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ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING
Advanced Costing Techniques to Improve Service Line Decision Making2
Healthcare’s new value-based business model requires that providers have reliable patient-level performance analytics to support strategic decision making.
Detailed cost accounting provides the foundation necessary to assess and understand operating results.
Introduction
Population Health
Management
Shared Risk ACOs
Capitated Payments
Pay for Quality
Which service lines and arrangements are
contributing to strong financial performance?
What are the most significant cost drivers?
The role of cost accounting in healthcare
Advanced Costing Techniques to Improve Service Line Decision Making3
Achieving accurate and effective costing requires addressing several common challenges:
The time and resource-intensive process
• Cumbersome costing applications
• Time-consuming to maintain and update
Poor data quality
• Validation and reconciliation are tedious
• “Black box” calculations limit buy-in
Data not leveraged for strategic decision making
• Reports aren’t timely or actionable
• Data are not well-integrated with other systems (budgeting and reimbursement, strategy, capital, productivity)
CHALLENGES TO EFFECTIVE COSTING
Resource-intensive process and data issues
While the strategic value of Service Line cost
and performance analytics is increasingly
important, many organizations lack access
to timely and actionable management
reports that they can trust.
Advanced Costing Techniques to Improve Service Line Decision Making4
DEFINING THE PROCESS
Overcome challenges with the right process for you!
INPUTS
Financial
Patient Detail
Reference Tables
OverheadAllocationsOverheadAllocations
Cost FactorWorkbooksCost FactorWorkbooks
Allocations to PatientAllocations to Patient
Derive ProductLines EstimateNet Revenue
Derive ProductLines EstimateNet Revenue
Cost SummaryCost Summary
CostAssignmentCostAssignment
VALUE-ADDED PROCESSING OUTPUTS
REPORTING
• Service Line Trends• Population Analysis• Payer Trends• Physician Analysis• Strategic Modeling• Workload Projections• Ad Hoc and distributed reporting
CHARGE SUMMARY
RVUs, Cost Per Unit stored by Department
Charge Item
ENCOUNTER CHARGE AND ACTIVITY DETAIL
Encounter Charge andActivity Item Detail by
Date of Service
COST SUMMARY
Department Account Level Costs summarized
into Cost Pools
ENCOUNTER
Clinical, Demographicand Financial Data by
Patient Encounter
Requirements:
Streamline data validation and reconciliation tasks.
Ensure transparency across charge item costing and allocations modeling.
Maintain cost detail across all levels of departmental and encounter reporting.
Leverage dynamic ad hoc and distributed reporting capabilities.
Advanced Costing Techniques to Improve Service Line Decision Making5
While the cost accounting process used in healthcare has similarities to other industries, it is unique in many ways. The following are commonly used methodologies for assigning costs to activities and patients.
COSTING
Typical costing methodologies in healthcare
Relative Cost to Charge (RCC)
• Costs are assigned using thecharge as the cost basis
• Can be done at a patient oractivity (charge item) level
• Efficient to implement
• If used exclusively as themethod, resulting costs areviewed as inaccurate
Relative Value Units (RVU) Activity-Based Costing (ABC)
• Activities or (charge items)are weighted with relativeunits to establish a % ofTotal relationship
• Can be time-consumingwhen getting buy-in fromManagers
• A well-accepted method ifRVUs are accurate
• An approach used inmanufacturing wherediscrete “activities” arecosted uniquely
• Often correlated with”time-driven” approaches,for which cost/minute isthe driver
• Pure ABC methods not well-deployed but expanding
Advanced Costing Techniques to Improve Service Line Decision Making6
3 Practical Approaches for Improving Healthcare Costing
Build in sufficient cost detail to maximize flexibility
Improve costing accuracy using activity and charge item costs
Adjust supply costing by assigning costs at an encounter level
1 2 3
Unfortunately, many organizations struggle to produce accurate and timely views of service volumes, cost, and performance analytics Ineffective costing approaches are a direct result of using antiquated technologies that are either too complex and resource-intensive to be effective, or too simplistic to meet their needs.
In the following pages, we’ve outlined three practical steps for improving your costing accuracy to improve decision making in your healthcare organization.
Advanced Costing Techniques to Improve Service Line Decision Making7
Avoid highly summarized models that provide limited visibility into cost drivers.
1 Build in sufficient cost detail to maximize flexibility
Raises the question.... Variable cost of $3,542,531? Which costs are included? Labor? Drugs? Medical Supplies?
Sample Service Line Report:
Advanced Costing Techniques to Improve Service Line Decision Making8
Build in sufficient cost detail to maximize flexibility1
Avoid highly summarized models that provide limited visibility into cost drivers.
Instead implement:
• Cost categories that map to familiar financial groups
• Detail that is retained across
COSTSUMMARY
CHARGE ITEM SUMMARY
COSTSUMMARY ENCOUNTER
DepartmentDepartment/Charge Item
Encounter/Charge Item Encounter
Medical Supplies Medical Supplies Medical Supplies Medical Supplies
Implants Implants Implants Implants
Pharmacy Pharmacy Pharmacy Pharmacy
Patient Care Labor Patient Care Labor Patient Care Labor Patient Care Labor
Purchased Services Purchased Services Purchased Services Purchased Services
Indirect Facilities Indirect Facilities Indirect Facilities Indirect Facilities
Financial and Patient Data Tables
Costing Processes and Data Flow
Costs Mapped Costs Derived Costs AssignedCostsSummarized
Consistent Detail
Advanced Costing Techniques to Improve Service Line Decision Making9
YTD Financial $s $100,000 $85,000 $120,000
LABOR VAR EXP SUPPLIES
Methodology TIME-BASED RVU DIRECT COST
Charge Item #1
Charge Item #2
Activity Item #3
Online Input and Review of Activity and Charge Item Costs:
Manager Input and Review
Decision Support Approval
15
15
15
1
1
$8,500
$7,500
DEPT: 1234 – CATH LAB YTD JUNE 2012
Instead implement:
• Costing at the activity andcharge item level usingappropriate cost assignmentmethods
• Intuitive costing models withtransparent calculations
• Workflows that are efficientand repeatable
2 Improve costing accuracy using activity and charge item costs
Avoid highly simplistic cost modeling using cost-to-charge ratios.
Advanced Costing Techniques to Improve Service Line Decision Making10
Adjust supply costing by assigning costs at an encounter level
KEY: Address costing needs on a charge item level. Assign costs on an encounter level.
Implement a combination approach:
• Direct cost for fixed price items
• Reverse markup for variable charge items
• RVUs for remainder of cost pool
3
AMOUNT ASSIGNED $100,000 $80,000 $120,000
IMPLANTS: TOTAL COST $300,000
Methodology DIRECT COST MARKUP RVU
Charge Item #1
Charge Item #2
Activity Item #3
Online Input and Review of Charge Item Costs:
Manager Input and Review
Decision Support Approval
$10,000
$2,000
5
DEPT: 1234 – CATH LAB YTD JUNE 2012
Activity Item #4 10
Advanced Costing Techniques to Improve Service Line Decision Making11
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Delivering an Integrated Financial Planning and Decision Support Platform for Healthcare
Your organization now can align business realities and financial plans through one, unified performance management platform. Designed for healthcare organizations, Kaufman Hall delivers sophisticated planning, reporting, and decision support functions in a single solution.
Learn more:http://www.kaufmanhall.com/software
decision support & analytics
performance reporting
budgeting & forecasting
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capital planning
