Given coding's importance, it is not surprising that most hospitals account for costs in relation to charges. The formal name is RCC: “ratio of costs to charges.” This is the equivalent of driving a car from the back seat. The car is going in the right direction, but it's all over the road.
A better but far-from-ideal model allocates costs to billable activities through relative-value unit, or RVU, metrics generated by finance departments. RVU mechanics are clear and use actual costs; however, they measure only hospital-based activity, frustrate clinicians who have little understanding of cost allocation and disconnect treatment prices from treatment costs.
Robert Kaplan, a Harvard Business School professor, pioneered the science of “time-driven, activity-based costing,” or TD-ABC, in the late 1980s. Kaplan's methodology maps and measures resources required to produce products and services over full-activity cycles. TD-ABC is considered best practice in many industries.
TD-ABC is coming to healthcare. More than two dozen health systems have undertaken pilot projects. A leading healthcare analytics firm, Strata Decision Technology, advances hospitals' cost-accounting capabilities through its data-driven product suite. Strata has extended its business platform to support TD-ABC adoption.
Fairview Health Services in Minnesota has employed process mapping and activity costing since the late 1990s. With Strata's help, Fairview is moving to TD-ABC to enhance resource efficiency, optimize utilization over full-care cycles and support pricing transparency.
Healthcare cost-accounting systems are complex to design and daunting to implement. Best practice will evolve through experimentation and incremental improvement.
The late Supreme Court Justice Louis Brandeis once observed, “Sunlight is said to be the best of disinfectants.” Attributing costs accurately and transparently is essential to efficient operations, fair pricing and customer trust. Winning health companies will master cost accounting to meet market demands for better healthcare at lower prices.
David Johnson spent 28 years as an investment banker at Merrill Lynch, Citigroup and BMO Capital Markets before launching 4sight Health, a healthcare consulting firm.