Virtually everybody, from CMS to veteran muckraker Steven Brill, argues that health care costs are too high—but which costs are they really talking about? It's often hard to tell.
Breaking down six types of hospital "costs"
After cracking my dusty business school textbooks and making the rounds of our finance experts, I can tell you for certain what the problem is: people are talking about no fewer than six different types of "costs." (There are, in fact, far more, but I’m going to focus on the hospital side of the story to keep the explanation from getting completely out of hand.)
Let me outline the various types of costs for you, doing my best to use distinct terms for each one:
First of all, there are "hospital input costs," by which I mean, "the costs that a hospital incurs to provide care." This includes the "variable costs" of everything it takes to treat an individual patient: the salaries of nurses and techs, as well as costs of supplies and drugs. It also includes the "fixed costs" of keeping the hospital in operation, such as electricity, major pieces of equipment, and even the land and buildings.
When we at the Advisory Board talk to our members about managing costs, we’re often referring to these fixed and variable input costs. (CMS and other insurers sometimes track "direct" and "indirect" hospital input costs. "Direct costs" are those costs directly associated with patient care, while "indirect costs" are other costs.)
Then there are the "hospitalization costs," the actual money that private insurers, patients, or the government end up paying to hospitals in exchange for providing care.
There are also "hospital charges," which are essentially hospital’s list prices for their services. It’s these charges that have come in for so much public scrutiny lately—which is confusing, since the charges bear little relationship to the actual "hospitalization costs" for most patients.
Finally, there is the "total cost of care"—the amount that an insurer expends on health care in a year on behalf on one individual.
Beyond that, there are "health insurance costs," what employers and individuals pay annually in premiums to insurers for health care coverage.
And there’s also the "total cost of care for a population," which is the total cost of care for each person in a population, all summed up.
The one thing that each of these costs has in common? All of them have been rising, year after year.
How different hospital costs work together
Of course, there are relationships between each of these different types of costs. When hospital input costs go up, hospitals try to increase their revenues accordingly—which often means higher hospitalization costs and higher hospital charges. And, all other things being equal, that leads to a higher total cost of care, for individuals and populations. Health insurance costs rise as a result.
But the fact we all keep using the word "cost" to refer to so many different things is confusing and distracting even to experts, let alone to lawmakers and the general public.
- Don’t miss Michael’s follow-up to this post. Find out why it made one member very angry—and why the nuances of cost accounting matter to care transformation. Keep reading.
Check out our costs vs. charges infographic
The Daily Briefing's Managing Editor Dan Diamond breaks down a sample joint replacement episode in Los Angeles and how different "costs" relate to one another.
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Michael Koppenheffer is an expert on health care product development, marketing, and technological innovation, with two decades of experience as a consultant and researcher.
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