DePaul University accounting professor Gary Siegel thought he was onto something as he studied the costs of operating physician practices: Not many doctors seemed to know what their costs were.
But when he told a California surgeon about his hunch, the surgeon corrected him: "No doctors know their costs."
Siegel is trying to change that. This month, he is scheduled to publish a study through the Institute of Management Accountants' Foundation for Applied Research that examines practice costs through a technique called activity-based costing, or ABC. Siegel and a group of specialty societies called the Practice Expense Coalition already have presented data in hearings and meetings regarding HCFA Medicare reimbursements.
The accounting technique examines how much it costs a practice to handle such chores as maintaining medical files, collecting payments, and scheduling and coordinating patients -- expenditures that otherwise might not show up on a balance sheet.
The idea, Siegel says, is to get a handle on how much every task costs by factoring in the amount of labor, technology and even office space it takes to complete it. That way, the next time a health plan or other payer offers a contract, physicians would know right away whether the pact would make them money.
This isn't an issue under fee-for-service. But Siegel says with managed care increasingly controlling physician payments through capitation, managing costs will be doctors' key to maintaining or boosting their incomes.
"One of the reasons a lot of medical practices are going bankrupt is they're not getting paid enough to cover their costs," Siegel says. In particular, he cites doctors signing HMO contracts because they think a high volume of patients will make up for low payments.
But that wouldn't wash in other industries, Siegel says. "If somebody comes up to a guy in a shoe store and says, 'I'll give you six bucks for a pair of shoes, the guy would say, 'No, that cost me $20.' "
Siegel and 20 other accountants have examined 80 practices in cataract surgery, gastroenterology, plastic surgery, neurosurgery, thoracic/cardiac surgery and orthopedics. The practices' specialty societies footed the study's bill, which was in the hundreds of thousands of dollars. No society would release its exact cost.
The societies say they drafted Siegel for an ABC project because of growing concern that HCFA was using inadequate cost information to set its practice-expense rates under Medicare. Surgical societies were especially worried that greater emphasis on a resource-based relative value scale, or RBRVS, was cutting into their reimbursements.
Their worries subsided somewhat with HCFA revisions released June 5, which the societies say are more accurate even though they don't reflect ABC. Still, the associations say the ABC project gives them some additional information they can use during the comment process on HCFA's changes, which ends Sept. 3. The changes are scheduled to take effect Jan. 1.
"We want to be able to point to any specific miscalculations that (HCFA) might have made (because identifying them) would have a positive impact on overall reimbursement," says Michael Roberts, vice president for public policy and government relations for the Bethesda, Md.-based American Gastroenterological Association.
ABC is hardly a new, radical idea. It was born in the 1880s, as manufacturers tried to get a handle on unit costs. For example, if they built tables, they could divide their total costs by the number of tables to figure out how much it cost to build each one. But they couldn't use that formula if they built tables of various sizes.
So manufacturers began using direct labor, direct material and overhead to calculate ABC. Until the 1970s, ABC was skewed heavily toward labor costs, but the growing use of computers and other machines makes overhead the greatest component of costs.
That helped make ABC more applicable to the economy's service sector. Retailers began using it about 10 years ago, while hospitals picked up on it in the past five years. Siegel claims to be among the first to apply ABC to medical practices.
"You talk to a doctor about cost accounting and it's a nonentity," Siegel says. "(Doctors) never had to (worry about it)." But with Medicare and managed care squeezing reimbursements, doctors now have to worry about cost control if they don't want their incomes to decline, he says.
Siegel's group of accountants, representing universities across the U.S., spent 12 weeks reviewing practices in Atlanta, Baltimore, Chicago, Dallas, Los Angeles, Miami, New York, Oklahoma City and San Francisco. The practices' names weren't released. Separate reports were developed for each specialty studied.
For example, in a report covering neurosurgery, the Siegel group isolated the total costs of 12 major processes, including servicing patients in the office and at the hospital (see chart on page 64). The group also broke out costs on a per-physician basis.
The specialty societies that participated in the surveys say the numbers won't be considered cost guidelines for all practices because the sample studied was too small. But they say ABC could be a good way for other practices to get a firmer hold on their costs.
Bob Fine, director of the department of health policy at the Rosemont, Ill.-based American Academy of Orthopaedic Surgeons, says Siegel's study of 18 orthopedic surgery practices needs to be validated before it can be considered useful as a guideline.
To validate the study, "you would go out and do other studies of 18 practices to see if it's the same," Fine says. However, he says the results were in line with HCFA's revised cost estimates, which the academy supports.
Of course, the cost of getting an ABC overview could keep many practices from considering it. Siegel himself says physician practices interested in doing an ABC review of their costs may be better off going through a larger organization such as a specialty society because most probably can't afford it. Siegel wouldn't disclose exactly how much he would charge a practice but did say it would cost "an arm and a leg."
The costs include coming up with an ABC model for every specialty, since each type handles different tasks. "That's why the associations came to us," Siegel says. "We developed the model," which can then be offered to member practices.
Siegel says that while the cost information is good, it would be better to have comparable data from other practices.
Specialty societies that participated in Siegel's study, conducted through his Lincolnwood, Ill.-based consulting group Gary Siegel Organization, say they are considering expanding the use of ABC beyond the original groups surveyed.
The Practice Expense Coalition has suggested to HCFA that the two groups split the costs of a wide-ranging ABC project to validate Medicare practice-expense reimbursement, but HCFA so far has said such a project would be too expensive.
The Fairfax, Va.-based American Society of Cataract and Refractive Surgery wants to develop a database its members could use to compare their costs with those of other practices.
Meanwhile, the American Academy of Orthopaedic Surgeons is considering selling a product that would allow members to do their own activity-based costing. "There may be other accounting techniques, but we happen to like this one," Fine says.