superficial strategy, not a strategy that addresses the underlying cost problems in healthcare delivery.

So how can we actually address the fixed-cost problem of healthcare? Please leave a comment. Input is welcome.

About the author

Kyle Samani

Kyle Samani

Kyle is CoFounder and CEO of Pristine, a VC backed company based in Austin, TX that builds software for Google Glass for healthcare, life sciences, and industrial environments. Pristine has over 30 healthcare customers. Kyle blogs regularly about business, entrepreneurship, technology, and healthcare at kylesamani.com.

6 Comments

  • Kyle, your last sentence summarizes it well – ‘But this is intrinsically a superficial strategy, not a strategy that addresses the underlying cost problems in healthcare delivery.’

    The second problem I see is not addressing the issue from a patient’s perspective. The <30 readmission rule can potentially put patients in harms way, just as I have found in my case, it was so difficult to get an approval for an MRI when my back hurt.

    Reducing costs must be addressed, but not at the expense of patients.

  • I think you are exactly right on this account but it does not really address two bit almost conflicting issues. Having been a management consultant for healthcare for over 40 years the Medicare reimbursement rate probably barelly covers the fixed cost in the physician office so doctors who are legit are not making a killing on Medicare.
    Secondly, the issue of rising costs will never be addressed in this country until we get a grip on this: with all the advances we have made and are still making in providing care and keeping people alive with severe conditions, costs will never go down because as a society we feel we deserve the best and that all measures should be taken to keep someone alive. More costly research, more costly equipment, more costly procedures and drugs. Anyone who says our costs can come under control is whistling past the graveyard.

  • Your headline and the content really are two different topics.
    The only true way to control medical costs is to open it up to free market forces. Right now there are no market forces (not including elective items like plastics, lasik, etc.). Nobody really knows what something costs.
    A major fixed cost worth mentioning is malpractice insurance, something CA (of all places) has done a good job of helping control by minimizing frivolous lawsuits.
    The <30 rule is just something else that can be, and will be, gamed (oh and EHRs will help game this).
    More importantly on this is the unknown – will the patient actually do what is prescribed? If the patient doesn't follow what is prescribed to get better, or only does it half-way, who's fault is that?
    Obviously if a doc screws up, the patient should be made whole, but when blanket laws are implemented, they rarely do any good.

  • Fixed costs are not always all that fixed. First, many hospitals are constantly expanding – adding expensive new capabilities (that other nearby hospitals may do already).

    They may also have super high salaries for some executives, and many inefficient areas. One ER I’ve mentioned here handles far fewer patients in a given period because their use of paper rather then EHR is amazingly wasteful of their rooms, equipment and staff. Plus their ER’s may be treating patients that would be better handled in outpatient treatment areas, and the hospital itself may have a poor layout, poor communication, inefficient lab services and more. The same hospital is working to implement EHR in the ER (hopefully connected to the rest of the hospital), and recently hired a new pharmacy director. That director cut turnaround time on getting IV meds
    up to an outpatient treatment room from hours to minutes, including the elimination of unordered dilution of certain meds). Right now meds are ordered by phone – putting this into the EHR would help. Same thing with labs, and getting back lab results. Patients often have long waits for lab results, and this often leads to wasted use of ER and hospital beds. Nurses, and often doctors waste their time waiting for results and for meds, plus doctors tend to do their notes on paper for someone else to enter into the EHR many hours later (which can lead to all sorts of delays and errors).

    Point being, many hospitals are loaded with waste, and if intelligent they can use EHRs to help get things in shape! But they also have to be more careful with their constant expansion plans and their executive pay!

  • From the psychiatric hospital perspective there is often a lack of continuity of discharge planning and actualization. For example, many prescriptions written by the discharging psychiatrist will end up “not covered” by either the pt’s insurance carrier or by the state (for Medicaid recipients). As such, compliance with necessary medications (antipsychotic agents, for example)drops significantly, resulting in a return for inpatient level of care. For a suicidal pt who is not covered for services at this level can prove disastrous. Perhaps hospitals will now have to ‘work harder’ at diverting a no-pay pt for someone else to ‘eat the cost’ of treatment.
    The bottom line so-to-speak is the bottom line. Since Medicare does not appear well managed financially speaking(as they are not a free market environment)they use their government clout to punish medical providers and institutions for their failed approach to health care rather than to open lines of communication to the providers who could educate them on how to run a successful business

  • Sorry for the lack of response. It seems my email notifications of new comments stopped working for some reason. I’ll have to look into it.

    Anyway, this conversation reminds me how complex it is in healthcare. As I emailed someone today:
    I don’t think there are any easy solutions here. If there were, we’d have done them long ago.

    My greatest hope is actually in the quality of people in healthcare. Most want to do what’s right. Although, the bad apples make the system so much more complex than it needs to be.

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