Healthcare Spending and Costs Aren’t the Same Thing: Fulfilling Your Mission as Hospital Margins Shrink

The growth in healthcare spending has been declining for the past several years. Recent further declines in spending growth have still surprised economists and slowed GDP growth. Analysis attributes most of the spending slowdown to the sluggish economy, and many others have done great work in further breaking down the causes and expectations for spending trends now and looking ahead.

Which Costs Are We Talking About?

In general, the spending growth decrease gets reported as a favorable advance toward of the goal of reducing overall costs of healthcare. But the conversation gets confused sometimes when we conflate spending with costs. Here’s a great example, from back in February. The folks at FactCheck rightly corrected the assertion by Maryland Rep. Chris Van Hollen that the Affordable Care Act (ACA) “has resulted in significantly reducing the per capita cost of health care.” Spending growth has slowed, but overall per capita spending continues to rise. Many project spending growth to spike upward again as the economy improves and larger numbers of insured people utilize care.

Click the picture above to read a study of how Baptist Medical Center South adopted production methodology to improve care and lower costs

Click the picture above to read a study of how Baptist Medical Center South adopted production methodology to improve care and lower costs

Throughout the FactCheck article, however, the authors interchangeably use the terms “spending” and “costs.” This is more than a semantic hair to split. It can confuse the conversation because these measures of healthcare spending don’t reflect the actual cost of delivering the care to patients. (It’s not even that FactCheck and others are incorrect, it’s just that the language clouds the distinction between the cost paid for and the cost of delivering services.) If healthcare reform focuses primarily on reducing the spending, then hospitals and other providers must act swiftly and comprehensively to reduce care delivery costs and keep them down.

Value-Based Care Tightens Margins

This article provides analysis that emphasizes the distinction. Many of the good things that we’re seeing in the shift to value-based care, such as reduced hospital readmissions, will still reflect lost revenue for hospitals as they transition out of the volume-based era. So while we celebrate these outcomes and slowed spending growth, they don’t automatically translate to hospital viability and financial health. Over the long term, we believe that the focus on value and patient outcomes will improve care delivery. But hospital leaders had better be willing to think differently about the processes of care delivery if they hope to thrive.

In a perfect world, we’d see spending decline steadily because we would continuously get better at delivering higher quality care at lower and lower costs. As it stands, the spending growth has declined because of reduced utilization in a slow economy, as well as reimbursement cuts and other factors. And projected future spending increases don’t necessarily mean hospitals will be able maintain margins; it just means we expect more people to seek care services. It remains to be seen how well hospitals reduce and manage the cost of delivering that care to remain viable, profitable and healthy. A widely cited prognostication says a third of U.S. hospitals won’t adapt and survive by 2020.

The Production Model for Care Delivery: New Thinking Helps Hospitals Thrive

That’s why it’s critical for hospitals and healthcare systems to adopt a production system mentality for care delivery. It’s the only way for hospitals to truly make costs and outcomes reliable and predicable. Healthcare providers in the past have resisted the notion of a production system for care because “people aren’t widgets,” and that is certainly true. But we’ve made the case here before that the most compassionate approach to inpatient care is also the most efficient. Just as logistical production models enable auto manufacturers to build higher quality cars more efficiently, logistics in patient care coordination delivers better care, more reliably, at lower costs.

The two videos that follow clarify how logistics transforms hospitals. The first shares the story of how Northwest Community Hospital embraced a hub-and-spoke logistical care model to ensure that it will remain a high-performance, high-reliability organization well into the future. The second video better explains the application of logistics and production methodologies to hospital care coordination.


Northwest Community Hospital Aims for Excellence Through Logistics and Patient-First Focus


How Logistics Transforms Hospitals By Making Patient Care Reliable

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