One of the seminal challenges of our healthcare profession is to measure actual costs in real time. All payers (e.g. the Centers for Medicare & Medicaid Services, employers, consumers/patients, etc.) are willing to pay for healthcare services based upon our real costs with a reasonable margin; however, our inability (or now unwillingness) to do so is leading to reference-based pricing by payers and a "take it or leave it" approach that is frustrating for everyone concerned.
A better approach is to embrace the tools and techniques available to look at real direct/indirect, fixed/variable costs in real time so that not only can we see what they are, but so we can manage and contract for them in a more transparent and dynamic way.
Cost accounting has come a long way: from the rudiments of capacity determination (costs calculated based upon the percent utilization of a cost center) to direct costs (costs associated with a specific service or production) to activity based costing (ABC) that accounts for indirect costs (costs allocated to all services/productions such as administration, utilities, overhead etc.) to time-driven, activity-based costing that takes into account direct/indirect costs over the continuum of a service or production. This concept was introduced in the November 2004 issue of the Harvard Business Review and updated for healthcare in the November-December 2014 edition of the Journal of Healthcare Management by none other than Robert S. Kaplan and Steven R. Anderson, who introduced the concept of ABC decades earlier.
They stress that costs should be measured over the continuum of care and that isolating costs can not only lead to distortions but can paradoxically lead to higher costs.
Take, for example, a project recently led by Eugene Christian, M.D., chief medical officer at Carolinas Medical Center in Charlotte, North Carolina. He was working with the total hip replacement unit that was using bupivacaine for continuous/episodic femoral/sciatic nerve blocks post-operatively. The project decided to try liposomal bupivacaine, a longer-acting version that had greater lipid penetration and cost significantly more. As a result of this change, the hospital was able to significantly reduce costs in: anesthesia charges, falls, VTE (due to earlier ambulation), elimination of knee immobilizers and less opioid use. The length of stay also decreased by 20 percent to 25 percent.
Robert Kaplan has demonstrated in a number of healthcare projects in the greater Boston area that hospitals can:
- Replace higher cost practitioners (e.g. physicians) with advanced-practice nurses (APNs) and physician assistants (PAs)
- Replace lower cost APNs and PAs with e-health platforms/solutions
- Replace steps such as triage in the emergency department with value-added steps such as medical screening exams
- Replace higher cost practitioners (e.g. surgeons who cost ($12/min) with scribes who are certified coders ($.80/minute) to produce more timely documentation that generates higher revenues
- Reduce or eliminate idle time
- Reduce or eliminate unused capacity
- Serve larger volumes of people with existing capacity
These projects demonstrate the importance of looking at all costs over the continuum of care and not isolating them into departmental or budgetary silos that inadvertently adversely affect the total cost of care.
Obviously, having clinical/business analytics to provide real time cost accounting information to all relevant providers, payers and managers with decision support alerts is essential to actively manage costs when it can do measurable good. The days of retrospective cost reports are gone for anyone who wants to compete for narrow/tiered network referrals by large employers and payers. Finally, it will be impossible to contract for services with payers and healthcare plans without a reliable way to calculate potential margin in advance based upon real costs and to negotiate dynamic contracts that modulate over time based upon mutually agreed upon variables.
Time-driven, activity-based costing is here to stay, and with good analytic tools readily available, there is no reason to hold on to antiquated cost accounting techniques that inhibit our ability to provide high quality/low cost care.
Jonathan H. Burroughs, M.D., is president and CEO of The Burroughs Healthcare Consulting Network. He's also a certified physician executive and a fellow of the American College of Physician Executives and the American College of Healthcare Executives.