Impact Insights

Moneyball Meets Cost Modeling

Joe Miccio

 “Data itself doesn’t tell the future, or give the answer – but it can limit the field for you and make it manageable for you.”   Paul DePodesta

Paul DePodesta is most famously known for his time with major league baseball’s Oakland Athletics. He was an assistant to the team’s general manager, Billy Beane, during a time documented by the Michael Lewis book “Moneyball” and a film by the same name. “Moneyball” is a term associated with the way Beane, DePodesta, and others used advanced statistical analysis to make various baseball management decisions for the Athletics’ organization.  It seems that in a way these analyses are similar to how the cost modeling approach is being used by healthcare enterprises, in that, to paraphrase DePodesta, limit the options and enable decision making more manageable and defensible.  What may also be important is that the ‘process’ of cost modeling among healthcare executive leadership serves to align enterprise leadership management decisions that could help mitigate risk and enhance the success of strategic initiatives.

What is cost modeling?   In general, cost modeling can be applied to many initiatives such as the assessment of IT systems’ costs.   The model’s approach is to provide analysis of comparable cost elements that may be applicable to many enterprise areas associated with a specific project. These cost elements encompass expense items from capital to one-time operating to annual operating costs.  Its impact touches hardware, software and peopleware throughout an enterprise.   Combined these investments can have a profound impact on specific business strategies and the financial performance of the enterprise.

Environment

Some have likened today’s healthcare environment to Darwinian times. From the emergence of Accountable Care Organizations, value-based and other payment models, to increased regulatory compliance and greater accountability, the business of healthcare is rapidly evolving, and increasingly dependent on IT technologies to aid adaptation. These changes require executive leadership to adapt with effective capital investments that could serve to help their respective organizations evolve and succeed.

Historically cost modeling has been the domain of chief information officers in considering large-scale technology acquisitions.   The planning and management of IT programs and large, complex EMR projects, for example, are inherently difficult.  Careful consideration of long-term vendor cost commitments, coupled with determination of internal resource allocations, are integral to these technology acquisitions.

In today’s healthcare environment, and more importantly in its evolution over the next several years, executive leadership decision-making will be challenged in a number of areas including capital investment and allocation in support of the:

  • Ability to finance operations, including support of continuum of care requirements, expansion and acquisition strategies.
  • Ability to acquire the underlying technologies that will serve to build new contracting models with payers, employers and consumers.
  • Transformation from community-based acute care services to coordinated networks of care encompassing all phases of acuity, and delivered in many venues of care, including telehealth.
  • Formation of Clinically Integrated Networks and Accountable Care Organizations.

These transformative changes are supporting enterprise adaptation to multiple external drivers and forming the foundation for enhanced future performance.  Essential to achieving successful operational and business objectives will be the understanding and alignment of executive leadership decisions on the effective capital investment.  Moneyball or in this case, cost modeling, represents a catalyst to making effective enterprise capital investment decisions manageable.

Manage Options and Enable Executive Decision Making

Like many baseball operations, healthcare enterprises find themselves attempting to balance capital requirements and investments that could enhance future performance.  Executive teams are responsible for a variety of departmental agendas often competing for limited capital resources.   Competing resource requirements ranging from EMR technologies to capital equipment, and facility expansion/acquisitions to risk contracting, require a greater degree of diligence in assessing comparable costs and investment models.

Cost modeling represents a vehicle for both executive decision support, as well as enhancing the processes of enterprise strategy discussions among executive leadership.  To more effectively leverage cost modeling, executive leadership should embrace and involve key organizational stakeholders, encompassing:

  • Clinical staff – across the care continuum, acute, ambulatory, home and telemedicine
  • Financial services – including population health, risk management, physician alignment teams
  • IT – including business intelligence, analytics

These discussions have incrementally moved and expanded executive understanding of technology acquisition or an ‘IT’ decision, to more broadly the effective investment into enabling technology(ies).  It serves to position their respective organizations to successfully execute in an evolving health marketplace by addressing ACO, population health and value- based purchasing initiatives.

Effective capital investment will afford healthcare organizations the flexibility to consider and address key clinical and business strategic initiatives that could serve to enhance an organization’s viability.  Cost modeling that provides a comparable option analysis is the key component in limiting the options and making the executive decision making process more manageable.

 

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