Healthcare cost structure can be tightened up significantly

Filip Roodhooft

By Filip Roodhooft

Professor of Management Accounting

14 January 2019

Healthcare institutions can play their part in counteracting rising healthcare costs. The fact is that contributions from the government and insurers will not and cannot increase very much: in that respect the limit has been reached. Professor Filip Roodhooft from Vlerick Business School makes a case for smart solutions in healthcare.


Source: Management Scope (19/12/2018)
The cost of healthcare is ballooning. People are growing older and treatments are becoming more complex and more expensive. If we want to keep healthcare affordable, we need to act. An interesting way to create added value is what is known as the value-based healthcare model, which I am currently researching along with my colleagues from the Vlerick Healthcare Centre at Vlerick Business School. In value-based healthcare, the focus is entirely on the patient. How can we structure healthcare in such a way that the patient – and we are all in that position at some point in our lives – gets the most out of it? How do we create added value for them? How do they get value for their money? How do we spend every euro of the healthcare budget as efficiently as possible?

Perverse incentives

It seems blindingly obvious that a patient should play a central role in healthcare. Surely the focus has already been on the patient for many years? Strangely enough, that is not the case. Currently, it is often the treatment that is central to the healthcare system. Health insurance companies reimburse the costs of medical examinations, CT scans, cardiograms or operations. This might generate a perverse incentive for hospitals to carry out as many CT scans as possible, since doing so means money coming in. I am suggesting that instead of looking at separate, individual treatments, we should look at the course of treatment as a whole: from the first intake of the patient to the last ‘congratulations, you’re back in perfect health’ handshake.

Magic formula

Value-based healthcare always asks itself the question: how can we maximise the value of healthcare for the patient? In order to quantify this value, a ‘magic formula’ has been devised which can very effectively be applied to healthcare. Value is determined on the basis of the following calculation: value equals outcome divided by input.

In order to be able to apply this formula effectively, it is of course essential that we carefully define the terms used. Broadly, the outcome is the result for the patient or the patient group, and the input is the cost incurred by the patient or patient group. To increase the value on the left-hand side of the formula ‘value = outcome ÷ input’, you will need to modify the right-hand side of the equation. You can either improve the outcome or reduce the input. Of course, a combination of the two is also possible. In both cases, this is up to healthcare institutions and insurers.

If we have fully defined the input and the outcome, it is only logical that healthcare financing is largely or entirely linked to the creation of value. I am suggesting that we then proceed with what are called bundled payments, which no longer reimburse the costs of a single treatment, but which look at the entire course of treatment for a patient group. The incentive to carry out as many treatments as possible then disappears.

Standardised definitions

It is extremely important that there should be full transparency throughout the course of treatment. Considerable research has been done on the results side (outcome), but in particular when it comes to healthcare costs (the input side of the formula), there is much room for improvement and there is still a dearth of standardised definitions. For example, the required transparency could be achieved through the time-driven activity-based costing system, which we partially apply ourselves. This is a system for analysing and providing a clear overview of the costs of healthcare based on a range of hospital data, from the financial side, treatment side and operational side.

This system illustrates what the costs are for a specific group of patients, for example the group with spinal problems that we have researched in collaboration with Leuven University Hospital. In order to do this properly, you also need to consider the differences between the patients. Some patients in this group use wheelchairs, others are overweight, and yet others also suffer from additional diseases. You need to incorporate all of this into your models for mapping the cost structure. The variability will be higher with complex conditions than with a simple sports injury.

Costs per minute

There is also much to gain in healthcare on the resources side. There are various resources in a hospital, for example the specialists, nurses, administration, operating theatre and the building itself. Researchers from Vlerick Business School are developing models in which we will soon be able to map what all these resources cost per hour, or even per minute. That will show us what a medical specialist costs and how much money is spent on a nurse.

With all the details above at hand, we will soon be able to create process maps for every patient. These process maps chart the entire course of treatment: from check-in (the first consultation) to check-out (the end of the treatment – preferably a ‘clean bill of health’, of course). The process map will always include the length of the treatment and who carries it out. New, useful details emerge from the process maps. For example, the hospitals can see whether there is overcapacity in certain resources, and it is also useful for the management to know who is carrying out which activities. If a specialist earns five euros per minute and a student nurse 70 cents, it is a good idea to reconsider the tasks that each of them perform.

Process improvement

Based on all the data, it is quite simple to implement a number of operational improvements. Certain tasks are then taken away from the staff who cost too much and time is allocated better. Putting the process maps of two hospitals side by side and comparing them enables process improvement to happen. For example, it becomes possible to better utilise underused capacity. Or – as a next step – we could classify activities as adding value and not adding value from now on. Perhaps too many activities take place that do not add value, and it may be useful to take these kinds of activities out of the system wherever possible.

Decisive step

In short, there is plenty for directors to get their teeth into. At Vlerick Business School, we are convinced that significant cost improvements are possible in average hospitals. We are currently conducting research at various hospitals to develop and perfect our theories and models. We can make a decisive step towards a more value-driven healthcare system. And we should do so in the interests of the hospitals, specialists and healthcare financiers, but above all in the interests of the patient.

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Filip Roodhooft

Filip Roodhooft

Research Dean