COST ALLOCATION CAN BE AS SIMPLE AS A-B-C ABSTRACT: Cost allocation for health care professionals can be an enigma, but activity-based costing allocates In a medical setting, the production method could be en- expenses incurred through providing goods and services visioned as the completion of a surgery, procedure or clinical to the consumer, and it can shed light on inefficiencies Iintervention with the outcome as a benefit to the patient across the supply chain and unlock excess capacity. This, This usually is paired with a payment for the given service in turn, can drive services provided toward generating that is a representation of the value. One method of ob- more value for the hospital system. Time-dependent taining information regarding the unit being measured is to activity-based costing offers advantages of both the survey employees directly involved in the production.* The fee-for-service and capitation models to transition to individuals can provide estimates for the percentage of time a value-based-system. ABC, however, comes with its required to complete tasks along the production chain. The own risks. electronic medical record can affect the process greatly, with more accurate time estimates. Alternatively, examining time ACTIVITY-BASED COSTING IS AN ACCOUNTING for surgery, time for the procedure, and time for workup in tool that allocates costs incurred through a company's practice the emergency department also can help provide an estimate of providing goods and services to the consumer.' In health of a facility's overall capacity to provide that service as a value to the patient. care, this often is based on services associated with patient care, which can be procedural or time-based. These include When considering a given service as a production line (for indirect costs, such as overhead expenses, and direct costs as- example, the process of completing a surgery through the perioperative environment), the patient must see the provider sociated with a given clinical or business entity, such as those attributed to a given procedure from the expenses of the preoperatively, arrive for surgery and comply with follow-up care. All steps require time and are associated with their own operating room." In most firms, direct costs are not allocated direct costs related to the process, as well as indirect costs The accounting method can be tailored to focus upon a (such as administrative or marketing expenses). Across this unit of measurement that holds value related to the company's theoretical surgical production line, an investigator can identify production method. This revolves around tasks performed the cost of each section per unit of time and subsequently during the production process, This unit of measurement can calculate estimated cost drivers of the given service.3 Once a fall under the metric of time or space _ e minutes required for cost driver is calculated, it can be applied to future production a procedure, or square feet associated with a given produc estimates by applying models of the known to the unknown. tion of the number of megabytes used for a given service. Perhaps more powerfully, it also can help identify areas of The challenge of applying ABC is in deciding which unit of efficiency within the process being studied. measurement makes the most sense in telling the story of Although it might be impossible to simplify patient care and cost drivers for that given service. If appropriate metrics are hospital operations into assembly-line production, there is a identified, the ABC method provides insight about whether benefit to calculating the costs of as many parts of the process services provide enough value to customers. It also helps il- possible with ABC methodology. Through the breakdown of lustrate where strategic assets should be deployed. as many parts possible, one can pinpoint which aspects of care are contributing the highest and lowest margins.COST ALLOCATION CAN BE AS SIMPLE AS A-B-C more payment delivered.5 The drawback of this system is that there's no built-in disincentive from scaling service that services are provided in a way that incentivizes necessity of may come with sacrifice in quality. In this incentive structure, surgery around that episode of care. A major driver in the cre- quality is not a driving component. Payment parties have no ation of a value-based system centers on activity-based cost- accounting for the quality of the service rendered, only that ing.7 ABC allows a hospital system to identify, with a higher the services were indeed provided and therefore payment degree of precision, the actual costs to deliver a service. This must be remitted."! enables a hospital to approach a third-party payment system This model has the tendency to escalate costs without with a high-quality marker for a lower price, thereby not only having to define quality. A study by Zuvekas, et al., found containing the cost but also delivering higher quality care.9 that 95 percent of all physician office visits in 2013 were billed under a fee-for-service model. Since that time, the THE LIMITATIONS U.S. Department of Health and Human Services has urged transition from that model, although it remains the dominant One must be cautious about approaching value-based medi- modality.'? It is not uncommon to hear about hyperinflated cine through the lens of time-driven activity-based costing, bills and exaggerated costs associated with a procedure, which has some limitations. hospital, personnel or device used. The litany of patients One is shown within calculating capacity. It is common for dissatisfied with their outcomes and facing bankruptcy from employees to erroneously report that tasks directly related to production take up 100 percent of their capacity. This often colossal hospital bills is staggering. neglects idle time, which includes travel time, training, breaks, pauses between cases, case turnovers, and the like. Accurate CAPITATION, VALUE AND MORE times for a given service can be drastically overestimated, resulting in an overestimated cost driver. Another system used in U.S. health care is the capitation model There are measures that can be applied to estimate prac- Those health care providers who participate in this model have tical capacity: Some argue 20 percent of reported capacity a set fee to provide service, but services are capitated for pricing accounts for idle time. This standard leaves a large margin for delivered from a top-down hierarchy. Executives decide how error that might not reveal itself until after the point for which much money will be deployed for given services and how those decisions must be made and relied upon from the models services are valued. The incentive stems from decreasing use. created by Td-ABC. This is especially true when it applies to As a result, more of the membership payment is retained by medicine as well as creating business cases for third-party the organization. This, however, can lead to denial of care, payers. which has no disincentive in this model. The incentive for quality Further, applying Td-ABC in an industry that historically is delivered only through the members' perception of it. The operates on a small margin (health care and hospital systems argued benefit is health care cost containment