As health systems increasingly transition to a value-based care model, the financial strains and uncertainty of COVID-19 have placed more urgency on cost management. More than ever, organizations need a costing solution that helps them understand the true value of their services. With the right next-generation activity-based costing (ABC) tool, health systems can access the detailed data they need to lower the cost of care, automate costing activities, and reduce administrative costs while preparing for the mounting intricacy of the post-pandemic setting.
Activity-based costing meets healthcare’s complex COVID-19-era costing needs by addressing four big challenges:
1. Data management.
2. Scalability.
3. Ongoing maintenance.
4. Adoption.
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While healthcare’s move from a fee-for-service to a value-based care (VBC) model has been taking hold over the past decade, the financial strains and uncertainty of COVID-19 have placed increasing urgency on cost management. As health systems emerge from the acute phases of the pandemic, financial recovery rests on understanding the true cost of their services.
Critical cost insights in the post-COVID era will include the following:
An effective costing solution is a critical asset in the newer payment landscape, in which increasing capitation will place more importance on the strategic use of resources to deliver quality care. Yet, building the right healthcare costing tool comes with significant challenges that only advanced and expert-driven technology can resolve. Organizations can best prepare for the inevitable changes under VBC with an activity-based costing (ABC) solution that delivers detailed and actionable cost data across the analytics environment, supporting service-line reporting, contract modeling, strategic decision making, and clinical process improvement.
Healthcare financial experts with frontline experience (such as building homegrown ABC systems), who understand the challenges, politics, and complexity of costing, point to three critical solution competencies:
Healthcare organizations need a data management strategy that involves communication across source systems, eliminating silos, and integrating cost data with organizational analytics. As the standard way to analyze cost data, most health systems will either have a traditional costing system or rely on an analyst using Excel to compile general ledger (GL) costs and combine them with charge code data. These approaches can be a viable costing solution to—a point.
With limitations including manual entry, lack of granularity, and insufficient data capacity for today’s increasingly digitized healthcare industry (e.g., between hundreds of thousands to millions of rows of patient activities each month associated with cost) and the more robust criteria for ABC, old methods based on charge codes, with hundreds of analyst hours required, can’t meet today’s needs. In addition to taking excess time, traditional approaches provide the wrong answers to the wrong questions. Costing based on charge codes results in an “averages of averages” that doesn’t reflect the true consumption of costs. Data captured each day by modern EMRs enables measuring true consumption with metrics including staff time, nursing minutes, and detailed supply and drug utilization. Leveraging EMR data in costing, however, requires a robust new costing model to support the new way of thinking.
Data management technologies that emerged in 2012 through powerful cloud and computer technologies offered enhanced scalability, enabling health systems to apply ABC to their operations and lay the groundwork for next-generation costing systems. Since then, newer, more sophisticated systems, such as the Health Catalyst® CORUS® Suite, have the advanced capabilities to not only enable ABC but provide an easy interface to validate and govern the massive amount of colliding financial and clinical data. These former systems were based primarily on billing data (charge detail). They used the ratio of costs to charges (RCC) or relative-value units (RVU) methodologies (pure allocation methodologies based on broad assumptions) in the place of more detailed direct and indirect costs. In this way, an advanced costing system gets to the cost per activity and true patient profit-and-loss statement, providing the credibility that was missing from older costing systems.
With more credibility, clinical and operational team members and leaders will more likely accept the premise of the data. From a clinician perspective, data based solely on charges doesn’t appear relevant to their work or patients. Direct and indirect costs, cost per activity, and actual patient profit-and-loss statements, however, more effectively engage clinicians to make cost-effective practice changes, as they understand exactly how their choices impact the cost.
Credibility enables ABC to drive true change across an organization, furthering operational goals and outcomes improvement-related efforts to lower cost, become more efficient, and reorganize around service lines.
A next-generation costing system has the following advanced data management capabilities:
One of the harder challenges of costing is maintaining a solution that combines many different data sources as they provide the translation. Location codes in one system for an operating room look completely different than a clinic location in another database, making mapping them to the associated GL cost center essential. Due to the challenge of storing voluminous detailed EMR data, older costing systems based on charges got around mapping by relying mainly on the detailed charge data from a billing perspective. Because an advanced costing system is more prone to data quality issues, given the size and scope of the input data, it has pre-built checks for the most common problems.
In general, the primary costing maintenance steps are as follows (Figure 1):
A more straightforward maintenance process, with the right guardrails, makes it easier to create new costing intelligence at the grain necessary for it to be meaningful. Some people believe an advanced ABC system is more difficult or cumbersome to maintain than older solutions, which isn’t always the case. Older solutions require users to maintain RVUs by charge code or rely on charge amounts that do not reflect the true cost of providing care. Maintaining charge codes is no longer needed when calculations, such as time in room, are done procedurally by subtracting a room-out from room-in time field within a line of SQL code. The calculation is free of the bias possible in conversations about the often highly subjective relative value or relative cost between two charge codes.
An ABC solution, such as CORUS, has progressed to the point where one person can maintain the system in a few days each month and can regenerate years of historical data in a matter of hours. Older solutions—if they offer the service—would require months of effort from many team members to test and apply updated logic. The architecture of newer costing systems frees up analysts’ time from maintaining outdated methodologies and hunting for data to maintaining the translation between different data silos.
Positioning a costing system for healthcare organization adoption is a critical area of strategy. Primarily, financial teams must present costing system output so clinical and financial leaders will accept the numbers. The strategy that helped develop the tool may not work as well for adoption, so financial teams need to think about how they approach leadership specifically.
A next-generation costing system strategy must aim for organizational buy-in during development, not only at the time of rollout. Users and key leaders are more likely to accept an end product when they’ve been consulted in its development. Costing systems developers must approach each party’s concern (e.g., clinical, IT, financial). CORUS, for example, can show these different perspectives and get the three groups on the same page, speaking the same language.
The example in Figure 2 for an operating room cost center shows the allocated dollar amount from the GL (agreed on by finance), the driver volume of 75,684 minutes as calculated from the EMR surgery module (code signed off on by IT/finance/clinical), and the cost per driver, which is applied to each patient in the costing period.
Widespread buy-in positions the costing system as the ultimate source of financial truth and enables different parties to sustain communication with each other, as clinical, IT, financial, and other departments don’t always naturally collaborate.
By adopting a next-generation costing tool, organizations can leverage ABC to drive financial and clinical outcomes improvement like these success stories:
As increasing digitization, the continuing shift to VBC, and new complexity amid COVID-19 promise to drive growth in and demand for health data, today’s healthcare organizations need a costing solution that can keep up with the data and meet associated challenges. With the right next-generation ABC tool, health systems can access the detailed data they need to address the challenges of lowering the cost of care, automating costing activities, and reducing administrative costs, particular as they face new financial strain associated with the pandemic. Finally, organizations can then pass those savings along to patients.
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