Bryan R. Wiggins

A costing methodology that complements healthcare’s landscape—current and future—requires eyes on the big picture, as well as hands-on data details. 

The key is perspective. Your organization’s well-being depends on both a view of the marketplace and a vision of alignment between your care delivery protocols and financial bottom line. Zooming in, you can see the need for cohesiveness within your organization to ready it for change, as well as the importance of complete, accurate, and detailed data. 

To gain a marketplace view, organizations must understand changes in payer mix, reimbursement models, market integration, and patient expectations. Comparative analytics that show variability in the cost to deliver care across your network are critical. This is invaluable for conversations between clinical and financial teams, especially when the teams meet to discuss outcomes equivalency, care cost-effectiveness, and how to reduce clinical and financial variability. Such discussions will rely on facts in the underlying data that accurately represent the components of care delivered and associated costs. The data will also enable realistic comparisons while achieving credibility with the clinical team. For example, in an orthopedic procedure, data related directly to surgery will need to be separate from data related to follow-up. The granularity of the data yields insight for questions, analysis, agreement, and decision-making. 

The process described above represents a cultural shift in how to manage care delivery. Although providers cannot focus on finances at the expense of care quality, they must pay more attention to their costs. As such, an effective costing solution can be a tremendous catalyst for improving operating results. For your organization’s well-being, aim to establish an economically efficient care delivery process so that all service areas may prosper.

Here are some key steps for creating effective costing capabilities.     

Step 1: Begin With the End in Mind

Start by aligning your costing initiatives to the organization’s strategic goals. This requires collaboration with the finance, clinical, operational, and technology teams. To that end, you must align priorities, examine information sources, research materials and tools, and revise or define processes. Most importantly, you need to manage expectations. Starting with the end in mind ensures resources are focused on the right targets.

Typically, the development of the costing methodology starts in the hands of the finance team. However, for initiatives to stick, executive sponsors must lead the way. The entire staff will be affected, so although wide collaboration in planning is necessary, project success will depend on senior leaders’ acknowledgment of its significance and their engagement. Executive sponsorship at the start motivates cooperation from all stakeholders.

Step 2: Assessment: Where are We Today?

Next, assess your current capabilities. Take an accounting of a cost solution’s four essential components: data, staff, tools, and processes.  

Work across teams to evaluate the quality and completeness of current data. Do you have a governance process in place to keep data consistent? Are your data complete? Will they need to be enriched, or will new sources need to be considered? You should document dependability and comprehensiveness, as well as weaknesses and gaps. Take the same approach in assessing staff, business processes, and technology.

With the assessment drafted, meet with leadership for review and acceptance, and build consensus among teams. Only with a common understanding can goals be set and achieved.

Step 3: Forward Thinking: Where Do We Want to Be?

A view of your costing methodology’s future state will emerge from the finance team engaging with clinical and operational teams. You should set goals for consistently understanding costs across the system, addressing direct patient care, as well as overhead and administration. Align clinical and business processes, data governance, purchasing and supply-chain practices, and all other cost-originating elements.

It’s important to plan carefully but remain flexible. Your current environment and access to data will help determine the model(s) you employ. You’ll likely leverage a series of models that allow you to drive cost visibility based on the care provided and the tools available, e.g., one for the acute care setting, another for physician practices, and a third for home health. Each model may require unique data based on specific requirements. Having strong data governance will foster a common understanding across your organization.

Your assessment should inform but not portray the solution; don’t allow the identification of strengths and weaknesses to limit your goals. Instead, apply the assessment knowledge in decision-making about your goals. As you use costing models over time, your understanding of the underlying data will evolve. Your model may change as a direct result of data governance or cost-reduction efforts. 

Moving From Concept to Action

With your model(s) in place, leadership must remain engaged through implementation; success is predicated on operational teams’ buy-in and use of the information to target cost improvement. Keep in mind that no two implementations look alike—choose a service line or area that needs prompt attention rather than tackling all costs in every facet, and build out from there. The process is iterative; one solid costing model guides the next one.

Both big-picture and granular views will aid in reporting at the enterprise-wide areas, as well as the service-line areas. Capturing both views is instrumental. At health systems that Grant Thornton LLP has assisted, our understanding of the unique challenges pointed to customized implementations. Whether leveraging relative cost to charge (RCC) or relative value units (RVUs) in conjunction with some form of activity-based costing (ABC), your success depends on agreement on the formula and methodology deployed to achieve your goals.    

Grant Thornton’s solutions-focused professionals can help uncover today’s status and discover your organization’s potential to meet tomorrow’s challenges. To learn more, visit grantthornton.com/healthcare.


Bryan D. Wiggins specializes in helping organizations evaluate, plan, and execute large-scale, technology-enabled transformational initiatives. A principal in the Grant Thornton LLP Technology Solutions practice, he focuses exclusively on consulting with healthcare and life sciences companies. He can be reached at +1 (513) 345-4630 or bryan.wiggins@us.gt.com.

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Publication Date: Tuesday, November 29, 2016