How to Pay for Health Care

Michael E. Porter; Robert S. Kaplan

Article | Harvard Business Review | July–August 2016

How to Pay for Health Care

by Michael E. Porter and Robert S. Kaplan

Abstract

The United States stands at a crossroads in how to pay for health care. Fee for service, the dominant model in the United States and many other countries, is now widely recognized as perhaps the biggest obstacle to improving health care delivery. A battle is currently raging, outside of the public eye, between the advocates of two radically different payment approaches: capitation and bundled payments. The stakes are high, and the outcome will define the shape of the health care system for many years to come, for better or for worse. In this article, the authors argue that although capitation may deliver modest savings in the short run, it brings significant risks and will fail to fundamentally change the trajectory of a broken system. The bundled payment model, in contrast, triggers competition between providers to create value where it matters—at the individual patient level—and puts health care on the right path. The authors provide robust proof-of-concept examples of bundled payment initiatives in the United States and abroad, address the challenges of transitioning to bundled payments, and respond to critics' concerns about obstacles to implementation.

Keywords: Health Care and Treatment; Finance; Health Industry; United States;

Format: Print

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Citation:

Porter, Michael E., and Robert S. Kaplan. "How to Pay for Health Care." Harvard Business Review 94, nos. 7-8 (July–August 2016): 88–100.

Leaders at six hospitals conducted a research study to assess and compare the health outcomes and costs of pediatric aerodigestive care. Four of the hospitals delivered care with an integrated practice unit (IPU) while two delivered care traditionally, with isolated specialists. The study used time-driven activity-based costing as a tool to measure and compare costs across the six sites. The results demonstrate that the four IPU sites improved clinical outcomes and had lower costs of care.

Value-based care models are becoming instrumental in structuring clinical care delivery in our healthcare climate. Our objective was to determine the value associated with implementation of a Family-Centered Care Coordination (FCCC) program for neonates undergoing tracheostomy.

Article | American Heart Journal

Are Cost Advantages from a Modern Indian Hospital Transferable to the United States?

R. S. Kaplan, F. Erhun, V.G. Narayanan, B. Mistry and K. Brayton, et al

We use time-driven activity-based costing to estimate the cost of personnel and space for an elective coronary artery bypass graft (CABG) surgery at two U.S. hospitals, Intermountain and Baylor Heart, and Narayana Health (NH), in India. All three hospitals use modern management methods to achieve excellent patient outcomes. We use variance analysis to remove the effect of differential prices paid for personnel and space at the three hospitals. NH, even at U.S. price levels, retains a cost advantage over the two U.S. hospitals by shifting tasks to less-credentialed and/or less-experienced personnel, supervised by highly-skilled personnel, a practice facilitated by NH’s high annual CABG volume. NH offsets some of its task downshifting cost savings by having lower-skilled employees spend more time counseling patients and their families for in-hospital and home recovery. NH’s cost-saving practices could be captured by U.S. hospitals by relaxing hospital and health professional licensing regulations, encouraging greater family participation in inpatient care, and performing complex surgeries in high-volume regional centers of excellence.

Keywords: Time-Driven Activity-Based Costing; Health Care and Treatment; Cost; Organizational Structure; Performance Efficiency; India; United States;

Citation:

Kaplan, R. S., F. Erhun, V.G. Narayanan, B. Mistry, and K. Brayton, et al. "Are Cost Advantages from a Modern Indian Hospital Transferable to the United States?" American Heart Journal 224 (June 2020): 148–155. View Details

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