Wednesday, August 24, 2011

Healthcare and Legal Costs: Defining, Measuring (and Slashing)

A couple of recent pieces discussing costs in healthcare and legal services.

Much ado these days about the exploding costs of health care, and the necessity of managing those costs. An HBR Podcast entitled What Health Care Really Costs provides one explanation why the costs of healthcare have become so unmanageable: we simply don't know what they are.

Robert S. Kaplan of the Harvard Business Business school is the author, along with Michael Porter, of an article called, "How to Solve the Cost Crisis in Healthcare," to be published this fall in the Harvard Business Review.

According to Kaplan, we have no idea how much it costs to deliver healthcare, due to the way the system has developed. He uses the metaphor of the Galapagos Islands-- where land split off and developed its own species of animals, completely unaffected by what is taking place on the mainland-- to highlight how healthcare costs and charges are different from those found in any other industry.

In a typical hospital or doctor's office, charges for service are based on how much providers get paid or would like to get paid. In other words, a provider wants to maximize reimbursements, and is not concerned with either the effectiveness of the outcome resulting from a practice or procedure, or the costs associated with that practice or procedure. Costs and charges are completely unrelated, with one result being a great many delivery inefficiencies and redundancies.

Kaplan and Porter propose to measure the outcomes resulting from the treatment of a patient and what costs you incur in order to produce those outcomes, and are looking for new ways of reimbursement rewarding practitioners for good outcomes and lower costs. If you organize the flow of activities based upon the needs of the patient and the costs to serve her, unnecessary costs can be eliminated and service delivery improved.

Similarly, several new types of firms are using technology and alternative fee structures to offer lower cost legal services to clients. As described in the Economist this week, Clearspire offers cost estimates for each part of a legal project. If the actual costs are greater, Clearspire must eat them. If the project comes in under budget, Clearspire keeps part of the savings, thus getting part of the benefit of its own efficiencies.

Axiom Law uses a flat-fee structure, or charges by the week or month for its legal team.

Both companies use technology (and its ability to make physical location irrelevant) to minimize costs. Clearspire has created "virtual offices" connecting lawyers who are actually working from home with each other and their clients, while Axiom has placed its headquarters and lawyers in lower cost locales.

These articles (and many others) continue to demonstrate that identifying and measuring costs and the outcomes associated with them (and then reducing costs when appropriate) are crucial to the survival of any organization in any industry.