TDABC model in Health Care Systems

TDABC model in
Health Care
systems
BUSINESS RESOURCE PLANNING SpA
Concepción, Chile, 2017
www.rps.systems
www.tdabc.org

PROBLEM
DESCRIPTION
• High rate of cost increase in
Health Care all over the
world.
• Public and Private insurers
have to cut benefits or
increase prices.
• Health care providers have
to contain cost.
www.tdabc.org - www.rps.systems

ROOT CAUSE?. Incentives are wrong !!
Examples from other industries:
- Construction: All prices are fixed
previously and payments are for
outcomes.
- Agriculture: Most of payments are
for outcomes (Ton, Kgs.)
This Producers are not hourly payed.

SOLUTION 1. New payment system, based on
Outcomes: Value-Based HealthCare (VBHC)

VBHC aims to contention of direct and Indirect costs. ¿What
tools can be used to support cost contention?
Types of Cost Examples Contention method Suggested
Tool
Direct or
Variable
(Measurable)
Drugs, Medical
services, Physician
fees.
(variable supplies)
Bill of Materials (BOM)
and Bill of Process
(BOP) standardization.
(Recipes of supplies)
ERP
Systems
Indirect
(Not
Measurable)
Staff, Assets and
Budget of fixed
expenses.
(Fixed resources)
Installed Capacity
planning and its fit
with Demand.
(Recipe of Resources)
Costing
Systems

Where cost
come from?
Taxonomy of
Accounting:
(Source: Top 7 trends in
Management
Accounting, Part 1 of 2,
by Gary Cokins,
Strategic Finance,
December 2013)

Where we are?: Costing Continuum / Levels of Maturity
(most companies are Level 5D and 1P)
Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins, published by the International Federation of Accountants, 2013

Robert Kaplan and Michael Porter insight…

SOLUTION 2. VBHC needs a new costing model.
Volume
costing
(≈1940)
INDIRECT COSTS (FC)
are allocated to
Production Volume
FC /
PRODUCTION
VOLUME
TDABC
Model
(2004)
INDIRECT COST (FC) are
allocated to Production
Capacity
FC / PRODUCTION
CAPACITY
(i.e. 1.000 hrs/mo.)
Average
Cost
Average
Cost
PRODUCTION
VOLUMECapacity Adjustment Used Capacity.
(i.e. 800 hrs/mo.)
¿Production Capacity? (It is not considered)

Volume Costing
does not allow to
plan the
“Resource
Recipe” that fits
Demand better

CONCLUSION: To go forward in VBHC it is
necessary to update Costing Model.
Fee for
Value
(VBHC)
Indirect
Cost
Planning
Direct Cost
Planning
BOM and BOP
Standardization
(ERP Systems)
Capacity
management
(TDABC Model)

¿Which countries have to adopt VBHC?

¿How many countries has entered to the road of
VBHC?

Our Solution: Web based TDABC model
Network Cost
Hospital Cost
Department Cost
Service Cost
Medical Bill Cost
Patient segment
Cost
Physician Cost
COSTOBJECTS

Comparative idle capacity, statistical analysis and
scenario simulations by each cost objects.

Healthcare providers have to update their costing systems in
order to support strategic decisions and keep on competitive

Business Resource Planning SpA
Applying TDABC model since 2007
(Documents described here can be
downloaded from our web site, at
Industries-healthcare section.)

APPENDIX: Numeric comparative example of a
patient with Appendectomy that uses 2 hours
of surgery room and 2 basic bed days.
Why cost planning is impossible using
veteran Volume Costing?

• Volume Costing (Absorption):
AvTC (Cost Object) = Variable Costs (VC) + Total Fixed Cost (TFC) Proportion
• TDABC Model:
AvTC (Cost Object) = Variable Costs (VC) + Cost of Capacity used
NOTE: Variable Costs (VC) do not show difference between both
methods. These costs are drugs or medical fees that are billed
separately from Clinical Bill. So, they are not included in
examples (AvTC: Average Total Cost)
Cost Objects: Services and Medical Bill.

