Redefining the formula to calculate costs in health care

Michael Porter and Robert Kaplan suggest that in order to reduce health care costs, the entire system of cost calculation must be redefined, according to an article in the Harvard Business Review. 

According to Porter and Kaplan, cost calculations under the current system are based on procedures, departments, and services, but not on the actual resources used to deliver care.  In order to improve efficiency and reduce costs, the costs should be based on the actual resources used to deliver care.

The article outlines a formula that more accurately calculates cost.  The formula is based on the cost of each employee that patients spend time with during an appointment, and factors in salary, benefits, employee supervision, and the cost of using medical equipment and building facilities.  The length of time that each patient spends with each employee is then factored in. 

An example, if a patient spends 18 minutes with a receptionist who costs (including all factors listed above)  $45 per hour, 24 minutes with a nurse who costs $65 per hour, and 9 minutes with a physician who costs $300 per hour, the total cost of the visit would be $84.50.  

(Sources: The Advisory Board Daily Briefing,, August 23, 2011, Harvard Business Review,, September 2011)