as the driving are estimated as low as 8 percent) carries some risk'9 - include incentive and not necessarily defining quality offered.'1 ing some that an organization's leadership might not have the In a value-for-care system, a single "bundled" payment is appetite to experiment with." To paint an accurate picture of given for that particular service. A bundled payment is defined value in a given production line is significantly demanding inCOST ALLOCATION CAN BE AS SIMPLE AS A-B-C the organizadon. This, however, can lead to denial of care, which has no disincentive in this model. The incentive for quality payers. is delivered only through the members' perception of it. The Further, applying Td-ABC in an industry that historically argued benefit is health care cost containment as the driving operates on a small margin (health care and hospital systems incentive and not necessarily defining quality offered 14 are estimated as low as 8 percent) carries some risk19 - include In a value-for-care system, a single "bundled" payment is ing some that an organization's leadership might not have the given for that particular service. A bundled payment is defined appetite to experiment with.14 To paint an accurate picture of as the reimbursement of health care providers on the basis value in a given production line is significantly demanding in of expected costs for clinically defined episodes of care.'s It terms of time and cost To create and maintain the Td-ABC can be used in a variety of specialties and works best in those model itself might require a dedicated budget line item and where a systematic approach to care can be reproduced uni- its own devoted capital expenditure. versally. Given high-quality outcomes, the system is rewarded Another potential weakness in applying Td-ABC to the U.S. by the bundled payment.16 If complications arise, or decreased marketplace in light of the Affordable Care Act is the changing efficiency is encountered, the system is penalized and the landscape of third-party payers and the value they perceive health care organization bears the risk for the variance. For example: a national insurance company that has changed Bundled payment rewards systems that can encourage the its business model from seeking health care services for its members to acting as a health care brokerage that transacts delivery of reliable, high-quality services while deterring entities its members to other medical insurance companies from molding into a system that can simply accommodate Though complicated, the impact of this is striking: The volume irrespective of the value added Value-for-service third-party insurer that the health care system assumes would reimbursement advocates a system that creates self-governing value and seek quality care at the lowest costs (value-for- feedback, thereby ensuring maximum reward to both patient service vs. fee-for-service) is now in a position as a broker and and institution." In 2013, it was estimated that one-third of all might value simply the transaction of connecting a patient to a health care reimbursements in the United States used bundled tertiary health insurer.16 Value-for-service might have become methodology." Although this concept already exists in health transaction-for-service. care, we believe a ground-level view will help encourage The stage has been set for large health care insurance physician onboarding. houses to lower their risk rather than look for value within 36 JULYAUGUST 1 2018 that delivery of care. Thus, the transition of the marketplace decisions to strategically deploy resources. It is essential that staff members as well as administrators understand the value using Id-ABC to show value might fall upon deaf ears andCOST ALLOCATION CAN BE AS SIMPLE AS A-B-C will not be an effective, freestanding tool on the road to a value- and quality-based model for health care. of ABC in identifying rational decisions for sustainability 3 Allocations of costs are important in the accurate assess- PREDICTABILITY ENLIGHTENING ment and application of Td-ABC. Cost allocation for health care professionals can be an enigma within the health care ABC typically is applied to repetitive processes that are predict system. Arguments have been made that the costs for goods able in their outcomes, such as manufacturing, In medicine, and services provided in health care are determined by realized procedures such as total joint replacement lend themselves reimbursements of the past.15 A 2011 manuscript, "How to nearly seamlessly with this model. Solve the Cost Crisis in Healthcare," states that "the inability To understand the parts necessary to provide a given ser- to properly measure cost and compare cost with outcomes vice requires some time talking to the people who deliver that is at the root of the incentive problem in health care and has service - for instance, interviewing a nurse to understand severely retarded the shift to more effective reimbursement how much labor time it takes to bring a patient with appen- approaches, " 16 dicitis from the ER to the OR. Further, what is the measure of In delivering health care, the focus for medical providers "idle time," where services lagged to be delivered? Was this s patient outcome above all. Adhering to this mandate while because of excess capacity, or inefficiencies in the system? concurrently applying Td-ABC can provide better insight into -Can those inefficiencies be fixed? the cost required to produce optimal outcomes. A clear benefit of Td-ABC, in the current health care landscape, is its ability -Herein lies a hidden tool within value-based costing. In to identify inefficiencies in a given production line, thereby uncovering the time associated with known activities in a identifying opportunities to provide further benefit and value service line, the manager finds out how and why it takes a to the patients. This clearly rolls into the bottom line, in creat- certain amount of time in different phases along the value ing a more streamlined and resonant value proposition. n.20 This reveals crucial information: Regardless of the condition of reimbursement, using Td- ABC as a method for uncovering inefficiencies will help the is there excess capacity? delivery of care.' Subsequently, this might help set the cost "Where are the Inefficiencies? structure among many of the players in health care delivery, therefore influencing the health care ecosystem. We must not Understanding these two metrics alone can have a pro- overlook the flaws of this accounting system, but also use its found impact on cost and might be cornerstones for deliver strength to improve the model of health care.' Therefore, we ing the bundled payment.'Specifically, the cost of unused encourage the application of this method broadly; however, capacity has a greater value in a bundled payment system we issue a caution to apply the tool toward health care's when leaders learn why high-dollar-value employees such as advancement, and not to its demise. physicians and nurses have idle time that could be applied to productive activity. It is estimated up to 70 percent of hospital costs are Filis M. Armand, MD, MMM, PhD, is chief of for personnel. so identifying opportunities to decrease the service for mediatric otolaryngology at Texas