1. Volume Costing: AvTC calculation concept under
Absorption method (for services)

Absorption Cost calculation method:
TFC = TCA + TCB +….+ TCN + TCSCC (All Costs Centers)
Where:
TCA-N = TFC * XA-N% (Absorption from TFC in productive Cost Centers)
TCSCC = TFC * Y% (Absorption from TFC of Support Cost Centers)
VC = Variable cost of Service or Medical Bill (measurable expenses)
QT = Total Quantity = Σ QT
A-N; Effective total production of all PCC.
QT
N= Q1
N + Q2
N +…+ Qx
N ; Effective Production from PCCN (“x” items)
AvTC (Service iN) = VCi
N + TFC*(Qi
N / QT
N) *[XN% + (QT
N / QT)*Y%]
AvTC (Medical Bill j) = ΣVCJ
A-N + TFC*(ΣQj
A-N / ΣQT
A-N) *[XA-N% + (ΣQT
A-N / QT)*Y%]

TFC is based on Fixed
Expenses from de past and
does not include Capital Cost.
TOTAL FIXED COST (TFC):
1,000,000 ($/month)
Productive Cost Centers
850,000 ($/month)
Support Cost Centers
150,000 ($/month)
Surgery Room:
Costs: 150,000 ($/month)
Sales: 300,000 ($/month)
Hospitalized Area:
Sales: 200,000 ($/month)
Surgery Price: $600 Bed-Days Price: $400
Absorbed Costs= 0.2%
6/3000*150,000
AvC= $300
Absorbed Costs = 0.2%
4/2000*100,000
AvC= $200
Total Services Sales:
1,200,000 ($/month)
Total Bill: $1,000
Absorbed Costs = 0.083%
1/1200*150,000
AvC= $125
Cost of Medical Bill = AvTC = 300 + 200 + 125 = $625
Absorption costing
calculation Example.

AvC changes with production volume because all TFC have
to be absorb on period Demand:
0
200
400
600
800
1000
1200
1400
1600
$ -
$ 20.000
$ 40.000
$ 60.000
$ 80.000
$ 100.000
$ 120.000
$ 140.000
$ 160.000
1 2 3 4 5 6 7 8 9 10 11 12
Bed-dayssoldbymonth
AvC($/Bed-Day)
Month
Bed-day AvC behavior according to Volume Costing
Bed-Days/Month AvC

2. TDABC applied to same case.

Calculation method on TDABC model:
TFC = TCA + TCB +….+ TCN (Execution and Direct Support Depts.) ($)
TT = TA +…+ TN ; Available Time for production in every Dept. (Hrs)
CCRN = Capacity Cost Rate in Dept. N: TCN / TN ($/Hr)
VC = Variable Cost of Service or Medical Bill (Measurable Expenses)
AvTC (Service iN) = VCi
N + tN*CCRN
Where tN is the time consumed by Dept. N for producing Service i.
Generalizing:
AvTC (Medical Bill j) = ΣVCJ
A-N + tA*CCRA + tB*CCRB +….+ tN*CCRN

Calculation
Example with
TDABC Model
TOTAL FIXED COSTS (TFC):
1,100,000 ($/month) (*)
Indirect Support Depts.:
150,000 ($/month)
Execution Depts.:
1,050,000 ($/month)
Direct Support Depts.:
50,000 ($/month)
Surgery Room:
Capacity: 1,600 (Hrs./month)
CCR = 100 ($/Hr.)
Admission, Billing and Collection
Depts.: 2,000 (Hrs,/month)
CCR= 25 ($/Hr.)
Time = 2 hours
AvC = 100 x 2 = $200
Time used= 5 hrs.
AvC = 5 x 25 = $125
Hospitalized Area:
Capacity: 800 (Bed-days/month)
CCR = 150 ($/day)
Time = 2 days
AvC = 150 x 2 = $300
Cost of Medical Bill = AvTC = 200 + 300 + 125 = $625
TFC is based on Fixed
Forecasted Budget and
includes Capital Cost.

Now AvC depends on Capacity, making its planning easier
because it can be annually compared with Demand.
0
200
400
600
800
1000
1200
-
20.000
40.000
60.000
80.000
100.000
120.000
140.000
160.000
180.000
1 2 3 4 5 6
CAPACITYINBED-DAYS/MONTH
CAPACITYINBED-DAYS/MONTH
YEAR
Bed-day AvC behavior according to TDABC
Capacity Demand AvC

APPENDIX CONCLUSIONS:
Volume Costing TDABC Model
Capital Cost Depreciation Only Depreciation + Alternate cost
of remaining Capital
General Expenses Past Values Projected Values
AvTC source Demand Capacity
Depts. Costing Productive and Support Indirect, Support and
Execution Depts.
AvTC Calculations Too fluctuant and subjective
because it depends on
Demand. It can’t be
managed.
Objective and very Stable
because it depends on
Capacity. It can be managed.
Visibility of Idle
Capacity
It does not allows It do allows

TDABC model in Health Care Systems

Recommended

Recommended

More Related Content

Similar to TDABC model in Health Care Systems

Similar to TDABC model in Health Care Systems (20)

Recently uploaded

Recently uploaded (20)

TDABC model in Health Care Systems