Three reasons why healthcare cost containment goals fail

Whether your health system is non-profit, for-profit, big or small, it’s critically important to understand the money coming in compared to the money going out the door. If you are not focusing on the following three areas, you are at risk of not understanding, or misunderstanding, your costs.

Some health systems opt not to invest in any costing software. Sometimes, the belief is that an offline calculation of Ratio of Cost to Charge (RCC) costing is “good enough.” Other times, there is an opposing belief that only a complex, custom in-house solution will do. Both ways of thinking may lead to stagnation and prevent your health system from achieving its cost containment goals.

Fortunately, and contrary to popular belief, there are several off-the-shelf cost accounting systems that provide a reasonable measure of detailed, patient-level costing. However, not all costing software is created equal, and software that works for one health system may not suit the needs of another. To determine the right software for your health system, you need to evaluate the following:

Maintenance: Do you have enough bandwidth internally to update the system on a consistent basis? Does the software vendor have a skilled team of implementation, support, and healthcare costing experts who will support you during and after implementation? What type of ongoing training is offered?
Integration: In this age of rich healthcare data, a cost accounting system that will allow you to integrate with systems other than only general ledger and billing will serve you better in the long run. More data sources afford more opportunities for accurate tracing of costs directly to the patient, as well as easier access to additional cost allocation drivers.
Flexibility: Does the software offer various methods to allocate and assign costs, ranging from simple allocation to more advanced capabilities such as Microcosting, Activity-Based Costing (ABC), and Time Driven Activity-Based Costing (TDABC)? You want a system that is committed to your continuous improvement.
Reporting: What are the reporting capabilities of the software, and what do you already have? If you already have a robust reporting system, then perhaps all you need is a cost accounting engine that can integrate into your existing reporting structure. Conversely, if you don’t already have a reporting system in place, then understanding the reporting capabilities of the software will be vital.

An investment in software that does not meet your health system’s needs is certainly not a step in the right direction for any cost containment goals. Choosing the right software is essential in sustaining a cost accounting system, as cost models can be quite complex, requiring a considerable amount of data gathering, configuration, and churning. When cost containment goals aren’t being met, costing software is not generally the only problem; in fact, it is often not the issue at all. Software can have all the features you could possibly desire, but it must be designed properly to reflect the actual operations of your system.

People are the key ingredient in any successful health system. The right people must be in place to properly configure and maintain a cost accounting system. Making any costing software vendor decision without first evaluating internal resources is simply throwing money at the problem. Standard implementations are fine as a baseline to grease the gears of a new cost engine. However, work must be done after an initial implementation to review and revise cost models as new information is gleaned. Spend the time, money, and resources to find people with the skillset to bring your service line profitability reporting to the next level.

Evaluate not only the skillset of your staff, but their career goals. Are they “into” cost accounting? Do they love working with data? You know you have the right people on staff if they get genuinely excited about finding new ways to refine, automate, analyze, and share insights. And they will be good at it, because they will work hard, with an incessant desire to find new ways to improve processes. In fact, you may often have to remind them when it’s time to go home, or to set aside a project for the weekend.

Even with a talented staff, additional development is essential. Determine for each person the training necessary to understand the technology, accounting, and operational concepts behind a well-designed healthcare cost accounting system. Cross-training and knowledge-sharing can be useful, as some analysts will excel on the technology side (data-mining and database work), others will be better versed on accounting concepts, while still others may have more experience with hospital operations. The idea is for the team to work together to help each individual member to have reasonable skill in all three areas: technology, accounting, and hospital operations. Bringing in additional team members and/or outsourcing are other effective ways to expose the team to more information and opportunities for development.

Whether you are trying to develop an existing staff, hire additional staff, or outsource, there are several qualifications and traits to look for:

Experience: Several years in a healthcare setting, absent of the delusions that they have everything figured out. Greener candidates can also work out great, but either way, be on the lookout for someone with an insatiable thirst to continuously take in new information and apply it.
Education: A Bachelor’s degree with a major in business, accounting, or information systems. A Master of Business (MBA) or Master of Healthcare (MHA) isn’t necessary, but does provide some “big picture” education. A Certified Public Accountant (CPA) never hurts, but I find a Certified Managerial Accountant (CMA) is more relevant for the role of a cost accountant in a healthcare setting, as its focus is more on internal than external reporting.
Learning Attitude: Excited about learning new information. All. The. Time.
Team-Oriented: There should be no secrets in cost accounting. Information should be fluid and transparent within the team, and when communicating with your internal clients about their costing information.
Data Geeks: They light up at the thought of working with new data or learning new technology.
Good Communicator: They can see and present the story behind the numbers.
Persistence: Good cost accountants are tenacious and tend to not be deterred when a project becomes challenging. They tend to think creatively about solutions, and always have a plan B, C, and D ready to be put into action.

In general, talented cost accountants, financial analysts, and decision support analysts must be given challenging projects. Ask them to get to the root cause of an outlier or a trend upward or downward. Encourage them to improve a process or proactively find ways to better serve your internal clients. Give them opportunities to observe clinical settings to help the transition from abstract data thinking to the more tangible world of patient care.

It was tempting for me to call this section “Reporting” instead of “Information.” However, it’s not just about developing cool reporting suites and easy-to-use ad hoc reporting environments (although I’m a big fan of these things). The information must be used effectively. Changes must be made. Results must be measured. It never ends, but that’s the fun part. If that is not enticing to you, refer to the “People” section above for personality traits of a good healthcare cost accountant to support you.

Cost accountants are just unbiased reporters of the data. It takes discipline and responsibility to not only compile the information, but to ensure it is accurate, reliable, and being used the right way. These things are crucial to buy-in of any service line profitability reporting that will support a health system’s cost containment goals.

Service line costing must be shared outside the accounting, finance, and decision support departments. It is best served with other useful analytics, such as quality, productivity, and revenue cycle. It should be a conversation starter and a question generator. Do the numbers look accurate? Are there better ways to measure costs? Why are costs increasing in x department? Why is y surgery consistently more expensive for one physician compared to the rest of the peer group?

An investment in any costing initiative that doesn’t provide variation in care analysis cannot be expected to enact meaningful change. Profitability reporting is only useful as a catalyst to effectively initiate conversations between financial and clinical leaders about the balance between the cost and quality of care. What happens (or doesn’t) following these conversations is where the ROI does (or doesn’t) occur.

ROI of Cost Accounting?
A costing initiative can come in many forms: install of new costing system (Software), an assessment and re-design of an existing implementation (People), or development of a new set of profitability reports (Information). A common question I get is: What is the ROI of any of these initiatives? It is a fair question. The truth is, there is no ROI in the planning, designing, or execution of any of these things. Cost accounting merely empowers you with information you can use to communicate, make change, measure results. Rinse. Repeat.

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