Today’s pressure to reduce healthcare costs and the increased liability providers have is challenging how healthcare systems address cost accounting.  Due to the uniqueness of hospital operations, most healthcare organizations continue to struggle with identifying thecosts of products and services by responsibility segments, capturing the full cost of products and services, including inter-entity and department costs as part of full costs, and selecting and consistently using an acceptable costing methodology.  

Understanding that some of biggest challenges for hospitals are not the desire to generate information about the costs to the organization and patient care, but rather knowing most hospitals have small budgets needed for the kind of technology needed to truly identify the full cost and their limited ability to improve reimbursement regardless of how much knowledge they acquire.  A quick review of the industry shows that healthcare organizations need to both leverage their vendor strategic relationships andoptimize their current tools.  Many hospitals have already jumped into the cost accounting requirements as they work to cost justify an Accountable Care Organization (ACA) or provide required information for a merger/acquisition.

Lessons Learned

  • Wasting Time Data Gathering Rather Than Analyzing
  • Too much time spent on pulling and “scrubbing” the data, rather than on actually analyzing the data.
  • Need for a strategic/Enterprise Extract Load and Transform (ETL) tool/engine, leveraging Application Program Interface (API) and a Master Data Management solutions
  • A scalable RDBMS for an Enterprise Data Warehouse (EDW) to serve as a repository for all data (any application and any data structure)
  • Lack of complete integration and understanding of detailed workforce and capital asset management
  • Implementation Costs
    • Hospitals make the painful mistake of purchasing an application without really knowing what’s in store.  The implementation process takes months, disrupts key people and leads to frustration.
    • Having the wrong people implement the system is a huge error incurred by too many healthcare organizations. If you have the right tools, but set them up wrong, you’re likely better off to not having the tools. Hospitals fail to implement cost accounting systems/processes to create value while also incurring a maintenance nightmare. Hospitals get overzealous in the amount of detail built into their process. It makes their implementations long, drawn out, frustrating and expensive.
    • Not leveraging packaged solutions designed for the healthcare industry
  • Shelfware and Underutilization
    • Underutilization comes from not recognizing cost accounting as a bona fide, very specific discipline requiring highly skilled support. It comes in not having the right resources and leveraging delivered functionality that supports a health system’s modeling, budgeting, forecasting, monitoring, and analysis requirements
    • Hospitals stumble because they fail to realize the experience and training needed to not only understand the mechanics of the software, but to learn what data, and in what form, it becomes of real value.
    • By not relying on both external and internal help, most do not understanding how to optimize the solution’s (software) usefulness, thus many organizations make errors in determining how to allocate, identify and quantify costs.
    • Due to limited sophistication and training, most hospitals don’t exact real value from even the best cost accounting software.
    • Training
  • Key Employees
    • Many organizations rely on people, not experts in cost accounting.  Many of these people don’t have a clear understanding of how direct and indirect costs, fixed, variable and semi-variable costs apply (and their impact on competitiveness assessment) or how to apply a “real world” process for cost allocation.
    • Be cautious if you rely on a handful of “key” people to maintain the system, support the data feeds and structures, operate the system and provide the data for analysis, for you are at risk of key people leaving.
  • Not Getting The Results 
    • Building the structures for costing is quite an art. It requires sophistication and a clear understanding of objectives, because understanding how the cost accounting structures should be built depends on how you want to use the data, e.g., Volumes, Net Revenue, Expenses, Flexible Budgets, Reporting
    • Those early steps and associated decisions have implications that are not evident unless you understand the end game on the use of specific data and how to processes it.  Spending time pulling data only to find that it’s really worthless is a painful process.
    • Need for a strategic Business Intelligence (BI) solution for Scorecards and executive Dashboards
  • Improve Financial and Operational Monitoring/Analysis Capabilities
    • Most hospitals still do not have a true cost accounting and decision-support system.
    • Many administrators do not see the benefits or value that true cost accounting can provide.
    • Not leveraging “best practices” during design and implementation, Data Governance Structures and adoption of an Enterprise Data Dictionary, e.g., physicians’ information should seriously be evaluated for not being in the standard General  Ledger (GL) – it gets too close to cost accounting, which can be very challenging in the financial system (ERP). How would you allocate costs to a single physician?  Some sort of allocation?  How would you allocate revenue?

