Health Care’s First Cost Accounting Adoption Model Is Now Available

The model aims to help hospitals respond to tightening margins, value-based payment models, population health initiatives, and payer pressure to control costs.

Feb. 11—Amid an industrywide effort to better identify and reduce the cost of care, the HFMA-Strata L7 Cost Accounting Adoption Model, known as the L7 Model, was introduced this week.

The model is the industry’s first roadmap to help guide the adoption of advanced cost accounting and improve access to accurate cost data for healthcare providers. HFMA partnered with Strata Decision Technology, leveraging their work with over 200 healthcare delivery systems, to develop the L7 Model.

The initiative comes amid a growing focus by healthcare providers on the cost of care, identified as the leading priority for hospital executives in a survey released in February. One of the key challenges on cost was illustrated in an earlier survey of hospital executives that found 90 percent lacked advanced cost accounting systems capable of providing accurate cost data across the continuum of care.

“To understand the true cost of care effectively and improve their cost accounting capabilities in a rapidly changing and complex setting, health systems need a roadmap to ensure their approach meets their strategic needs,” said Joe Fifer, FHFMA, CPA, president and CEO of HFMA.

Many healthcare delivery systems have launched efforts to rethink and restructure how they deploy and leverage cost accounting, including thought leaders and early pioneers in advanced cost accounting such as Cleveland Clinic and Intermountain Healthcare.

Intermountain has been traditionally “data rich” with cost information, but a dated cost accounting system has made it difficult to integrate that data into its clinical care and determine costs per case, said Chris Bruerton, FHFMA, assistant vice president, finance at Intermountain. The system is launching an updated advanced cost accounting system to provide detailed cost data and distribute it though the organization.

“Getting accurate costing information into the hands of our leaders will be crucial to helping them understand the total cost of the services they provide so they can drive out any unnecessary costs,” Bruerton said in an interview.

Among the factors driving that cost-control shift are tightening margins, illustrated by a decrease in operating margins for not-for-profit hospitals to 1.6 percent in FY17—the lowest ever, according to a Moody’s Investor’s Service report. Additionally, an American Hospital Association survey found 30 percent of hospitals had overall negative margins in 2016.

“Organizations are being tasked with driving out anywhere from $50 million to $500 million in costs every year, but how do you do that without data?” said Dan Michelson, CEO of Strata.

The challenge is especially acute as hospitals and health systems shift to value-based payment models, where accurate cost data is needed in part for providers to determine whether proposed contracts can provide them with positive margins, Michelson said.

Intermountain Health is among the providers transitioning to more at-risk or capitated payment models.

“The costing data is critical to be successful in that environment and to manage to a cost per case,” said Bruerton.

How It Works

The L7 Model aims to help hospitals and healthcare delivery systems measure the adoption and utilization of advanced cost accounting methods, including time-based, activity-based, and patient-level costing.

The L7 Model identifies the seven levels providers can advance through, moving past the basic and often inaccurate ratio of costs to charges methodology many have used traditionally. The levels build on each other, deploying more-extensive data sets and dynamic methodologies to help organizations increase the extensibility and accuracy of their cost data. Each level indicates increased sophistication of costing processes and workflows deployed to generate more meaningful and accurate output.

The model also aims to identify gaps in source-system data to help standardize and automate data capture. An organization that reaches Level 7 has expanded the use of time-driven costing to all clinical areas and has engaged clinicians with the cost data to help drive performance improvements.

Overall, the industry standard provided by the model aims to help hospitals and health systems through:

• Assessing their current cost accounting methodology, understanding the level of accuracy of their cost data, and benchmarking capabilities against peers
• Creating an organizational roadmap on steps needed to ensure their cost accounting approach meets their strategic needs

A key benefit of the model is the creation of a common framework to compare organizations’ progress in the use of cost accounting, said Chris Donovan, executive director of enterprise analytics at the Cleveland Clinic. Such context is key for external cost-control comparisons and to demonstrate the internal need for greater organizational investment in cost accounting.

“Being able to look at high-performers and peers across the industry and see how they are doing and where we are out of whack could be huge for us,” said Donovan, who estimates Cleveland Clinic’s cost accounting system is about a Level 4.

Cost Data Uses

Among the ways Intermountain, which is currently at Level 4 in the framework, aims to use better cost data is by finding unnecessary clinical variation.

“Anytime a clinician is using more of something or a more expensive something that doesn’t improve quality, safety, or the patient experience, finding that is important,” Bruerton said. That data can inform discussions with clinical leaders to address unnecessary practice variation and find savings.

Better cost data also can identify margins for individual service lines and inform which need resources to protect from disruptors and where cost reductions should be prioritized to improve affordability of services that are considered key community benefits.

The Cleveland Clinic aims to use better cost data to reach the strategic goals of improved affordability and better population health.

“The ability to understand each acute care episode cost and how we drive improvement, and the ability to understand the true cost of treating a population over time, all is predicated on having good cost accounting and a solid understanding of what the cost of delivering that care is,” Donovan said.

Internally, cost accounting can help leaders find resources by identifying avoided costs, such as those for each future sepsis case that could be prevented through strategic investments. A key challenge for many hospitals and health systems is the ability to reconcile potential cost savings with the resources needed to provide high-quality care.

“We don’t want to provide the least expensive care; we want to provide the best-value care—the highest-quality and safest care—while driving down costs,” Bruerton said.

Traditional hospital and health system use of time-driven costing—as a resource-intensive and very manual cost accounting process—sought to identify potential savings in very specific clinical circumstances, at a specific point in time for a limited number of patients.

Implementing the type of automated cost accounting approach outlined in the framework aims to provide low-cost, real-time cost data that’s shared with clinical decision makers on an ongoing basis.

“In order to be able to access accurate and comprehensive cost data across the enterprise every day for every procedure and every physician, this all needs to be automated. That’s where the journey on cost accounting must lead you, as opposed to limiting your work to hyper-target one area at a single point in time,” Michelson said.

Unlike the time-consuming, consultant-driven electronic health record adoption process, Michelson said organizations can improve their cost accounting efforts simply through an internal focus as well as by collaborating with other health systems such as Cleveland Clinic and Intermountain.

“Most of this, if not all of it, can be done through collaboration with others and automation via an advanced cost accounting application. Given the need to understand and manage the cost of care, making progress here is now considered mission-critical for healthcare providers,” Michelson said.

A Feb. 26 Strata webinar will provide more detail on the L7 roadmap.

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Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare