Value-Based Health Care fails without accurate cost measurement because value is defined as patient outcomes divided by the cost of delivering them, and most health systems have spent the last fifteen years building only the outcomes side of that equation. Time-Driven Activity-Based Costing (TDABC) is the method Kaplan and Porter explicitly prescribed to measure the true cost of a full cycle of care. Without it, value remains a slogan rather than a managed number.
The value equation has two sides, and we built only one
The premise of Value-Based Health Care (VBHC) is deceptively simple. Value is what matters to patients per euro spent: the health outcomes achieved for a given condition, divided by the total cost of achieving them over the full cycle of care. Michael Porter framed it this way, and the discipline has organised itself around that ratio ever since.
The problem is that the two halves of the ratio have received wildly unequal attention. On the outcomes side, the field has invested heavily and well. ICHOM standard sets now define which outcomes matter for dozens of conditions. Patient-reported outcome measures (PROMs), clinical registries, and quality dashboards have proliferated. Hospitals can increasingly tell you, condition by condition, how well their patients actually do.
The cost side has been all but ignored. Most providers still cannot answer a basic question: what does it actually cost us to treat one patient for one condition, across every department, encounter and consumable, from first consultation to recovery? If you can measure only the numerator, you cannot manage the ratio. You are flying value-based care on half an instrument panel.
Why traditional hospital costing and reimbursement data fail
When providers try to fill the cost gap, they reach for the data they already have. It does not work, for three structural reasons.
Reimbursement is not cost. Charges, tariffs and DRG payments describe what someone is willing to pay, not what the care consumed. A systematic review of cost measurement in VBHC (PubMed 36600363) found that roughly half of published studies relied on reimbursement or charge data as a proxy for cost. That is not a measurement of resources used; it is a measurement of the billing system, and it imports every distortion that the billing system contains.
Departmental and ratio-of-cost-to-charge allocation smears the truth. Traditional hospital accounting aggregates costs by department and then spreads overhead using broad averages, percentages of charges, or bed-days. A complex patient and a simple patient in the same department absorb the same average. Cross-subsidies hide everywhere. The result is a number that is precise, auditable, and wrong for any individual care pathway.
Costs are organised around departments, not patients. A cycle of care for a single condition crosses imaging, surgery, wards, pharmacy, physiotherapy and outpatient follow-up. Departmental cost reports cannot reassemble that journey. They tell you what radiology cost in total; they cannot tell you what radiology cost this care pathway. VBHC needs cost measured along the patient’s path, and conventional systems measure it along the organisation’s chart.
Why TDABC is the method Kaplan and Porter prescribed
This is not our opinion grafted onto VBHC. In 2011 Robert Kaplan and Michael Porter published “How to Solve the Cost Crisis in Health Care” in Harvard Business Review, and their answer was Time-Driven Activity-Based Costing. They argued that the central obstacle to value was not bad outcomes but the near-total absence of reliable cost information at the level of the individual patient and condition. TDABC was their prescribed remedy.
A systematic review in Value in Health on TDABC for inpatient management reached the same conclusion that the broader literature keeps reaching: where studies actually measure cost rather than borrow charges, TDABC is regarded as the most accurate and practical method available. A 2025 scoping review in Frontiers found Value-Based Purchasing and TDABC to be the two most frequently reported approaches for aligning funding with value, while naming the barriers that keep providers stuck: fee-for-service inertia, the lack of standardised cost measurement, and weak interoperability between systems.
TDABC succeeds where traditional costing fails for one reason: it follows the patient, not the org chart.
How TDABC works at a care-line level
TDABC rests on just two parameters, which is precisely why it scales inside a hospital where conventional Activity-Based Costing collapses under its own complexity.
- The capacity cost rate. For every resource that touches the patient (a surgeon, a nurse, an MRI machine, an operating theatre) you calculate the total cost of supplying that resource divided by its practical capacity, expressed per minute. Practical capacity is set at roughly 80-85% of theoretical capacity, because no clinician or machine is productive every scheduled minute. This single rate already exposes something traditional accounting buries: the cost of unused capacity.
- Time equations. For each step in the care pathway you estimate how many minutes of each resource it consumes, and you let that time flex with patient complexity. A straightforward case and a comorbid case no longer absorb the same average; the time equation adds minutes for the conditions that actually drive them.
Multiply the minutes a patient consumes of each resource by that resource’s capacity cost rate, sum across every step from first consultation to final follow-up, and you have the true cost of that cycle of care. Now the denominator of the value equation is a real, defensible number, measured the same way outcomes are measured: along the patient’s full journey for a specific condition.
What a provider should do first
The instinct is to attempt the whole hospital at once. Do the opposite. Pick a single, high-volume, well-defined condition or care line and measure that one cycle end to end. The result is twofold: a true cost for that pathway, and a map of where time, capacity and consumables are actually consumed. That map almost always reveals unused capacity and process variation that no departmental report ever showed.
This is the bridge between outcomes and economics that VBHC has been missing. With reliable cost on one side and ICHOM-grade outcomes on the other, value finally becomes something you can measure, compare and improve, rather than merely assert. It is also the foundation that platforms like CostCTRL build on to keep that cost picture live rather than locked in a one-off study.
Outcomes measurement told us how well patients do. TDABC tells us what it costs to get them there. You cannot manage value with only one of those numbers. To go deeper into the method and the evidence, start with our Value-Based Health Care pillar.