Healthcare organizations have traditionally determined costs based on historical methods of charging for services such as patient days and procedures. Products or product lines have also been defined for cost analysis, such as DRGs or a specific type of day surgery patient. Determining full and incremental costs within the structure of a healthcare organization (revenue center or department) continues to focus on a Decision Support System (DSS) or an EDW. The need to know the cost of each procedure and major product line is essential to financial stability of every healthcare organization. In reality, to make sound management decisions, costs must be known at the procedure, patient, and department levels.
Without accurate cost information hospitals are at financial risk when making decisions considering current operations as well as long-term plans. The cost of providing services is obviously only one of many considerations. Accurate costing, however, has been a major missing component of the decision-making process.
Now without a “deep-dive” of vendor Commercial Off-The-Shelf solutions (e.g., McKesson (HPM), Allscripts (TSI), Siemens (DSS), andhc_acct_ll-3 now the Budget & Planning vendors, Oracle, Kauffman Hall, and a number of Tier II vendors) , here are some practical “common sense” decisions to consider.

Flexible Dataset

Not every organization fits neatly into 12 month fiscal years and standard FTE hours, but regardless of whether or not your organization fits, Cost Accounting methodologies apply. As most healthcare organization have varying degree of uniqueness, most will need to “customize” their aggregate Dataset per the organization’s needs, whether typical or non-standard.

  • Seek solutions that allows Data to be represented in quarter, month, year or any period based on the facility needs
  • Seek a variety of default export file types, and export files to email addresses (seek delivered APIs)
  • Seek import capabilities from various file types or directly from key clinical systems
  • Ensure all department needs are met

Departmental Costing Control

Whether the healthcare entity is large or small, no matter how many beds it services or staff it employs, its’ individual departments must have their needs met efficiently and effectively.

  • Require management of departmental charge items
  • Seek ability to automatically calculate departmental allocation based on readily available data, or manually definable as required
  • Establish a product group support and explore user communities
  • Seek multi-tiered reporting structures and ability to group departments by those structures
  • Seek ability to define department types in a variety of ways, including by revenue source, transfers, and special cases
  • Seek and then leverage ability to establish department managers (and integration to Workflow tools/email)

Address Product Costing

Product costing and accurate revenue reporting is a challenge; those solutions that provide simple-to-use, in-depth product grouping functionality will become utilized.

  • Seek solutions that assist to summarize product groups according to your unique organizational needs; allow for the creation of many groups to organize like products, one large group with all products, or anything in-between
  • Seek ability to tie products to charge codes quickly and effectively
  • Seek ability to track product volumes for accurate costing

Out-of-the-Box Tools

Working with your organization’s costing data requires soundly-designed, flexible tools for the data auditing, import/export, needs of a health system.  Seek a solution with powerful and practical utilities to ensure your organizational growing analytics needs are addressed such as:

  • Import assumptions between data (SOA or Rules Based Engines)
  • Import and export costing data with simple interoperability
  • Supports advanced data analysis, identifies discrepancies and keeps your data reliable
  • Maintains users; add, modify, or remove users and passwords effortlessly
  • Creates reports for revenue, department, and facility reconciliation
  • Maintains classification code databases
  • Builds and maintains a costing task list, and check off tasks as they’re completed
  • Provides modeling and advance analytics at the account detail

Data Modeling for Proactive “What If” Analysis

All healthcare organizations perform “what if” modeling, but today’s requirements include the need for modification to large amounts of data.   Seek a solution that quickly and easily allows forecast change impacts and associated pros and cons.

  • Seek solutions that allow for the definition and modification of assumptions to evaluate the impact of facility changes such as inflation, new service, equipment purchases, pay raises, union contracts, etc., change impact
  • Seek ability to anticipate and review average revenue realizations
  • Seek ability to review impacts of charge prices and volume changes
  • Seek ability to explore changes in Payor volumes
  • Seek a solution that provide Cost Accounting details

Extensive, Detailed Reporting

Detailed reporting is essential to ensure continued smooth day-to-day operation. Any solution must contain a broad selection of built-in reports based on organizational best practices.

  • Summary reports for upper management
  • Item and product reports with multiple sorting and categorizing report variations
  • Departmental reports for managing department costing
  • On-line reports that can be printed or exported to a variety of file types (Excel,PPTx, PDF, HTML, etc.)
  • User defined reports for the patient, doctor, DRG, ICD, and other demographic level, etc…

Have a question or comment? Drop me a line.


Glossary of Healthcare/Financial Terms http://www.hfch.org/hmc/glossary-of-terms.htm
Review of Financial Management and Cost Accounting Principles, Ronald P. Powell, Jr. and Noel C. Hodges http://www.ashp.org/DocLibrary/Bookstore/P881/Chp1.aspx