The Boston Children's Hospital: Measuring Patient Costs (Abridged) case study analyzes the use of activity-based costing in pricing patient treatments. It looks into the importance of developing more accurate costs for hospital procedures.
Robert S. Kaplan
Harvard Business Review (914407-PDF-ENG)
September 26, 2013
Case questions answered:
- Analyze the market and competitive forces faced by Boston Children’s Hospital (BCH). What are BCH’s strengths, weaknesses, opportunities, and threats (SWOT)?
- In this industry situation, why should clinical department heads, such as Drs. Meara and Waters, be interested in developing more accurate costs for their procedures?
- Use the accompanying Excel worksheet to calculate the costs and margins of the three different office visits using:
• RCC method
• TDABC method - What explains the difference in costs using the two methods?
- Suppose DPOS dedicates the following resources to handle all office visits: 2.5 surgeons, 2 Ambulatory Service Representatives, 2 Registered Nurses, and 1 Clinical Assistant. During the year, the office performs 4,400 Plagiocephaly visits, 2,200 Neoplasm visits, and 1,800 Craniosynostosis visits. Calculate the quantities and cost of used and unused capacity for the four types of personnel and the total cost of unused capacity for the year. How can Dr. Meara reduce the costs of unused capacity?
- Use the accompanying Excel worksheet to calculate the costs and margins of the three different orthopedic casts using the TDABC method.
- Compare the TDABC costs and margins with those calculated using the hospital’s existing RVU system. What differences occur and why?
- Should the two TDABC pilots be extended throughout the hospital, or should senior hospital management just allow such local initiatives to arise spontaneously, based on local physician interest?
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Boston Children's Hospital: Measuring Patient Costs (Abridged) Case Answers
Analyze the market and competitive forces faced by Boston Children’s Hospital (BCH). What are Boston Children’s Hospital’s strengths, weaknesses, opportunities, and threats (SWOT)?
Market and Competitive forces faced by Boston Children’s Hospital (BCH)
The US market was undergoing health reforms where insurance coverage for health care by mandate and subsidy by the government. In turn, insurance companies and Medicaid providers are putting a tab on rising healthcare costs through various control mechanisms.
Healthcare payments are not value-based. Insurers have introduced alternate quality contracts and prefer bundled payment mechanisms for entire hospitalization over the existing fee-for-service reimbursement model of Boston Children’s Hospital.
The cost of health services is not aligned with the quality and value of health services. Insurance companies are indiscriminate about reimbursements between specialty pediatric hospitals like Boston Children’s Hospital and cross-subsidized services of hospitals having pediatric wards in adult hospitals.
Similar quality and complexity of health care in different places are compensated discriminately and at different rates. Boston Children’s Hospital is at a disadvantage, having an integrated setup and infrastructure of research, training, and specialty care for rare diseases.
Moreover, BCH is renowned for handling low-income patients, and complex cases put them on the wrong side of the competition, with hospitals running childcare wards in adult hospitals.
As a freestanding pediatric hospital, BCH is having tremendous pressure to balance the act of retaining its market reputation of superior research and market leader position as well as low-cost services at par with the competitors.
State and local governments are gradually reducing the medical reimbursements to health care providers like BCH. This has forced BCH to move to low-intensity services at satellite healthcare centers. The focus has shifted to better patient outcomes by decreasing unnecessary overheads and judicious resources.
SWOT ANALYSIS OF Boston Children’s Hospital
Strengths
Boston Children’s Hospital is a top-rated pediatric hospital in the US acclaimed for ranked specialties and the world’s largest hospital-based pediatric research center.
It is reputed as a last resort for children with rare diseases and is well known for novel treatments and therapies for debilitating conditions. This attracts more patients outside the community.
Well-noted for a smaller number of after-surgery/treatment errors and complications. After-treatment visits are comparatively much less, and a lot of cost savings to patients, unlike in other hospitals.
Weaknesses
Being a freestanding pediatric hospital, Boston Children’s Hospital cannot follow the cross-subsidizing tactics followed by its competitive adult hospitals having pediatric wards only.
Infrastructure with research, training, and specialty services attracts more complex and highly resource-intensive health cases, which jack up the cost of services. Integrated cost tracking for all health services is not available across all the sections.
Opportunities
Alternative quality contracts with bundled pricing for full care service health cases can be the USP of Boston Children’s Hospital in the long run for their market growth.
Transparent SCAMPs and efficient treatment with no after-treatment complications and fewer visits shall score over the cross-subsidizing tactics of competitors.
Threats
Risk-adjusted global payments by insurers for higher costs of Boston Children’s Hospital will get reimbursements less and will have severe pressure on costs and, in turn, on profits.
Increased Co-pays on patients by the payors to compensate for the higher costs of BCH will have a negative effect on the flow of patients to the hospitals.
High complex and resource-intensive cases will only increase in BCH, which may lead to a ‘Death spiral’ like situation in the long run.
The challenge for the hospital is to handle the intense local and national pressure to reduce costs.
In this industry situation, why should clinical department heads, such as Drs. Meara and Waters, be interested in developing more accurate costs for their procedures?
As bundled pricing is being contemplated internally and externally in insurance companies, it becomes more logical to know what levers of costing and drivers are of costs before going for all-in bundled reimbursements.
If the hospital cannot control prices, it will…
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