Activity-Based Costing in Healthcare During COVID-19: Meeting Four Critical Needs

Activity-Based Costing in
Healthcare During COVID-19:
Meeting Four Critical Needs

© 2020 Health Catalyst
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Activity-Based Costing During COVID-19
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:
Reliable understanding of an organization’s
services’ impacts on patient outcomes.
The tools to negotiate payer contracts as
well as understand and adapt to the impact
of new and changing pricing schemes.
Disparate data sources including claims,
clinical, cost, and geospatial data to make
intelligent strategic decisions (e.g., make
versus buy, capital planning, mergers and
acquisitions, etc.).
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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.

Meeting the Top Challenges of Building an
Effective Healthcare Costing Solution
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:
Data Management and Scalability
Ongoing Maintenance
Adoption
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Healthcare organizations need a data manage-
ment 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 of manual entry, granularity, and
insufficient data capacity for today’s increasingly
digitized healthcare industry 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 do not 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:

Applies logic every month, ensuring all
patients are costed:
Older costing systems account for only
inpatient cost and lack ambulatory
data, excluding all facility users who
aren’t admitted to a hospital.
A newer system incorporates
ambulatory data and ingests all the
information from the patient journey—
profit and loss for the whole stay—that
influences cost (e.g., how long a
patient is in one room).
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Can grow with an organization’s currently
unknown costing needs over time:
For example, just basing costing needs off of
charge codes or simple operational data won’t
suffice in the future when the industry looks for
real-time locating systems (RTLS) data.
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Leverages a common platform for all data
(e.g., a cloud-based platform such as the
Health Catalyst® Data Operating System
(DOS™):
The first step in accurate costing is to have
a data warehouse to bring in data from
multiple different sources and a means of
capturing information beyond the EHR
(from the patient bedside to outpatient and
virtual services, wearable sensors, etc.).
Historic costing solutions have been limited
to one or two data sets.
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Reconciles detailed costing output to
monthly and yearly financial statements:
Anchoring to a source of truth is essential
for trusting and accepting the cost results.
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Positions organizations to measure and
look for the most critical data for their work:
Various technology captures a lot of data
about each patient, but accurate costing
only needs certain elements.
Advanced costing sifts through massive
data sets for those critical pieces of
information, forcing organizations to
identify the source of truth for each set of
metrics and standardize around it.
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Calls out inefficient areas in a health
system (e.g., determining if one operating
room is more efficient than another):
Applying the same costing principles to
different places in the organization
performing similar tasks—down to cost
per minute and cost per visit—highlights
efficiency and opportunities for improve-
ment in high cost/low throughput areas.
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Identifies data quality and document-
ation problems:
These problems include process
issues at the point of care; identifying
them helps standardize workflows by
addressing processes that aren’t up
to organizational standards.
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Shows ongoing performance, eliminating
the need for one-time cost analysis:
For example, understanding the cost at
an organization of a procedure is a
historically time-intensive, manual
process (due mainly to the time it takes
an analyst to hunt and gather data).
When organizations calculate
performance data on an ongoing monthly
basis, they don’t need to rely on manual
analysis to calculate each procedure.
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Ongoing Maintenance
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 data-
base, making mapping them to the
associated GL cost center essential.

Ongoing Maintenance
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.

Ongoing Maintenance
In general, the primary costing maintenance
steps are as follows (Figure 1):
1. Pre-cycle source data quality and
validation checks (known as pre-checks).
2. Executing or scheduling the cost engine
to run.
3. Reviewing and reconciling the resulting
output compared to the GL.
Figure 1: Three primary costing maintenance steps.

Ongoing Maintenance
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.

Ongoing Maintenance
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.

Ongoing Maintenance
The calculation is free of the bias possible
in conversations about the often highly
subjective relative value or relative cost
between two charge codes.

Ongoing Maintenance
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.

Ongoing Maintenance
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.

Adoption
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.

Adoption
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.
CORUS, for example, can show these
different perspectives and get the three
groups on the same page, speaking the
same language.

Adoption
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.

Adoption
Figure 2: An operating room cost center.

Adoption
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.

Healthcare Activity-Based Costing Drives
Better Financial and Clinical Outcomes
By adopting a next-generation costing tool,
organizations can leverage ABC to drive
financial and clinical outcomes improve-
ment like these success stories:
Activity-based costing and clinical
service lines team up to improve
financial and clinical outcomes:
New generation activity-based
costing accelerates timeliness of
decision support:

Activity-based costing and clinical service lines team up to improve
financial and clinical outcomes:
When an academic medical center recognized
the common denominator to addressing threats
to sustainability was fully understanding and
effectively managing costs, it leveraged an
advanced costing solution to implement ABC.
This initiative delivered detailed and actionable
cost data across the analytics environment and
supported service line reporting and clinical
improvement, helping the organization drive
cost savings and improve clinical outcomes.
Initial improvements included $3 million cost
savings.

New generation activity-based costing accelerates timeliness
of decision support:
In healthcare, the timely delivery of patient-activity level
cost metrics to clinical, financial, and operational
leaders is critical. These insights allow the organization
to respond to internal and external shifts and challenges
to positively impact financial performance without
negatively impacting patient care and experience.
An academic medical center implemented an analytics-
driven cost management system and achieved a 50
percent reduction in the time needed to complete
month-end close, allowing many months of data to now
run simultaneously and providing a foundation for a new
data-driven governance structure.

A Costing Solution for COVID-19-Era
Healthcare Challenges and Beyond
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.

A Costing Solution for COVID-19-Era
Healthcare Challenges and Beyond
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.

For more information:
“This book is a fantastic piece of work”
– Robert Lindeman MD, FAAP, Chief Physician Quality Officer

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Currently leads the implementation and ongoing support of the CORUS Suite with a
team of finance and technical professionals. Prior to joining Health Catalyst in 2016, Bob
led the design of a home-grown, advanced activity-based costing system as a Lead
Financial Analyst at UPMC after working in multiple departments through UPMC’s
Finance Management Rotation (FMR) program. He was born in England, grew up in
southeast Michigan, and became a US citizen in 2011. Bob has a degree in Finance from
Penn State University and currently lives in Pittsburgh with his wife and daughter.
Other Clinical Quality Improvement Resources
Click to read additional information at www.healthcatalyst.com
Bob Alexander

Other Clinical Quality Improvement Resources
Click to read additional information at www.healthcatalyst.com
Health Catalyst is a mission-driven data warehousing, analytics and outcomes-improvement
company that helps healthcare organizations of all sizes improve clinical, financial, and operational
outcomes needed to improve population health and accountable care. Our proven enterprise data
warehouse (EDW) and analytics platform helps improve quality, add efficiency and lower costs in
support of more than 65 million patients for organizations ranging from the largest US health system
to forward-thinking physician practices.
Health Catalyst was recently named as the leader in the enterprise healthcare BI market in
improvement by KLAS, and has received numerous best-place-to work awards including Modern
Healthcare in 2013, 2014, and 2015, as well as other recognitions such as “Best Place to work for
Millenials, and a “Best Perks for Women.”

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