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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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ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING/ 3
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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ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING/ 4
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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ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING/ 8
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
1 Build in sufficient cost detail to maximize flexibility
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:
ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING / 10
1 Build in sufficient cost detail to maximize flexibility
• 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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ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING / 11
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:
ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING / 12
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:
ADVANCED COSTING TECHNIQUES TO IMPROVE SERVICE LINE DECISION MAKING/ 13
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.