Calculating the Cost Savings of Healthcare Improvement

Healthcare improvement is all about the patients. Every hospital and healthcare system would agree that making sure someone leaves a facility healthier than when they arrived is the No. 1 priority. But hospitals and healthcare systems are businesses, so a high priority also is placed on the financial benefit of healthcare improvement.

How in the world do you calculate the cost savings of improved healthcare? With a lot of math, sure. But it’s more than that. Turns out it’s a two-step process.

Step 1: Estimation of costs from reported charges for each discharge.

Claims data includes total charges for each hospital stay. This charge information represents the amount that hospitals billed for services, but does not reflect how much hospital services actually cost or the specific amounts that hospitals received in payment.

To determine cost savings for quality improvement activities, the hospital charges must be translated into actual costs. Cost-to-charge ratios enable this conversion. Charge information is obtained by summing total charges across hospital stays for each hospital. Cost information is obtained from the hospital accounting reports collected by the Centers for Medicare and Medicaid Services (CMS).

Converting the discharge-level charge data to cost estimates involves multiplying total charges with the appropriate hospital-level cost-to-charge ratio.

Step 2: Calculation of incremental costs associated with an adverse event.

Here you have to match cases (discharges that experienced an adverse event) to controls (discharges in the population at risk that did not experience an adverse event). Cases and controls are matched based on the predicted rate for the adverse event using the same covariates used in the risk adjustment models (age, gender, severity, etc.)

Analyzing actual and potential cost savings data enables better decision making for cost control and patient care. For example, analysis may show that preventing a re-admission by increasing the length of stay lowers re-admission costs and other associated costs, providing a clear benefit in care and economic terms.

Battelle enables hospitals and hospital systems to access and digest this data with the WayFinder Dashboard.