Expert Coaching. Practical Resources.

November 19, 2020

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Richard Stringham

Is Your Board Examining the Right Costs?

In a recent episode of NPR’s Hidden Brain podcast, Vivian Lee, the author of: “The Long Fix: Solving America’s Health Care Crisis with Strategies that Work for Everyone,” describes the results of a substantive change that took place in Utah’s Medicaid program.

Prior to the change, health care providers were paid for each medical procedure that patients received. This had the unfortunate effect of incentivizing health care providers to focus on procedures, rather than health outcomes.

To illustrate, she used the example of a woman who had been into the emergency room 52 times in the year prior to the change. (That’s not a typo….52 times in just one year!)

When Utah changed the Medicaid program, payment to health care providers became based upon the patient rather than the services; consequently, health care providers focused on health outcomes for patients covered by Medicaid rather than the provision of medical procedures.

With the new payment system in place, the health care providers looked at their patients in a new way. In the case of the woman who had been into emergency 52 times, the provider realized that it could produce more effective health care outcomes for substantially less cost.

Lee goes on to note that overall costs of health care for Americans are 2 ½ to 3 times as much as other developed nations, yet America is experiencing poorer outcomes for those costs. “So even though [Americans] are spending so much money, we are not getting the results that we really deserve with that. And that is a consequence of, in my view, the fee-for-service system or what I also call paying for action. We’re paying for action, but we’re not really paying for results.”

When I heard the podcast, I was struck by the similarities that boards of directors face when governing operational costs. Too often boards get caught up in the budget lines, seeking to understand the costs of various operational units. In the process, they may think that they are addressing cost efficiencies that enable an outcome at a lower cost.

But CEOs have several different levers to use in multiple combinations to produce results. It is the combination of these levers that determine both the extent of results achievement and the associated costs.

If boards are focused on the operational methods, then two critical items can easily be overlooked, especially when the board is a non-profit board.

The first is simply the question, “Are we actually achieving the outcomes that we seek?” Too often non-profit boards mistake operational activities for intended results for intended beneficiaries. Operational activities may bring about the intended results, but the board does not know until it actually receives measures of the results.

The second question is “What is the cost of producing the results and is that cost worth it?” Just as Lee challenges the notion of health care costs being worth the sum of the cost of the medical procedures, the sum of the operational expenses may tell a board what it cost to produce the results; but it does not indicate that those costs were worth it.

If the board is fulfilling its fiduciary duties, it must focus on those two questions.

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