This blog post is part of our Real Customer Stories series which features lessons and case studies from actual VitreosHealth customers.
Over the last few years, I have worked with many customers and prospects at VitreosHealth. There is one question they always ask me during our initial cost opportunity analysis:
“What is cost avoidance and how can you really measure it?”
This question has become so frequent, that if a customer doesn’t ask it during our initial presentation, then I know we did not do a good job of explaining that proactive care management and cost avoidance are critical factors for successful population health management.
So, how do we measure cost avoidance in population health management? Before I answer that, I’d like to take a step back and cover two things:
- What is cost avoidance?
- What is the difference between cost avoidance and cost reduction?
What is cost avoidance?
Cost avoidance is any action or intervention that prevents incurring higher costs in the future compared to the current status quo. In healthcare and especially in population health management, cost avoidance is the amount of money saved by preventing a high-cost event or a poor health outcome (such as an ER visit or hospitalization) with proactive health interventions.
How are cost avoidance and cost reduction different?
It is very common for cost reduction and cost avoidance to be used interchangeably, but it’s important to understand the difference. When case management or transition of care management teams bring down the costs associated with previously high-cost members, you can attribute these savings to cost reduction. The main difference between cost reduction and cost avoidance is whether you are preventing members from incurring high-cost or reducing cost for members that have already experienced high-cost events. Typically, cost reduction is easy to measure.
To illustrate this, let’s look at one member who had a heart attack in January of 2018 which resulted in hospitalization. We can measure this member’s cost reduction by taking her cost after hospitalization (Figure 1, Point A) and then comparing her cost after transition of care management and case management (Figure 1, Point B). The difference between Point A and B is the cost reduction; in our case, that’s $14,000 monthly.
The same concept could be applied at a population level by adding the costs and outcomes from each patient.
Figure 1: Measuring cost reduction is as easy as measuring cost at one point after a high-cost event and then subtracting the cost after Transition of Care and Case Management.
How do you measure cost avoidance?
At VitreosHealth, we’ve really made it a priority to standardize the way we think about measuring cost avoidance. We do these two things for every population we come across:
- We use the prior year’s data as a baseline and see if everything remains the same (within a persistent population), what is the expected cost for next year. By doing this, we can take into account the local characteristics and risk burden of your population.
- We use the concept of Movers as a percentage of the total population to define the historical trends for the whole membership. Movers are low-cost members who became high-cost over the 12-month period under consideration.
This can be a complex concept, so stick with me. Below is our Vitreos Quadrant Chart (Figure 2) where we map every member in your health plan. Cost is on the x-axis and risk is on the y-axis.
Figure 2: Vitreos Quadrant Chart. Members are mapped onto this chart to determine the overall health of the population.
We use 2 to 3 years of historical data to identify what percentage of members are Movers (members that move from low-cost categories to high-cost categories) and what is the increase in cost post-movement over a 12-month period. We remove the impact of changes in population mix, new enrollees, and members who dropped out of the plan. We are left with an image like Figure 3.
Figure 3: Tracking the Movers across two years of historical data. This way we can see how much of cost has historically been due to movement from low-cost categories to high-cost categories.
From the example illustrated in Figure 2, we can see that on average, 14% to 15% of the population moved from low-cost to high-cost categories and they brought in a new cost of $85M (which is actually 20% of total cost for this plan). These members had a cost increase of 10.8x over previous years. For the persistent population, we use the historical patterns demonstrated above to estimate the increase in costs and determine the year-end Expected Cost.
Cost Avoidance = Expected Cost – Actual Cost
Figure 3 shows real numbers from a customer of ours. After I presented our findings, this customer decided to focus the efforts of their care management team on proactive care and avoiding high cost events. Figure 4 shows how their efforts paid off.
Figure 4: After focusing on proactive care, our customer saw a reduction in the amount of Movers from low-cost to high-cost and a decreases in associated costs.
After shifting to focusing on proactive care, this customer only had 12% of members moving to high-cost categories (as compared to 14% to 15% in previous years). In addition, they saw that the cost increase was only $76M, which was 17% of total cost (as compared to 20% from the previous year) and 9.2X increase in cost (as compared to 10.8x from previous years).
The real impact was a reduction in low- to high-cost movers by 3%. Which means, this care management team managed to reduce the low- to high-cost movement by 3% (which translated to approximately 1,500 Rising Risk members).
But most importantly when you compare the cost increase from previous years (that’s shown in Figure 3) and compare that to the present year where you had some of your care management team focus on proactive care, there is a decrease in the cost by $10M. So that’s $10M in cost avoidance.
At Vitreos We do this analysis every month so that our customers know how their cost is trending and how much avoidance they can expect. Most of our customers succeed because they have a balanced focus on both cost reduction and cost avoidance. Unfortunately, many organizations tend to do the easier stuff and completely forget of the other side of the coin: cost avoidance.
Here are some things you should be asking yourself if you aren’t already focusing on cost avoidance:
If your cost reduction strategy is working perfectly well, why is your organization’s medical cost (such as PMPM) not trending downward
If your organization’s focus is completely touching the members that are already high-cost, shouldn’t you have very few high-cost members by the end of the year?
Cost Avoidance is not as easy to measure as cost reduction. You need to have the right tools and application to do so. It is not easy to calculate or prove something that has not occurred due to an intervention. Let me know what the answers to those two questions above were. And check out an example below of how Vitreos customers track their cost avoidance performance monthly.
Figure 5: This is a screenshot from our Performance Insights application. Customers use this application to track the successes of their care management programs in terms of cost and outcomes. Here, you can see that we are featuring the Avoidable ER Visits program. It has resulted in a 18% decrease in ER visits and a 28% decrease in PMPM as compared to last year. The dotted black line shows the PMPM of the members in this program last year, and the solid black line shows their PMPM this year. The white line shows the associated cost avoidance (secondary y-axis).