Introducing a Road Map for Advanced Cost Accounting

The appeal of a road map is easy to understand.

A good road map gets you exactly where you want to go while orienting you to where your destination fits into the big picture. That describes health care’s first road map for advanced cost accounting, the result of a collaboration between HFMA and Strata Decision Technology. The HFMA-Strata L7 Cost Accounting Adoption Model, which is being made available at no charge to all healthcare providers, enables hospitals and health systems to leverage their cost accounting systems in strategic ways.

In HFMA’s early Value Project research on business intelligence, conducted in 2011, our provider survey found that many hospitals and health systems still relied on traditional cost accounting methods, such as ratio of cost to charges (RCC). The continued prevalence of RCC, even as value-based payment began to make inroads, contributed significantly to the healthcare industry’s difficulty in accurately estimating the costs of patient care.

RCC is the equivalent of using a blunt force object when precision is required. It doesn’t capture enough specific costing, reflect time studies, or appropriately handle indirect costs. Frankly, it is just a crummy method. That’s one reason why RCC is equated with Level Zero in the L7 Cost Accounting Adoption Model.

Most healthcare finance leaders understand the limitations of RCC by now. But there is little guidance about cost model components or the scope of costing for those who are venturing beyond RCC to advanced cost accounting methods, such as time-driven and activity-based costing.

Cost accounting needs vary, depending on where an organization is on its value journey. In other words, health systems that are managing population health in a comprehensive way will want to cost out all services provided to patients and members, both within and external to their organizations. They have very different needs than organizations that are interested in costing only at the hospital level, or costing for hospitals and physician groups.

That’s where the L7 model comes in. It creates a road map for the actions required to ensure that a provider organization’s cost accounting approach meets its strategic needs. The model can also be used to benchmark capabilities against peers. The L7 model is uniquely contemporary. It’s built on the premise that provider organizations are all over the map when it comes to both their ability to deliver care across the continuum and their willingness to assume risk for the total cost of care. The L7 model meets organizations where they are and provides a road map for building the cost accounting capabilities to get them where they want to go.

HFMA is proud to collaborate with Strata on this important tool for helping healthcare organizations improve their ability to manage the total cost of care and deliver improved value to patients and other care purchasers.