In support of the corporate function, a best practice cost accounting model can be streamlined when supported by a high degree of standardization of information systems and processes across all entities.  This standardized infrastructure is common within most large “for-profit” health systems and helps facilitate and simplify the implementation of the cost accounting process.

The process of implementing a best practice hospital cost accounting model for a large health system also requires standardization in approach.   This would include:

• Standardized chart of accounts in use
• Standardized CDM in use
• Standardized accounting and bookkeeping practices in use
• Standardized cost categories reported from patient database
• Standardized methodologies for handling revenue offsets and expense reclassifications
• Standardized conceptual definition of fixed costs vs. variable costs
• Standardized conceptual definition of direct costs vs. overhead costs
• Standardized overhead allocation step down process and statistics
• Standardized RVU Development Process
• Standardized Update and Reporting Cycle

In support of the hospital function, a best practice cost accounting model will follow a process that benefits from the above corporate standardization, yet which produces cost data reflective of each hospital’s unique operation.  The focus is centered on the details of the RVU development process.  The RVU development “process” can be standardized, however the details that are unique to each individual hospital should not be.  Those unique details should be reflected in the development of each studied departments procedure RVUs.  The following are examples of the data collection that is unique to each hospital:

• Skill mix and staffing ratios
• Pay rates
• Physical plant layout
• Age and type of equipment
• Support services (centralized vs. decentralized transportation, registration, etc.)
• Available IT infrastructure (charge capture, order documentation and charting)
• Use of contract labor or purchased services

 Attempting to standardize RVUs across facilities will not produce cost data reflective of each hospital’s operations; hence it only provides marginal value, which in turn will not foster clinical management buy-in.

 In addition, when benchmarking hospitals utilizing standardized RVUs across facilities, the operational differences will not be sensitive to the hospital-specific items listed above and will not support analysis pinpointing the reasons for the operational differences between hospitals.

In Conclusion

Unlike cost accounting in industry which is very black and white, hospital cost accounting provides for many levels of complexity and variability.  Implementing a “Best Practice” process requires a sound implementation strategy that will guide you through providing appropriate detail for all users of the information and provide for a process that is maintainable in the long run.

However, how many hospitals are actually taking the next step and utilizing the cost data to effect change? How many are using the cost data and working with their services lines and physicians to change practice to produce a positive financial outcome?  Sure it gets a lot of lip service, but in the past 20 years of working with hundreds of hospitals in cost accounting and decision support, I can say that I have seen very few hospitals engaged in this practice. The few that I have worked with that have been successful in this endeavor have successfully bridged the gap between the finance executives and the physicians.  A strong alliance has been developed between the finance executives and the physicians to enable the pursuit of cost reduction opportunities coupled with the pursuit of increased quality measures.  What a great opportunity to use cost data to effect change.

For those organizations that HAVE successfully used the cost data to effect change, I would welcome you to share a specific example of how your organization used the cost data, the actual change that was effected and the positive financial outcome attained.  I would also be interested in learning about any of the challenges you faced implementing the process.

For those organizations that HAVE NOT used cost data to effect change, why not?  What are some of the road blocks you have experienced that have prevented your organization from implementing this type of initiative?

The CDM structure as it relates to “billable supplies” tends to be one of the more heavily impacted areas.  Departments like the Operating Room that tend to be structured around CDM codes that are time-based increments and billable supplies can be an ideal basis for developing cost.  This structure allows you to more accurately track the cost utilization assigned to a patient and in turn the physician.  Charging by procedure code in an area like the Operating Room forces you to develop a cost for the procedure and you lose the ability to track the variability of cost utilization by patient and physician due to the fact that the procedure will reflect the same cost for every patient and in turn every physician.

The issue typically found with this “ideal structure” is that the CDM codes for the billable supplies tend to be at a lesser amount of detail than desired.  Worse yet, the kiss of death for cost accounting, they can be “open” or “variable” miscellaneous codes where the charge put into the code can  be different each time it is used whether it’s a $500 item or a $50,000 item.  A prime example of this would be evaluating “implant costs” in the Operating Room.  All too often the charge master for implants gets summarized in to some form of “open” miscellaneous codes.  Some have no detail while others attempt to create codes with some reasonable cost-based groupings.

In the Operating Room and specifically for the “implant cost” codes, we have been recommending mirroring the materials master (for implant items) into the charge master.  Yes, this is an exceptional amount of detail, however with two very substantial benefits.  First, getting a file from the materials system makes it very easy to update the costs. Secondly and more importantly, the ultimate ability to track the variability of cost utilization by patient and in turn physician. (i.e. who’s using what).  This detail allows one to evaluate the cost impact of differences in physician treatment patterns and in turn provides the ability to use the cost data to effect change (the topic of one of my upcoming discussions).

The “implant cost” example demonstrates that cost accounting (in most hospitals) plays an insignificant role in dictating the structure and detail of the CDM.  It also demonstrates the “need” for cost accounting to play a much more significant role.  For those hospitals serious about cost accounting, it seems ridiculous that in one of the highest cost areas of the hospital you wouldn’t exert a little more effort to create the appropriate detail for tracking costs.

The moral of the story is to get involved (if you’re not already) in driving changes in your CDM that support not just adequate but exceptional cost accounting so that the foundation of your cost accounting system gives you something to build on.