Why hospitals urgently need modern cost-accounting in a value-based world

Healthcare spending is expected to hit $6 trillion by 2027, up from $3.6 trillion in 2018, according to CMS' national health expenditure projections.

The spending projections mark an average annual increase of 5.5 percent, which exceeds the U.S. economy's projected 4.7 percent annual growth, meaning that by 2027, healthcare spending could account for nearly one-fifth of the country's gross domestic product, the California Health Care Foundation reported in May 2019.

Skyrocketing healthcare costs — accompanied by pressure from patients, payers and providers to lower those expenses — make cost accounting more important than ever for healthcare organizations, according to Organizational Intelligence COO and Founder Jeff Lambert.

During an April 20 webinar sponsored by Organizational Intelligence and hosted by Becker's Hospital Review, Mr. Lambert discussed the fundamentals of cost-accounting systems for recording and analyzing the costs of patient services. He also explained why healthcare organizations have more to gain than ever by integrating reliable, accurate cost-accounting systems into their financial management routines.

A pressing need for timely, credible cost-accounting data

About 70 percent of hospitals already have an automated cost-accounting system installed, Mr. Lambert said, citing research from HIMSS Analytics. However, that same research showed just 9 percent of those hospitals with automated cost-accounting systems have an advanced, next-generation solution in place. A majority either have legacy systems that are decades old or that simply lack modern functionality.

Many healthcare organizations are missing key data insights due to the belief that it's too difficult, expensive or resource-intensive to not only implement, but also to maintain cost-accounting systems, according to Mr. Lambert.

There are several reasons cost-accounting has garnered this unsavory reputation. For starters, outdated legacy cost-accounting systems aren't user-friendly, require significant staff involvement to implement and don't easily incorporate data changes.

Mr. Lambert said legacy systems also utilize "rudimentary" cost-accounting methodologies, such as the ratio of cost to charge method, which delivers less reliable results than the hybrid advanced costing model or activity-based costing.

Moreover, because they rely on methodologies that fail to fully account for resources and related costs, widely used legacy systems are especially ill-suited for ACOs. Without appropriate cost-accounting methods, hospitals involved in ACOs — which assume greater financial risk as part of their model — will find it "virtually impossible to make informed decisions that will improve financial results to meet ACO targets," Mr. Lambert said.

"At the end of the day, these methodologies didn't result in actionable data," he explained. "They simply weren't accurate and therefore not trusted by management."

A new era of valuable cost data

Mr. Lambert suspects healthcare leaders at many organizations are making decisions every day without access to vital cost-related information. This kind of data, however, will be key as hospitals leave behind the fee-for-service world and adopt value-based care models. Higher volumes will no longer directly translate to higher profitability, Mr. Lambert said. Through this "delicate" transition, hospitals that have higher productivity backed by effective cost-accounting will emerge as winners.

"As more healthcare revenue contracts are linked to value-based purchasing, hospitals have to increase focus on cost containment and learn how to correlate per-unit revenue with per-unit cost, as well as consider various quality outcomes," Mr. Lambert said.

Cost-accounting data can have immediate benefits in areas critical to value-based care success, such as service-line reporting, contract negotiations, and financial and clinical performance improvement initiatives, according to Mr. Lambert.

Cost-accounting can also help healthcare organizations pinpoint otherwise-overlooked savings opportunities, improve budgeting and planning capabilities, provide segmented clinical and financial analysis, and inform performance improvement initiatives, Mr. Lambert added. For these reasons, he said, cost data can — and should — be used throughout hospitals, with strong investment by executives and senior leaders.

"Healthcare organizations need to understand the relationship between cost of care and quality outcomes to maximize their ability to deliver high-quality care at a lower cost," he said. "[They] need and will benefit from the implementation of a decision-support cost-accounting system. The data derived from these systems will absolutely be necessary to provide services through the ongoing changes."

Click here to access a recording of the webinar.

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