As the debate over national health policy continues, many
state health administrators are looking for ways to do more with less. A key
step towards maximizing the impact of state and federal healthcare dollars is
ensuring reasonable spending on existing programs. There are endless factors
which impact the cost of healthcare such as geographic location, patient
demographics, intensity of services and availability of resources.
Consequently, reasonable cost is difficult to pinpoint.
PCG’s team partners with state health departments nationwide
to ensure reasonableness of health-related cost incurred by hospitals, schools,
localities, EMS providers, FQHCs and other healthcare providers. Below are five
of the most effective and easily transferrable tools we use.
- Risk Sharing. If 100% of the cost of health service provision is reimbursed to the
provider through state and federal funding sources, providers have no incentive
to control cost. Allocating a portion of the cost to the provider motivates
providers to implement cost-cutting mechanisms which can lead to a higher
quality of care and an expanded patient pool.
- The “Prudent Buyer” rule. Costs are
deemed reasonable if they are both necessary and ordinary costs related to
patient care which a prudent buyer would pay for a given service. By training
providers to conduct make-or-buy analysis, seek cost effective solutions and
trim unnecessary cost, administrators can create a more efficient system of
- Benchmarking. Costs incurred by providers
should be reviewed in comparison to the costs of providing comparable services
in other states or locations as well as costs incurred in previous years or
reporting periods. Large variance in cost compared to similar programs or prior
reporting periods can be a red flag.
- Consideration for geographical cost factors.
Benchmarking is only valuable to a point – it is critical that factors such as
regional cost of living and availability of resources are considered. For
example, limited access to specialty care clinicians for certain rural
providers can have a substantial impact on cost.
- Compliance with federal regulations. The
most important solution to safeguarding cost reasonableness is familiarizing
providers with federal guidelines such as Provider Reimbursement Manual 15-1
and 42 CFR 405.2401.