Total cost of care: Key considerations

By Paul Keckley, Molly Smith - Group Vice President for Public Policy, American Hospital Association

There is a general consensus that the current level of health care spending is unsustainable. Yet, such spending is expected to continue to grow faster than the U.S. gross domestic product over the next 10 years.

Hospitals and health systems are continuously striving to reduce costs and improve the efficiency of care. Historically, providers have focused on managing their own costs for a particular service, but new risk-based payment arrangements are making many hospitals and health systems accountable for a broader range of health care spending, including the cost of services delivered by other providers during an episode of care or for a defined population. It is, therefore, useful to consider the impact of measuring the “total cost of care” on hospitals and health systems, as well as contemplate what steps health care leaders need to take. 

Some definitions

While a single definition does not exist, the phrase “total cost of care” is generally used to refer to all direct and indirect costs associated with an episode of care for a period of health care coverage (e.g., a health plan benefit year).

Trustee talking points

  • Hospitals and health systems are adapting to new risk-based payment systems.
  • To do so, some are using the concept of “total cost of care.”
  • Robust and properly managed data and partnerships are key elements of a total-cost-of-care strategy.
  • Numerous resources are available to hospitals to understand their total cost of care.

Two primary variables are used to measure total cost of care: utilization and price. Utilization includes all related or covered services delivered during an episode of care or period of coverage, regardless of provider or setting. Price is defined from the payer’s perspective (i.e., how much is reimbursed for a particular service), not from a provider’s perspective (i.e., how much it costs the provider to deliver the service). There is, however, a link between the two: Providers that can deliver services at a lower cost may be able to offer lower prices to payers. 

Five applications of TCOC measures

While the definition and use of total-cost-of-care measures continue to evolve, here are five ways in which hospitals and health systems already may feel the impact of these metrics:  

1. Hospital Value-based Purchasing Program

The Centers for Medicare & Medicaid Services evaluates hospitals’ performance on the Medicare spending per beneficiary measure as part of the Hospital Value-based Purchasing Program. Under this program, a portion of hospital reimbursement is based on performance, with the opportunity for a hospital to either earn financial incentives or be penalized by a reduction in reimbursement. The MSPB measure is calculated using all Medicare Part A and B spending during an episode of care, which is defined as three days before a hospital admission through 30 days after discharge (adjusted for geographic differences, costs associated with indirect medical education, beneficiary age and case severity).

2. Hospital Compare

CMS publishes certain hospital performance data on the publicly available Hospital Compare online tool. Results on the MSPB measure are included as evidence of a hospital’s level of efficiency. These data may be used by consumers in selecting a provider or by insurers for purposes of network development. 

3. Bundled payments and accountable care organizations

Hospitals and health systems that are considering participating in a bundled payment or ACO arrangement can use a total-cost-of-care framework to assess whether their organizations can be successful within the model’s target spending parameters for a given clinical subpopulation. The framework also can assist those organizations already participating in such models to manage the cost of care by helping to identify spending variations among different providers or along the continuum of care.

4. Provider-sponsored health plans

Managing costs within the premium dollar is integral to the operation of a health plan. Approximately 100 hospitals and health systems currently sponsor health plans for Medicare, Medicaid and commercial populations, and others are partnering with insurers to develop joint-venture products. These providers assume financial risk for delivering the full set of services to an enrolled population. The total-cost-of-care framework can help these organizations to manage budgets within the premium dollar and assess cost performance across the network.

5. State and regional health system improvement efforts

Several regional, multistakeholder collaboratives have formed to advance health care system improvement, including through reductions in the total cost of care. As health care utilization is directed largely by physicians and other primary care providers, these efforts largely track total health care spending by physician group. Hospitals and health systems work with the medical groups and other providers to develop and implement new care delivery protocols to improve quality and efficiency and to reduce cost variation among provider groups.

Key considerations and action steps

To prepare for measuring total cost of care, hospital and health system leaders can begin by discussing these four issues: 

  1. Understand the organization's capabilities to track and monitor the total cost of care.

    Payers and providers increasingly are working together on value-based payment arrangements, including bundled payments, ACOs and capitated arrangements. Such models require that providers be able to track the total cost of care and use the data to identify opportunities for intervention. For example, hospitals and health systems will want to use the data to identify unexpected variation in both price and utilization for further investigation.

    • Action step: If gaps exist in the organization's capabilities, consider learning more about existing tools for measuring the total cost of care. In addition to proprietary frameworks that are available commercially, Minnesota-based HealthPartners has developed a total-cost-of-care and resource-use framework, endorsed by the National Quality Forum, that providers can adapt for free. 

  2. Recognize the need for claims data.

    Measuring and monitoring total cost of care requires access to claims data, which may be obtained either directly from payers or through all-payer claims databases.

    • Action steps:
    • Initiate discussions with payers about access to claims data for the purpose of improving care efficiency.
    • Discuss the value of all-payer claims databases with state officials and community leaders. Providers should specifically address their ability to access the data in a timely manner.

  3. Partner to drive communitywide progress in cost measurement.

    Multistakeholder collaboratives, like the MN Community Measurement pilot program in Minnesota, provide a useful platform for using the total-cost-of-care framework to drive health system improvements across a region or state.  

    • Action step: Identify whether such a collaborative already exists or is underway in your community. If not, approach other health care stakeholders about whether such an effort would advance the community’s health care system transformation goals.

  4. Prepare for future iterations.

    Total-cost-of-care measures will likely continue to evolve as we gain a better understanding of the drivers of health care use and cost. For example, future iterations of total-cost-of-care measures may include spending on community-based social services as we learn more about the influence of socio-economic and socio-demographic factors on health.

    • Action step: Stay a part of the conversation. Participate in American Hospital Association educational meetings and access resources related to total cost of care on aha.org.

Molly Smith (mollysmith@aha.org) is vice president, coverage and state issues forum, at the American Hospital Association. Paul H. Keckley, Ph.D. (pkeckley@paulkeckley.com), conducts independent health research and policy analysis and is managing editor of The Keckley Report. He is a member of Speakers Express; for speaking opportunities, please contact Laura Woodburn.

Minnesota total-cost-of-care program breaks new ground

The MN Community Measurement's regional total-cost-of-care pilot program launched in 2014 to serve as “a catalyst for change ... to drive improvement in our community’s health and health care through public reporting of cost, quality and patient experience information.” The collaborative measures and reports on the total cost of care delivered by 115 medical groups, including several hospital-affiliated groups, using a framework developed by Bloomington, Minn.-based HealthPartners.

The collaborative allows participating stakeholders to identify cost variation among medical groups, regions of Minnesota and neighboring states. Several committees and task forces were created to capture, analyze and report total cost of care for each medical group. Insurers provided claims data, and a technical advisory group comprising insurers, providers, employers, government agencies and nonprofit health care organizations participated in the analysis and interpretation of the data. Through a relationship with the Network for Regional Healthcare Improvement, MN Community Measurement participants are able to compare their findings with similar regional efforts in Colorado (Center for Improving Value in Health Care), Maine (Maine Health Management Coalition), Missouri (Midwest Health Initiative) and Oregon (Oregon Health Care Quality Corp.). 

Trustee takeaways

Here are some resources on the concept and implementation of total cost of care: