TDABC - Understanding Where the Money Flows Can Fix Comp

Walking through the airport in Orlando, FL last week I was looking for something to read on the flight and happend upon the September issue of Havard Business Review (HBR) with the headline story, "How to Solve the Cost Crisis in Health Care."

Whoa! A scholarly, high-level, business oriented analysis of the health care management system!

The real surprise of this discovery was that I had just listened the day before to Dr. David Deitz give his lecture at the 2011 FWCI conference on the problem with focusing on costs in the work comp medical delivery system as opposed to focusing on the value provided.

For anyone that is interested in controlling medical costs in workers' compensation, I highly recommend reading the HBR article, and related articles by the authors, Robert S. Kaplan and Michael E. Porter.

Kaplan and Porter argue that the problem with the expense of medical delivery in the United States is that we focus on the wrong element: cost. Focusing on cost, they argue, drives total costs in the wrong direction, providing incentive to deliver the wrong care at the wrong times thus increasing overall costs at the expense of incremental savings.

For example, a unit of surgery is more highly compensated than a unit of office time, thus the incentive is to provide surgery.

The authors argue that the analysis must be on the total value provided the consumer - i.e. a global assessment of the totality of procedures that result in a given outcome. In the medical world this is expressed in the deceptively simple equation of value = outcome/cost, not the number of services provided (as we now measure health care in workers' compensation).

Kaplan and Porter primarily focus on the provider of services and how the provider can cost out incrementally the actual delivery of services to completely understand what each element of service costs, then using that data to drive the best outcomes.

They use case studies where care providers have used a simple, but involved, costing technique from the business world known as Time Driven Activity Based Costing (TDABC).

TDABC requires that each step of the care delivery process be carefully analyzed to determine exactly what that component actually costs. This process requires that many steps of the care delivery process be flowcharted to ensure that all steps are accounted for.  There are only two parameters that are actually measured: the cost of each resource in the process and the quantity of  time the patient spends with each resource.

A resource can be medical hardware, a service location (e.g. emergency room or x-ray facility), a health provider (e.g. nurse, doctor, physical therapist), pharmaceuticals, etc. etc.

As you can see, while the process itself is simple, it requires drilling down to minute details to examine all elements provided in the care delivery equation.

Case studies are provided in the article where care delivery systems that thought they were delivering the most cost effective care were astonished to find that in fact care was being mis-directed because of reimbursement incentives AND that their profits were being marginalized because money was being wasted.

Oh, and of course those case studies also found that patient outcomes were much, much better when processes were subjected to TDABC.

The question in my mind while reading this article was how can this apply to workers' compensation?

1. Get rid of fee schedules - fee schedules have the perverse effect of providing incentives that drive the wrong outcomes. First measure the cost of care delivery using the TDABC process.
2. Define desired outcomes and start measuring them - this is what Deitz was saying in Florida: we have tons of data but none of it is used or analyzed properly to drive decision making relative to cost control in the right direction.
3. Pay medical providers for the TOTALITY of services as a whole, based on diagnosis, rather than on a per procedure basis. Only when you step back to take a look at the complete care delivery package, and provide reimbursement for the expected outcome, can you change direction in health care costs.

Before you comment on this post and accuse me of oversimplifying medical care in workers' compensation, consider that we have been doing the same thing now for nearly 100 years - and the inflation of medical delivery costs continues to be the single biggest component of workers' compensation costs. To continue doing things the same way as in the past and expecting changes is illogical.  

This blog post is way too limited for a complete review and analysis of the work of Kaplan and Porter - but if you're a health care executive, an insurance executive OR, perhaps more importantly, a state administrator, you owe yourself to at least consider the arguments and examples that Kaplan and Porter set forth.

The way medical care is delivered in workers' compensation must be changed in order to keep the system viable for the future. The only way to do that is to change the motivations in the system, and the only way that can happen is to completely understand where the money flows.