Five Ways Activity-Based Costing Can Maximize Earnings

Five Ways Activity-Based Costing Can
Maximize Earnings

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Five Ways Activity-Based Costing
Can Maximize Earnings
Effective financial management ensures
health systems have the resources to
carry out every aspect of care delivery—
from billing a patient’s insurance provider
to performing a CT scan.
Without solid financial standing, health
systems risk cost-cutting pressures that
prevent them from providing the best
care to their communities.

New financial hurdles, including the
pandemic and its aftermath, emerging
competitors, and a shifting healthcare
market, make sustainable financial health
increasingly critical.

Despite evolving financial challenges,
many organizations still rely on outdated
costing strategies, such as the relative
value unit (RVU) and cost-to-charge ratio
(RCC) methodologies.
Such older approaches will not suffice in
today’s fiercely competitive healthcare
climate, as they don’t provide detailed
cost information—the critical insight to
steer financial decision making in
tumultuous times.

To maximize already-thin operating
margins and recover lost revenue from
the spring 2020 suspension of elective
procedures, health systems should use an
activity-based costing (ABC) system, such
as the Health Catalyst CORUS® Suite.
ABC provides a comprehensive analysis
of every cost driver in the care delivery
process, allowing health systems to see
the real cost of providing care, not just
estimated or allocated costs.

Health Systems Face Increasing
Threats to Their Revenue Stream
Even before the pandemic, health
systems typically survived on small
operating margins.
Now even smaller due to COVID-19,
shrinking operating margins face
additional threats, such as the following:
 New competitors
 Reimbursement model transition

NEW COMPETITORS
New competitors in the market other than
traditional neighborhood health systems are
entering the healthcare sector as providers—
such as large retailers (e.g., Amazon Care)
and insurers (e.g., Optum).
These non-traditional players have strong
financial backing, existing doorstep delivery
infrastructure for medication delivery, and a
consumer-centric approach, forcing health
systems to reconsider the way they deliver care
if they want to retain and grow a patient base.

REIMBURSEMENT MODEL TRANSITION
Reimbursement model transition from fee
for service to pay for performance has
also proved challenging for healthcare
organizations struggling to realign
incentives and implement workflows that
support value-based care (VBC).
Many health systems and providers don’t
understand how to measure value within
their current system or don’t have the
data infrastructure to support a VBC
approach to care delivery.

Five Reasons Activity-Based Costing in
Healthcare Leads to Long-Term Financial Growth
Outdated costing systems (e.g., RVUs
and RCCs) assign an average cost
estimate to different parts of the care
continuum.
An ABC system leverages accurate
patient resource utilization data to
understand—at an individual patient
and clinician level—how much it
costs to deliver care.

The ABC methodology provides five major
benefits for health systems:
1. Comprehensive Costing Data
2. Ease of Use
3. Precision and Accuracy
4. Near Real-Time Analytics
5. A Proactive Cost Strategy

#1: Comprehensive Costing Data
Historically, health system leaders
(e.g., CEOs and CFOs) were
responsible for financial perform-
ance, even though clinicians had
the biggest impact on cost (e.g.,
clinicians determining a patient’s
length of stay).

Because older costing systems lacked the
infrastructure to connect financial data to
clinical data, hospital administrators couldn’t
understand and effectively manage their
providers’ clinical costs.
Activity-based costing combines a health
system’s financial and clinical data so
organizations can see clinical costs to
accurately identify clinical practice variation.

With clinician-specific cost profiles, providers
can see their actual cost consumption and how
their performance compares to their peers.
This transparent costing information can
incentivize providers to improve perform-
ance and decrease costs.

#2: Ease of Use
ABC is easier to maintain and implement
compared to other costing methodologies
because it was built with the EHR in mind.
Traditional costing systems were developed
before the EHR and thus lack the infrastructure
to access valuable operational data recorded
in the EHR.
This outdated approach leaves financial
decision makers with a fragmented view
of cost information and reliant on averages
and allocations.

#2: Ease of Use
As an updated cost management approach,
ABC considers the EHR a critical source of
operational information.
ABC seamlessly integrates with a health
system’s EHR, retrieving any relevant cost
drivers and including it in the health system’s
overall cost data.
With this comprehensive, granular level
of cost information, financial leaders can
pinpoint cost-savings opportunities and
cost-effective best practices to implement
throughout the organization.

#3: Precision and Accuracy
RVUs and RCCs provide an average
cost account for every patient encounter.
This approach is insufficient because
each patient has a different journey
through the health system.

For example, a patient who enters the health
system through the ED will have a different
cost compared to a patient who enters through
a primary care appointment, even if both
patients have the same medical condition.
Activity-based costing in healthcare allows
systems to access patient resource utilization
information for accurate insight into every cost
driver of a patient’s unique journey.

Clinician variation is real, and ABC is the
only way to accurately understand cost
and performance.

#4: Near Real-Time Analytics
Activity-based costing in healthcare allows
financial leaders to access actionable cost
and service line profitability analytics within
two to three days of a health system’s
financial close, instead of weeks after the
closing period.
This near-real time information helps
financial analysts immediately identify
and address cost variation.

#4: Near Real-Time Analytics
For example, significant variation for
the same procedure might reveal an
opportunity to standardize pathways
that support best practices or provide
additional clinical training, both in
pursuit of better care and lower costs.

#5: A Proactive Cost Strategy
Organizations can leverage ABC to transform
their cost strategy and generate more revenue.
Using ABC to understand actual cost, financial
leaders can create a proactive pricing strategy
and negotiate the best rates for premium
services versus commodity services.

#5: A Proactive Cost Strategy
For example, health systems can command
premium pricing for premium services—
specific procedures (e.g., specialized surgery)
that other health systems can’t perform with
the same level of quality—and optimize
profitability for that procedure.

Activity-Based Costing in Healthcare Highlights
Financial Improvement Opportunities
With continued challenges diminishing
healthcare revenue streams, organizations
must prioritize an ABC approach to cost
accounting.
ABC provides five benefits (listed above)
that allow health systems to precisely track
all cost activity across the care continuum.

Activity-Based Costing in Healthcare Highlights
Financial Improvement Opportunities
This level of detailed costing information
allows leaders to identify variation in
practice, reduce overlapping resources,
and find opportunities to improve
efficiency—all of which is essential for
ongoing financial survival and wellness.

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

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Link to original article for a more in-depth discussion.
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As a Board Director and retired Chief Financial Officer, I bring a diverse operational
background and a record of success in delivering exemplary results at the highest
levels of global business. I excel at building and leading high-performance
organizations; working effectively in front of stakeholders and the media; and
successfully guiding companies through complex change, regardless of the internal or
market challenges.
Other Clinical Quality Improvement Resources
Click to read additional information at www.healthcatalyst.com
Robert DeMichiei

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.”

Five Ways Activity-Based Costing Can Maximize Earnings

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