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ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING

ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING/ 2

Healthcare's new value-based business model requires that providers have reliable patient-level performance analytics to support strategic decision making.

INTRODUCTION The role of cost accounting in healthcare

Population Health

Management

ACOs

Pay for Quality

Capitated Payments

Shared Risk

Which service lines and arrangements are

contributing to strong financial performance?

What are the most significant cost drivers?

Detailed cost accounting provides the foundation necessary to assess and understand operating results.

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The time and resource-intensive process • Cumbersome costing applications• Time-consuming to maintain and update

CHALLENGES TO EFFECTIVE COSTING Resource-intensive process and data issues

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)

Achieving accurate and effective costing requires addressing several common challenges:

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.

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DEFINING THE PROCESS Overcome challenges with the right process for you!

Overhead Allocations

Cost Factor Workbooks

Cost Assignment

Allocations to Patient

Cost Summary

Derive Product Lines Estimate Net Revenue

ENCOUNTER

Clinical, Demographic and Financial Data by

Patient Encounter

ENCOUNTER CHARGE AND

ACTIVITY DETAIL

Encounter Charge and Activity Item Detail by

Date of Service

CHARGE SUMMARY

RVUs, Cost Per Unit stored by Department

Charge Item

COST SUMMARY

Department Account Level Costs summarized

into Cost PoolsFinancial

Patient Detail

Reference Tables

• Service Line Trends• Population Analysis• Payer Trends• Physician Analysis• Strategic Modeling• Workload Projections• Ad Hoc and

distributed reporting

REPORTING

INPUTS OUTPUTS VALUE-ADDED PROCESSING

Streamline data validation and reconciliation tasks.

Maintain cost detail across all levels of departmental and encounter reporting.

Ensure transparency across charge item costing and allocations modeling.

Leverage dynamic ad hoc and distributed reporting capabilities.

Requirements:

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COSTING Typical costing methodologies in healthcare

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.

Relative Cost to Charge (RCC)

Relative Value Units (RVU)

Activity-Based Costing (ABC)

• 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

• 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

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3 PRACTICAL APPROACHES FOR IMPROVING HEALTHCARE COSTING

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.

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1 Build in sufficient cost detail to maximize flexibility

2 Improve costing accuracy using activity and charge item costs 3

Adjust supply costing by assigning costs at an encounter level

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ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING / 9


Avoid highly summarized models that provide limited visibility into cost drivers.

Raises the question.... Variable cost of $3,542,531? Which costs are included? Labor? Drugs? Medical Supplies?

Sample Service Line Report:



• Cost categoriesthat map tofamiliar financialgroups

• Detail that isretained acrossfinancial andpatient datatables

Instead implement:

Medical Supplies

Implants

Pharmacy

Patient Care Labor

Purchased Services

Indirect Facilities

Medical Supplies

Implants

Pharmacy

Patient Care Labor

Purchased Services

Indirect Facilities

Medical Supplies

Implants

Pharmacy

Patient Care Labor

Purchased Services

Indirect Facilities

Medical Supplies

Implants

Pharmacy

Patient Care Labor

Purchased Services

Indirect Facilities

Consistent Detail

COST SUMMARY

Department

ENCOUNTER CHARGE DETAIL

CHARGE ITEM SUMMARY ENCOUNTER

Encounter/ Charge Item

Department/ Charge Item Encounter

Financial and Patient Data Tables

Costs Mapped

Cost Assigned

Costs Derived

Costs Summarized

Costing Processes and Data Flow

Avoid highly summarized models that provide limited visibility into cost drivers.

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2 Improve costing accuracy using activity and charge item costs

Avoid highly simplistic cost modeling using cost-to-charge ratios.

• Costing at the activity andcharge item level usingappropriate cost assignmentmethods

• Intuitive costing models withtransparent calculations

• Workflows that are efficientand repeatable

Instead implement:

15

15

60

1

1

$8,500

$7,500

Charge Item #1

Charge Item #2

Activity Item #3

$100,000 $85,000 $120,000 YTD Financial $s

Methodology RVU DIRECT COST TIME-BASED

LABOR VAR EXP SUPPLIES DEPT: 1234 – CATH LAB YTD JUNE 2012

Manager Input and Review

Decision Support Approval

Online Input and Review of Activity and Charge Item Costs:


KEY: Address costing needs on a charge item level. Assign costs on an encounter level.

Direct cost for fixed priceitems

Reverse markup for variablecharge items

RVUs for remainder of costpool

$10,000

$2,000

5

Charge Item #1

Charge Item #2

Charge Item #3

$100,000 $80,000 $120,000 AMOUNT ASSIGNED

Methodology MARKUP RVU DIRECT COST

IMPLANTS: TOTAL COST $300,000 DEPT: 1234 – CATH LAB YTD JUNE 2012

Manager Input and Review

Decision Support Approval

Online Input and Review of Charge Item Costs:

10 Charge Item #4

3 Adjust supply costing by assigning costs at an encounter level

Implement a combination approach:


KAUFMAN HALL’S UNIFIED PERFORMANCE MANAGEMENT SOLUTIONS

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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.

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