This chapter presents basic health care economic concepts focusing upon cost, the methods to determine the cost of, and the effects of health care policy on the delivery of health care.

Cost of health care was not studied until the 1960s. During that time, the American traditional belief system held that every individual was entitled to health care. In an attempt to initiate control of costs, the government enacted amendments to the Social Security Act; Medicare and Medicaid which provide health care coverage to the elderly and indignant respectively. The intent was to require health care providers to account for the cost of Medicare and Medicaid, which would lead to a reduction in spending. Other insurers followed launching an overall attempt to budget health care. Despite these efforts however, the cost of health care continued to grow.

In the 1980s, health care reform grew in response to these escalating costs. This reform lead to the contemporary value system that holds individuals have the right to health care at a responsible cost.

Managed care (a nongovernment system) evolved which integrates financial and clinical care delivery functions into an organized system emphasizing coordinated care throughout the continuum while using financial incentives to achieve cost efficiency. There are a variety of models e.g. preferred provider organization (PPO), point of service (POS), etc. most commonly offered through employment benefits.

Health care businesses use their mission and vision to establish a strategic direction. The mission often defines what types of services are delivered that generate revenue. Expenses are accrued in the delivery. Health care organizations need to generate enough income to cover expenses and make a profit so that they have money to pay for future needs e.g. replacement of old equipment, establishing new services, and construction for new growth. Managing both cost and quality is critical.

Fundamental definitions of cost are reviewed including: direct, indirect, fixed, and variable; along with the suggested methods to predict cost e.g. high-low cost estimation, regression analysis, and break even analysis.

Labor costs (staff salary) and technology (diagnostic and therapeutic equipment and information systems) generally account for major organizational expenses. Accounting for the cost of nursing care is challenging because current systems are complex and time consuming. Two common systems utilized are:
• the “patient classification system” which distinguishes patients based upon acuity, functional ability, and resources required so that appropriate staffing levels can be assigned.
• the “relative value unit”, a system that identifies the cost to produce a service based upon labor, capital, and supply costs.

Quality improvement is factored into the discussion as a core goal for strategic business and clinical success. Quality measurement is reviewed including regulatory oversight governed by the Joint Commission of Hospital Accreditation and internal organization monitors, such as customer satisfaction surveys.