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Like many other health systems, Adventist Health, a faith-based, not-for-profit, integrated healthcare delivery system serving communities in California, Hawaii, Oregon, and Washington, expects to see operating revenues reduced over the next few years and, with them, its ability to cost-shift and subsidize programs. At the same time, Adventist wants to focus on improving quality, and a major thrust of that initiative is identifying and removing variation in care delivery across the system’s 19 hospitals, 14 home care agencies, and 150 clinics.
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Both of these developments helped drive Adventist’s decision in 2011 to move to a costing system that would better reflect actual costs than the ratio of cost to charge (RCC) system it had been using, says Paul Selivanoff, CPA, vice president finance, St. Helena Region.
“RCC assumes that you have the same markup on all items in the same department, and clearly that is not true, has not been true, and probably will be less true going forward as we price more aggressively.”
Stopping short of a full-blown cost accounting system, Adventist chose a multiple relative value unit (RVU) methodology, a hybrid sometimes called activity-based or procedural costing that is easier and more affordable.
To implement multiple RVU, the health system expects to spend between $3.5 and $4.5 million, which includes:
“It seems reasonable,” Selivanoff says, “for a company that has more than a billion dollars of net revenue to spend that much for knowledge of what it costs to do business at the patient level.”
At Adventist, two factors have led to the implementation process taking longer and being more complicated than anticipated. First, Adventist decided not to bulk up corporate project staff only to have to cut back sharply during the maintenance phase. Sometimes, bringing too many people into the process too quickly can cause false starts, Selivanoff says.“So we chose to use a smaller group and take our time, allowing the organization to address the concerns that arose at a steadier pace.”
This means that three to four people on the project team are developing the RVU system for all 17 hospitals. This leads to the second factor that is delaying implementation: Each of those hospitals has unique issues, “which restricted our ability to use a one-size-fits-all approach,” Selivanoff says.
It’s been an educational process for both the hospital CFOs and the corporate leadership group, he says. The lack of consistency in the way individual hospitals use what is ostensibly the same financial system (same general ledger, same payroll, same chargemaster) meant that each implementation of the costing system at each hospital had to be customized.
“When we actually went out into the field, it turned out to be not so much an enterprise system as a regional system. Separate instances of the same master software had been installed at each hospital. So even though there was a standard chart of accounts and standard job codes, each hospital had made changes that moved them away from the standard.”
For example, some hospitals chose to package supplies in a catch-all charge that encompasses a particular service, while others chose to itemize. So, Selivanoff explains, “You’re not going to get comparability when you try to do any type of costing analysis because your costing system takes all of your expenses from the general ledger and applies them to all your charge codes. Some hospitals don’t have those charge codes or are using them in a different way.
“As a result, we’ve had to go through and do a lot of standardization and reconfiguration before we could proceed, and that’s taken time.”
The need to reconfigure systems poses its own challenges, Selivanoff says. What happens when a hospital that has been buying supplies for years under one code, which is reflected on its purchase orders, suddenly has to change that code? “Now the hospital has credits on the old account but expenses in the new account. How do you deal with that?”
In the next year or two, Adventist is hoping to replace all of its financial systems, moving to a true enterprise model, in which all hospitals will run off a single instance and configuration of a vendor’s product and be in the same database.
“That should ensure a lot more consistency because hospitals won’t just be able to add accounts or departments or job codes on their own; those things will have to be added at the master level, where they will automatically be available to all the hospitals.”
Wouldn’t it have been easier to introduce the enterprise system before the new costing system? Selivanoff laughs. “Absolutely, but we couldn’t wait for the data—we need it now.”
Another stumbling block has been the lack of IT resources, which have been tied up with the implementation of an EHR and other clinical and peripheral systems that, unlike cost accounting, have meaningful use dollars attached.
So even though Adventist has enough accountants, according to Selivanoff, “We’ve had some situations where we’ve not been able to move data from one system to another as quickly as we’d like. There’s a lot of traffic out there, and you have to wait your turn.”
In addition to the complexity of Adventist’s current processes and systems, and the many demands on IT, there are political issues to deal with: people who are responsible for the general ledger or for purchasing, who have come to like things the way they are.
Far from being discouraged, however, Selivanoff believes that a coming together of organizational executive leaders and cost accountants—what they’re interested in and what they need to do a better job—is not far down the road. As Adventist comes to rely more and more on cost accounting, he says, it will be up to the cost accountants to say, ‘Hey, we can’t give you more accurate data because you’re not giving us the data we need from that purchasing system or general ledger. If you guys will clean up the GL, we can give you what you need.’ Then there will be alignment of priorities.”
This development is inevitable, he says, because the new cost accounting system will quickly demonstrate its value by helping hospital leaders make better decisions, such as:
One feature of the new costing system that Selivanoff is especially excited about is its ability to integrate medical records, financial systems, and quality data. Ultimately, this will make it possible for Adventist leaders to compare outcomes at different cost levels with the standard of care in the community and home in on best practices.
An example is hip replacement surgery. One Adventist hospital, hypothetically, may average $60,000 in costs while another hospital averages $30,000. “By drilling down, we can compare average lengths of stay, surgical techniques, types of equipment, and post-op care in both facilities, along with infection rates and outcomes in terms of patient functionality.
“If it turns out that the two hospitals are using different processes to generate similar outcomes, then we would want to see the hospital that is spending $60,000 adopt the model used at the hospital spending $30,000. On the other hand, if we find out that patients at the less expensive hospital generally have poorer outcomes, we can dig deeper to identify which parts of the process used at the more expensive hospital are influencing outcomes for the better and make that the standard.”
Well into its journey, the system spent a little more than a year implementing RVUs, and will be rolling the results out to hospital CFOs in 2013. Adventist Health has two pieces of advice for other multi-hospital systems pursuing a new cost accounting system. From a leadership perspective, says Selivanoff, it’s important to have one person at a very high level—in this case the CFO or COO—hold on to the vision and drive the process.
“There is a lot of distraction and noise in a large organization, and it’s helpful to have a stakeholder responsible for keeping things moving in the right direction through all the various phases.”
On the technical level, a major key to success is to know your data—what you have and, as important, where you have it—before you start. This is particularly true if the different units of a health system are not all on the same page, either using different systems or using the same systems differently.
For example, he says, if one hospital uses insurance code 3000 for Medicare and another for an HMO, or if one hospital puts the DRG code in this field and another somewhere else—and you don’t know about the discrepancies—then when you try to bring all that data together and conduct some analysis, or create some standard rules for how data are supposed to flow, it won’t work. And you’re back to customizing rather than standardizing.
Categories of data to focus on include:
Selivanoff likens the entire process to climbing Mt. Everest. Before you get to the base camp, he says, you should research the weather patterns, surface conditions, equipment track records, and the experience levels of your fellow climbers. “I think that a thorough walk-through in advance can help hospitals identify and bypass many of the problems and put in place a strategically sound implementation plan.”
Not that failure means falling off a cliff and dying, of course. But success can make you feel like you’re on top of your organization’s financial situation, with the best view around of what high-quality care looks like and costs.
Lauren Phillips is president of Phillips Medical Writers, Ltd., in Bellingham, Wash., and a frequent contributor to Strategic Financial Planning (firstname.lastname@example.org).
Interviewed for this article: Paul Selivanoff, CPA, is vice president, finance, St. Helena Region, Adventist Health, Roseville, Calif. and a member of HFMA’s Northern California Chapter (selivaPG@ah.org).
Access Related Presentation: Creating a High-Performance Cost Accounting Strategy
Access Related Q&A: Moving Toward Cost Accounting
Publication Date: Thursday, February 21, 2013
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