Q&A: Executives Discuss Cost Accounting Obstacles, Opportunities

For many provider organizations that are moving to dynamic planning, good cost accounting establishes a key foundation to empower their leaders to better understand their business and make the right decisions, said one executive.

Feb. 15—Hospitals and health systems are increasingly pushing to better identify and reduce costs of care.

As part of that effort, the HFMA-Strata L7 Cost Accounting Adoption Model, known as the L7 Model, was introduced earlier this week.

HFMA interviewed senior executives with two industry-leading providers to get insight on why cost accounting is seen as increasingly important, what barriers can prevent progress, and steps they have found to improve results.

Providing insight on this subject were Chris Bruerton, FHFMA, assistant vice president, finance at Intermountain; and Chris Donovan, executive director of enterprise analytics at Cleveland Clinic.

HFMA: The model HFMA and Strata released this week aims to help organizations assess their current cost accounting methodology, understand the level of accuracy of their cost data, and benchmark capabilities against peers. Can you tell us why each of those areas are important to your organization?

Chris Donovan: Building a common model to have something to compare against and that we’re all measured against equally will be a huge value. This is especially true not just when you are trying to communicate externally—there’s a lot of discussion about how health care doesn’t understand its costs—but being able to communicate internally to our own organization about the need to invest in this capability and having an external benchmark that other peers and organizations are participating in, and that we can show our progress against, can really help move the needle internally as well.

There’s a ton of people doing really simplistic cost accounting, which is really simplistic ratios of cost to charges (RCC), and doesn’t drive a lot of value and may lead you to make bad decisions instead of better decisions. You might be better off not doing anything, rather than doing some of these really poorly thought-out methodologies.

Benchmarking is the hardest thing to do, but if we can achieve a common understanding of how we apply this and are able to get meaningful cost benchmarks—which is the internal costs to the healthcare system, not an external measure like charges or some RCC methodology, which is typically what I have seen people trying to do benchmarking of costs with—benchmarking can be immensely valuable because everybody is looking to understand how we can take costs out of the healthcare process. Being able to look at high-performers and payers across the industry and see what they are doing and where are we out of whack will be huge for us.

HFMA: Another aim of the new model is to create a roadmap for the actions required to ensure your cost accounting approach meets your strategic needs. Can you give us an example of a strategic need that requires a better cost accounting approach?

Chris Donovan: The clearest strategic example is around care affordability. So, how are we going to drive better value for our customers and patients through high-quality, low-cost healthcare? It’s really hard to do that if you don’t have a clear understanding of what your costs are.

It’s also going to have a pretty strong influence on a lot of strategies around population health management. Again, it comes down to understanding the true costs of delivering care and moving beyond delivering care in individual, acute-based episodes to delivering care to a population.

All of this builds on each other. Being able to understand each acute-care episode cost and how we drive improvement there, and the ability to understand the true costs of treating the population over time and on a longitudinal basis, is predicated on having good cost accounting and a solid understanding of the cost of delivering that care.

It also ties into quality. We have to understand the incremental value of quality and the costs of achieving that quality so we can make smart decisions about where to invest limited resources. We have to understand what the cost is of avoiding a sepsis infection. That’s really hard to do today. But if I can understand it and quantify it, I can derive the resources that are necessary to achieve those quality goals.

HFMA: How can this type of approach to improving costs accounting help your efforts to shift to value-based payment models?

Chris Donovan: The underlying issue of shifting to value-based payment is that as a provider, we’re going to be increasingly taking on risk. Historically in a fee-for-service model we were getting paid for what we were doing, so we didn’t have to be efficient necessarily. We could negotiate rates with the insurance company and do a good enough job of delivering care at those rates to be successful in that.

But in a value-based world, we’re going to be at risk for providing care. And in order to appropriately set the level of risk that we’re willing to take, in order to achieve value in taking that risk—and not lose our shirts—we have to understand the costs of delivering that care. Otherwise, you’re going to enter into agreements that you have no idea if you can manage the risk that you are taking on.

HFMA: In the world of value-based payment, what are the limitations of using time-driven activity-based costing to get cost information for all patients and procedures that can match detailed clinical data, which allows for examining quality on every procedure and for every physician?

Chris Bruerton: This is challenging sometimes. Getting costing data on all patients and procedures and aligning it with detailed clinical data to understand the quality provided is critical in a value-based payment environment. You need to have good data so you can make the right decisions.

At Intermountain, we don’t want to provide the cheapest care; we want to provide the best-value care—the highest-quality and safest care while driving down costs. We don’t ever want to do anything to harm the patient, jeopardize quality, or negatively impact the patient experience. 

Identifying unnecessary variation and understanding the cause of it is key to driving out waste and avoidable costs in the organization. If a procedure can be performed at a lower cost, without jeopardizing quality, why wouldn’t you do it that way?

HFMA: What are challenges with traditional time-driven activity-based costing?

Chris Bruerton: I have discussed this with peers around the country that have attempted to do time-driven activity-based costing. What I hear is that philosophically it is a great idea, but it is not easily scalable, is generally focused on a certain procedure or case type, and is very time-consuming. You may not get value out of it when you try to expand that across multiple areas.

If you have the capability within your electronic health record to capture time components of activities, and can then feed that data into an automated costing process, that is definitely the way to go.

HFMA: Is there a need to get more precise and timely cost information to physicians to collaborate more closely with them on the costs of care?

Chris Bruerton: Yes. In our old home-grown costing system, we would update the costing data quarterly. Having automated and more frequent costing information allows you to get it into the hands of physicians and caregivers so they can understand how much the services they provide cost, and if there are opportunities to provide better and more cost-effective care. The more accurate the data they receive and the quicker they get it, the faster that decisions can be made to go after those savings opportunities.

HFMA: Is this kind of cost accounting roadmap likely to benefit certain types of hospitals or health systems, or can even small and under-resourced hospitals benefit from it?

Chris Bruerton: If you have access to data that can improve your costing process and accuracy of costing information, then I think you should use it. If you have limitations with your electronic health record and don’t have access to this data, then you should do the best with what you have. Even progressing one or two levels on the [seven-level] L7 model can make a significant improvement.

If you are an integrated delivery system, then having costing data for different care settings, (such as hospitals, physician groups) will enable you to see the costs across the entire continuum of care. This can help the system drive patients to more cost-effective care settings.

HFMA: What other initiatives is your organization undertaking to improve your cost accounting?

Chris Bruerton: Another initiative that we are doing is called “beyond budgeting” or “dynamic planning.” It’s transforming our financial planning process by transitioning us away from the traditional budget process, which is very detailed and time-consuming, and replacing it with a more nimble and agile process to respond to the ever-changing healthcare environment.

You implement rolling forecasts, do benchmarking, and manage to metrics. A key component of “beyond budgeting” or “dynamic planning” is having good costing information so you can help leaders understand their business and empower them to continually improve their operations, drive out waste, and reduce costs. Reducing costs, without sacrificing the quality of care, is critical to being successful in a value-based, at-risk environment.

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