The Devil is in the Details; Time-Driven Activity-Based Costing06/18/2018
In the United States, we are fortunate to have one of the best quality health care delivery systems in the world. Unfortunately, even in a country with an economy as prosperous as the United States, the access to this quality care is still a challenge for many Americans. While the quality in many ways is unmatchable at the international stage, the system itself has been consistently driving up the national deficit every year. The cost of care not only causes friction with access, but also the health and growth of the U.S. economy itself. Federal and State government contributions to Medicare and Medicaid rise sharply every year and many seem devoid of any long-term solutions to stop the momentum of the deficit. Some argue that the U.S. does not have a debt problem but instead that it has a health care costing problem. If costs were under control and not growing faster than the economic growth of the nation, the debt itself could be managed.
The health care system produces a large scale of homogenous products and services where the “price” of these are applied individually. But are generally not taken into consideration through the intricate combinations of pricing grouped services and indirect costs from patient to patient. The pricing structure may also vary for a number of reasons including brand name, market power and efforts to subsidize. There are standard definitions of cost that exist, but the manner in which these are interpreted and used vary widely across health care institutions. Perhaps in no other area of health services research is that old trope, “the devil is in the details,” more apt than in health costing analysis[1].
A hospital based in Grand Rapids, Michigan engaged in those very details by embarking on a time-driven activity-based costing (TDABC) project. In the article, Applying Time-Driven Activity-Based Costing to Metro Health’s Outpatient Clinic[2], Metro decided to begin this journey in their 12 outpatient clinics located throughout greater Grand Rapids. The project worked on the assumption that health care institutions do not appropriately assign cost to unique patient episodes that consistently bundle a group of unique services and products. Like many hospitals, before the TDABC project was initiated, Metro did not apply indirect cost to the services provided. TDABC lends itself to provide clarity into the ambiguous nature of those indirect costs as they are a challenge to apply on an individual basis.
The Metro Health TDABC project gathered costing information from finance, information technology as well as management and staff. These interviews produced five resource groups: Physicians, Physician Assistants, Medical Assistants, Receptionists and Occupancy. After identifying these groups, a cost per minute was assigned which could then more accurately be applied in a less generic way to the direct cost of patient services. These steps also led to the ability to apply these costs and cap them within their respective capacities. These capacities could then be analyzed by the number of encounters in a given clinic to see which is the most resource intensive and so on. With this knowledge, Metro Health could now determine the number of minutes required for each encounter or service.
The takeaway from this project revealed to Metro Health the value of moving from a traditional flat cost per office visit model to determining the true cost per visit based on complexity, time, resources and previously unrecorded costs such as telephone calls and prescription refills. This valuable model for more accurate costs per visit can also extend into the predictive and prescriptive realm once stored over time allowing organization to better understand the relationship between different costs incurred and their effect on patient outcomes.
With health care costs resting at the core of the rising U.S. deficit, projects like TDABC create the hope we need to arrive at a long-term solution to reduce and slow that momentum. If hospitals do not have accurate data on the costs for their products and services, how can they hope to find areas where they can be reduced? This type of analysis is critical in the journey to match the outstanding quality of healthcare in the United States, with financially solvent solutions that close in on that gap of access for so many Americans.
At Prominence, our team shares a passion for pushing the boundaries and challenging the status quo. This article referenced in this blog was written by a team member and published in Reuters. It illustrates that no matter what we do, we are working towards a better tomorrow. From optimizing processes to exploring new perspectives, we always seek improvement.
[1] Lawrance, W., & Williams, L. (2009). Health Care Costing: Data, Methods, Current Applications. 1-5.
[2] Clark, J & Sopariwala, P. (2017). Applying Time-Driven Activity-Based Costing to Metro Health’s Outpatient Clinic, Reuters.1-15.
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