How focusing on a handful of hospitals could reduce overall costs

To bring healthcare costs under control, the healthcare sector must focus on the minority of hospitals responsible for the majority of excess costs, a blog post from the Harvard Business Review argues.

Analyzing inpatient data released in May by the Centers for Medicare & Medicaid Services (CMS), ManMohan S. Sodhi of London's Cass Business School and Navdeep S. Sodhi, managing director of Minneapolis' Sodhi Pricing, found that only a handlful of hospitals were responsible for more than $5 billion of excess procedure costs to CMS and inpatients. Thirty-two hospitals--about 1 percent of those in the data--accounted for 25 percent of excess accepted charges, according to the post.

Of those hospitals, the authors wrote, nearly 80 percent were in New York state, Baltimore, San Franciso, Los Angeles or Stanford (Palo Alto), Calif. "If the excess is that highly concentrated," the post states, "it is likely that significant efficiency gains can be achieved with relatively little effort."

The CMS data analyzed also included a breakdown of the 100 most common procedures performed in 2011. The two most frequent procedures--major joint replacement and septicemia--together accounted for more than 10 percent of all procedures, according to the post. Of these procedures, the authors found significant cost variations across hospitals. Major joint replacement cost an average of $9,000 at the cheapest hospital, compared to $39,000 at the most expensive, and septicemia cost an average of $7,500 per treatment in the least expensive hospital, compared to $44,000 in the most expensive.

The authors recommend that the federal government and hospitals conduct a similar data analysis each year. "They can identify the tiny minority of hospitals--or areas within a hospital--that are enormously expensive across many procedures they perform and need better understanding of what is behind their extraordinarily high accepted charges," the post states. "It may well turn out that many of these excess charges levied by these few hospitals can be significantly reduced simply through better management."

This data parallels an October study that found 21 percent of total healthcare costs are driven by 1 percent of patients, FierceHealthFinance previously reported.

To learn more:
- read the Harvard Business Review post