Costing and Managerial Accounting

Cost Accounting Evolves as Provider Needs Change

June 11, 2018 8:38 am

Current models are more actionable.

Christie Scanlon, a healthcare cost consultant with Scanlon Enterprises LLC, Charleston, South Carolina, offers advice on harnessing advanced costing models.

On using cost models to support value-based payment.  As payer payments shrink and providers take on more risk, many are turning to cost models to gain key business insights. “It’s important to understand patient-specific costs so you know what your cost level should be when you get reimbursed for a procedures or DRGs. Not understanding costs at the service line level is akin to not having a budget and trusting that things will ‘work out,’” Scanlon says.

Cost models also can help providers understand their costs to better prepare for payer negotiations. By using accurate data to identify average patient costs for DRGs, finance leaders can determine payment needs to protect their margins. “If a payer is not covering your costs, then that is not a good contract. However, there are cases where providers have little or no negotiating room with their big payers. In these cases, focus should shift to areas where contracts can be renegotiated or cost reductions can be made,” Scanlon says.

Put another way, cost models can support providers as they transition to value-based payment by helping them answer the following questions:

  • What level of resources (e.g., materials, labor, equipment) have been consumed to deliver patient care?
  • What are the resource costs for product and service delivery?
  • Are revenues covering costs?
  • What is driving these costs?

On today’s cost models.  Current cost models are more actionable because better provider data and more sophisticated vendor platforms are available, Scanlon says. For example, advanced costing models can use time stamps to account for different procedure lengths based on patient acuity and assign material costs via item master links.

Over the past few years, cost accounting systems also have become easier to use. “A lot of systems can be automated to use more enhanced EHR data we didn’t have before, so there is less human intervention to maintain the models,” Scanlon says. This means a broader, clinical audience can use the models to reduce variation and contain costs. “I’m getting much more buy in from physicians, chief nursing officers, and other clinical leadership,” she says. “Now that we can get more sophisticated cost modeling that ties to actual resource usage, service line profitability reporting is more defensible and easier to understand across the organization.”

Leaders also are using cost information differently—before patient care is delivered—to help clinicians make decisions. “This real-time cost-of-care information, combined with evidence-based care, can lead to the transparency needed before we can move the needle on decreasing the cost of care and delivering more value to our patients and communities,” she says.

On activity-based costing.  “Most organizations are moving beyond RCC [ratio of cost-to-charge] costing and are doing some level of activity-based costing,” Scanlon says. Often synonymous with relative value unit (RVU) costing, activity-based costing (ABC) is a more complex method of costing than using a simple ratio of cost to charge. Instead, ABC drives costs down to resources used or by equipment. From there, costs will be directly traced or will be estimated and allocated to patient or service level.

“There’s a lot more activity-based costing going on in health care than people realize,” Scanlon says. “It’s not as elusive or as hard as people think it is. Sometimes people overdesign activity-based costing, which can be a danger. You just have to know how to right-size [the model] based on what data you have and the health system’s needs.”

On building a foundation.  Beyond cost accounting software, the most important component of costing at the service line level is leaders who understand how to use the models, Scanlon says.

Having interfaces that automate data sharing between the pharmacy, materials management, surgical, and payroll systems also is important. These databases can help leaders trace direct patient costs in their departments.

On uncovering data problems.  One of the indirect benefits of cost models is that they often uncover data issues that need to be addressed, Scanlon says. “A client once said that implementing a cost model is like going through an audit, and as painful as I know that sounds, I think that’s a good thing,” she says.

On developing effective cost models.  “Don’t feel compelled to do it all at once,” Scanlon says, adding that it can be overwhelming for some organizations to adopt advanced cost models if they are new to costing. She suggests setting milestone over a 12-month period.

She also suggests working with what you have. “If you have data on OR time usage at your fingertips—and you likely do in your surgical system or EHR [electronic health record]—and you are not using the data in your cost models at the patient level, that can be a good place to start,” she says. The same holds true for supply cost data, which is available in the item master. By linking acquisition prices to the cost model, leaders can assign supply costs at the patient level.

Updating models regularly also is important.“Sometimes, people can let their cost models get a little stale,” she says. Beyond monthly maintenance and reconciliation, finance leaders should talk with clinical leaders at least once a year about new activities, supplies, and labor in their departments. Using automation to pull in costs of supplies or labor time also can help keep a model up-to-date.

On cost model value. “Think about cost models as clinical and operational tools, not just cost accounting tools,” Scanlon says. “Cost models are there for the end game, so think about your goals. You want to understand costs so you can improve processes and change behaviors and better serve your communities.”

Laura Ramos Hegwer is a freelance writer and editor based in Lake Bluff, Ill.

Interviewed for this article:

Christie Scanlon, CMA, is a healthcare cost consultant with Scanlon Enterprises LLC, Charleston, S.C., and is a member of HFMA’s Tennessee Chapter.


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