NEJM: Hospitals' fixed costs prevent QI from saving money
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“The explanation lies in the cost structure of the typical healthcare setting: its management and organization create a rigid cost structure that is relatively insensitive to small changes in patient volume, resource use or the severity of patients’ health conditions,” Rauh, of the Dartmouth Institute for Health Policy and Clinical Practice in Hanover, N.H., and colleagues wrote.
For the purpose of determining where costs savings could be achieved, Rauh grouped hospital expenditures into "cost layers" and found that few were truly variable. “An examination of the different cost layers highlights the distinction between variable costs, such as supplies and medications, where reduced use produces true savings and fixed costs, such as facilities and ancillary services, where the costs persist despite reduced use,” he opined.
Rauh suggested that medications and supplies represent variable costs of patient care where hospitals can realize savings by producing quality improvements like reduced readmission rates and shorter lengths of stay.
Medicine will presumably be saved if a patient’s length of stay is three days instead of four. “The item is not consumed, does not need to be replaced and is available for later use,” Rauh wrote, pointing to an area where incremental quality improvements can result in cost-savings.
Beyond that, Rauh suggested that quality improvements need to happen on a large scale to create bottom-line savings and, even then, there are some items hospitals are obliged to pay for no matter how little they’re used.
“A single nursing unit might have to discharge multiple patients before any savings in hourly nursing labor costs could be captured by allowing an hourly employee to go home early,” Rauh wrote.
“If an intervention reduces operating room time by 15 minutes, the costs of the equipment and salaried staff required to run the operating room do not change,” he added.
Although quality improvements that result in reduced resource utilization rates might not reduce healthcare costs, they do allow hospitals to increase the volume of patients that they treat and to collect additional revenue.
While providing service to a larger population and collecting more money is not the same as reducing bottom-line costs, Rauh wrote that it may look that way since “the cost per case decreases when the high fixed costs are spread over a larger number of patients.”
Rauh suggested that decreasing costs per case may be a better objective for hospitals, at least until they are able to remodel their cost structures.
“The most meaningful way to achieve savings is to focus on overall reductions in utilization rates for healthcare services and to eliminate the associated unnecessary capacity,” Rauh wrote.
“As the U.S. healthcare system begins shifting its focus from volume to value, hospitals will need to adapt their cost structures and capacity to accommodate lower per capita utilization rates as well as reductions in the per-episode intensity of care,” he concluded.