As the industry begins to see the necessity of transitioning to a true, cutting-edge cost accounting system to support financial and clinical decisions, hospitals can avoid the most dangerous mistakes.
Here are six mistakes hospitals make when implementing cost-accounting as part of decision-making as well as solutions to tackle these problems.
Mistake #1: Implementation and ongoing costs are too high and results fall short of expectations
Cost accounting software should come with a warning sign: “Buy at Your Own Risk!”.
Hospitals make the painful mistake of purchasing cost accounting software without really knowing what’s in store. In most cases, you’re hit with at least $300,000 for software and will incur $200,000 to get it running. Or, you can try to implement the system yourself and hope you get valuable results. The process takes months, disrupts key people and leads to frustration. Being out a half million dollars and finding you really dont have an effective tool is not a mistake you want to make.
Having the wrong people implement the system is also 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 even have 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. And then when finished, they are unable to maintain it. Such systems often just die.
To illustrate, a hospital purchased an expensive cost-accounting software program and had an employee implement it. After more than a year of frustration, the hospital invited the vendor of the software to come back to fix the implementation problems. The vendor said it was such a mess that it could not be fixed! Ouch!
The cost of maintaining a purchased system is high as well. You pay for staff, annual licensing, maintenance fees and more. Too often such costs dwarf the gains your cost accounting system helps you achieve.
Mistake #2: Your system is underutilized
Are you aware that software typically is only used at 10 percent of capacity? The CFO of a hospital once told me his hospital purchased very expensive software to help determine the costs of procedures provided by physicians; yet, they never used it. Purchasing an expensive program and using 10 percent or less of its capacity is unacceptable.
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. 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 such data, becomes of real value to those who analyze it.
By relying on internal help and not understanding how to optimize the software’s usefulness can severely affect the system’s value. Organizations make errors in determining how to allocate, identify and quantify costs. Again, even excellent software can fail if the users lack needed knowhow.
Mistake #3: Overdependence on one or two people
Organizations place too much reliance on one or two people to “run” the software. Such people may not be dependable, have weaknesses in the art of cost accounting or struggle to organize data needed to make effective financial and clinical decisions.
If you rely on people not experts in cost accounting, who 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, you can greatly stymie even the best purchased software. Even if you are successful, while your trusted individual maintains the system, supports the data feeds and structures, operates the system and provides the data for analysis … what happens when he/she leaves?
Mistake #4: Wasting time data gathering rather than analyzing
Even if you have some great people who know what data to pull and how to format it for effective decision making, you and they may find yourselves too exhausted to use the data. This problem results as you spend so much time pulling and “scrubbing” the data when your time is already stressed with other duties. You don’t have needed time to actually analyze the data.
Whether it is cost accounting or other areas that take your time, don’t you often feel stretched so far that many worthy projects get put off, perhaps even ignored permanently? Cost accounting should be a decision-support tool, not an obstacle to getting other important projects completed.
Mistake #5: Not getting the results that you intend
As noted, putting lots of money, time and resources into a cost accounting system and having it fail is costly and frustrating. 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. Proper implementation also requires knowing the pitfalls of “common sense” decisions that can come back to haunt you. Not knowing how to allocate costs for various analyses leads to poor decisions. Not having specialists to walk you through this decision maze can be disastrous.
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. Even worse, you cannot support your cost accounting system without an inordinate amount of work which, invariably, leads to its demise. Due to limited sophistication and training, most hospitals don’t exact real value from even the best cost accounting software.
Mistake #6: Not understanding the value of true cost accounting and, as a result, failing to fully capitalize on the effort
Some 70 percent of hospitals still do not have a true cost accounting and decision-support system. One reason is that administration does not see the benefits. The mistake is in not communicating to administration the value that true cost accounting can provide. If you can’t provide reasons to get in place a cutting-edge true cost accounting system, then how can you justify the investment?
Solutions to avoiding the mistakes
Sometimes avoiding the most damaging mistakes requires some openness to new ideas, some simple yet profound.
By having a cost accounting service, you can avoid all of the mistakes noted. Such a service has of a team of experts in cost accounting. They have highly responsive, flexible software programs they use to provide the service for you. They understand what data you need, how to efficiently access and structure it for your use, and how to help you analyze and see how and when to utilize it. Ideally, they provide ongoing consulting. You avoid the $300K+ purchase costs and the $200K+ or more in implementation costs. And, you reduce your implementation lead time (and its cost) by half or more. You avoid the reliance on people who may not be cost accounting artists. You spend your time analyzing data and making decisions rather than pulling and scrubbing data, work that is time consuming and exhausting. And the service helps develop your own internal experts, positioning you to more easily transition to a completely in-house system should you so choose. Then you’ll know what you want the system to do, have the needed sophistication to make the right choices in data structuring, and avoid squandering 90 percent of the system’s capacity.
An April 2011 MIT study, “Strength in Numbers: How Does Data-Driven Decision Making Affect Firm Performance?” concluded that those that adopted “data-driven decision making” achieved productivity improvements of 5 to 6 percent, enough to separate winners from losers. A true cost accounting service can help you be among the winners.
Footnotes:
[1]The costing engine creates the cost per procedure (traditionally a “chargeable” procedure although not 100 percent necessary that it be chargeable as long as its activity is “trackable”). This is the process where the costing experts determine the types of cost needed for business analysis in the institution (variable, fixed, direct, indirect in its multiple flavors like variable direct labor, variable direct supplies, fixed direct equipment, etc.). Part of this process also involves the allocation of non-revenue producing departmental costs which is an art in and out of itself.
The other component involves a “Patient Activity and Clinical/Demographics” database. In this database, the activity of the patient is stored and from where the cost accounting engine draws a procedure’s activity volumes to calculate cost. Once the costs are calculated, the system applies them back to the given procedure to compute the cost of patient’s treatments. The database is where true, valuable cost data resides and which provides the foundation for all of the analyses that the “Cost Accounting System” supports for effective decision making.
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