The ground is moving beneath the nation’s hospitals, and many are struggling to keep their feet.

With Obamacare, the government is beginning to pay health providers a set fee for keeping whole populations of people healthy. Commercial insurers are following suit. The days of providing more services to make more money may be on the way out.

Moreover, Medicare reimbursements are declining, and hospitals are scouring the books looking for ways to cut costs. They’re also looking for new allies, new thinking, and new technologies to help.

All this puts hospitals in a tough spot, because they don’t have the tools to manage costs effectively — or even to see what they’re spending on specific treatments.

“We spend $3 trillion on health care each year and there is no system for managing costs,” Strata Decision Technology chief executive Dan Michelson told VentureBeat.

Backstory: Northwestern Memorial

Northwestern Memorial Hospital in Chicago found itself without such a cost management system in 2011 when it called in a team of consultants led by veteran hospital administrator Liz Kirk. Her job: Find and eliminate 25 percent of the hospital’s costs over a three-year period without compromising patient satisfaction or quality of care.

And she did it, but it took some serious resources. Fifteen Northwestern MBAs worked on the project full time, and another 50 VPs, directors, and managers devoted 40 percent of their time to the project. Northwestern is a well-monied institution and could afford it, but most of the nation’s thousands of smaller hospitals likely could not have.

When Kirk left Northwestern a year ago to join Chicago-based Strata, she brought with her the hard-won lessons and techniques she and her team had learned.

Kirk and Strata then baked those lessons into a cost management product that other hospitals could introduce with relative ease.

The Strata story

That new cost management product is sold as a module — called the “Continuous Cost Improvement Module” — within Strata’s larger product suite, called StrataJazz, a cloud-based software-as-a-service platform that provides cost analysis, financial planning, forecasting, and budgeting tools.

Strata, which was founded in 1996, sells its financial analytics and performance platform to 175 healthcare delivery organizations representing approximately 1,000 hospitals in the U.S., including some very big names like The Cleveland Clinic, Johns Hopkins, Duke, Yale, and Harvard (Boston Children’s).

Strata says its system can usually find a 10 percent cost reduction at its hospital clients, which is impressive considering that the hospital business typically has margins of only 2-3 percent, Michelson says.

Using technology to lower costs and transform health care is a central topic at VentureBeat’s HealthBeat 2014 event, Oct. 27-28 in San Francisco. Be sure to register.

It does this mainly by keeping hospital physicians constantly informed about the relative financial and clinical impacts of their care decisions.

The reality is that physicians within one hospital or hospital network treat specific diseases in very different ways, at very different costs, and usually without paying any attention to those costs at all.

One orthopedic surgeon might choose to put an $8,000 knee replacement in a patient’s leg, for example, while another orthopedic surgeon will choose a $3,500 knee replacement and get exactly the same clinical outcome.

The Strata module can show the hospital the median price that its orthopedic surgeons spend on knee replacements. It can then show them how much money could be saved by driving all orthopedic surgeons toward that median cost per case. The same could be done for drugs, diagnostic tests, and other therapies.

Indeed, the research shows that only about 20 percent of doctors were able to estimate the costs of the services they rendered within 20 percent of the actual costs.

“The cost data was just not present,” Michelson says. “Just by making physicians aware of the costs of the decisions they’re making, that by itself can positively impact their decisions.”

There’s some science behind this assertion. A Johns Hopkins study showed that utilization (the usage of hospital goods and services) went down by 10 percent when physicians could see the cost of the care they were giving, at the moment when they were giving it.

In another study at the University of Miami, physicians were shown, retrospectively, the real costs of the diagnostic tests they had ordered. After seeing that, the doctors in the study reduced the number of tests they ordered by 25 percent.

How the module works

Using the Strata platform, the hospital can pull the diagnostic codes and procedure codes from the electronic health records system, which includes virtually any medicines prescribed, exams given, tests an images ordered, implants used, or medical devices employed. The platform can then tap into the hospital’s accounting systems to derive all the line item costs for those products and services.

With all this data in place, Strata can show physicians the clinical outcomes and the financial outcomes of their choices side by side. The variation in cost effectiveness of the care given from physician to physician and from case to case can be seen.

Kirk says the idea is not to establish strict care protocols for doctors, but rather to give physicians access to the numbers that make up the cost-effectiveness picture behind their clinical choices.

“It identifies the cost reduction opportunities on a daily basis, not once a month or once a year.” Kirk says. “That may sound simplistic but that is the state of the art in health care today.”

The new module is meant to plug easily into the hospital’s existing clinical and financial systems without the need for millions of dollars of system building and integration work.

On the clinical side, Michelson says 70 of the health systems that use Strata also use Epic Systems for their electronic health record systems. He adds that contrary to popular belief, Epic has been very easy to work with when it comes to integration with the Strata platform.

Analytics allies needed

Strata has been flying below the radar for a number of years as it has built its hospital analytics business. It joins other analytics companies like Evolent Health and Aledade, which are also doing deep integration with legacy systems and looking for ways to cut costs.

More of these kinds of companies will certainly show up in the future as data integration becomes more of a focus for all types of health providers.

But right now it’s a hard business for Strata and its ilk. It can be very expensive and labor-intensive to build the software platforms, and an element of on-the-ground consulting is often needed.

And health care is a messy business; you have to be willing to get your hands dirty to cause change, Aledade CEO Farzad Mostashari told me. Difficult as it is, everybody agrees that change must come.

As Michelson noted, we spend about $3 trillion on health care in the U.S. every year, or about 18 percent of our gross domestic product. This is well above any other developed country. The high price isn’t because the health care is better.

“Of all the money hospitals spend on healing the sick, close of a third of it is believed to be waste,” Michelson said.

We hear a lot of talk in Washington about fixing this, but companies like Strata are the ones on the ground doing it, in this case, for hospitals.

Strata’s new module effectively makes the cost-effectiveness of treatments a top-of-mind issue for caregivers and administrators on a day to day basis. It can reveal some clinical decisions that just produce costs, not necessarily good outcomes.

“Liz’s module is the missing piece,” Michelson said, “it takes those costs out.”

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