Post on 06-Mar-2018
Copyright © Harvard Business School, 2013
Introduction to Time-Driven Activity-Based Costing in Health Care
Driving HealthCare Value, May 2014Dublin, Ireland
Professor Robert S. (Bob) Kaplan
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Measuring Costs: We must overcome several health care costing problems.# 1: Confusion of Costs with Prices (Charges)
o Currently, provider expenses are allocated to patient care based on charges or “relative value units”—neither of which is a good surrogate for the actual costs incurred
o Costs are not assigned to unbilled or unreimbursed processes and procedures
# 2: Wrong Unit of Analysis for Measuring Costs o Currently, costs are measured for organizational units or
individual procedures and events, not for the full cycle of careto treat a patient’s medical condition.
# 3: Economists, administrators, and policy makers believe many health care costs are “fixed”o We wish! If health care costs were fixed, we wouldn’t have a
health care cost crisis.
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Measuring costs using Time-Driven Activity-Based Costing (TDABC)
• A bottoms-up approach to costing patient care based on the actual clinical and administrative processes, and resources, used to treat patients.
• Combines process mapping from industrial engineering with the most modern approach for accurate and transparent patient-level costing
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Time-Driven Activity-Based Costing (TDABC)
• What activities are performed over the care cycle for a medical condition?
• Who performs each activity?
• How long does each activity take?
Determinethe Care Process
• What is the cost per unit of time for each type of personnel?
Calculate Cost Rates
• What is the cost of materials, devices, supplies, and drugs consumed during the care cycle?
Account for Consumables
• What are the drivers that determine the workload for each indirect department/area?
Allocate Indirect Costs
1
2
3
4
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MD encounter
Assess appropriateness
Assess risk
Schedule OR
Procedure Recovery
Possible need for procedure
Shared decision making
Pre‐procedure testing
Tier 1,2 outcome measures
Patient problem
Tier 3 outcome measures
Patient-level outcomes and costs are measured over a complete cycle of care for a clinical condition
Source: Tim Ferris, MD, personal communication
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Measuring Costs: Develop process maps for the care cycle
Map 1: Surgical
consultation
Map 2 : Pre-operative
testing
Map 3: Day of surgery pre-
operative prep
Map 4: Operation
Map 5: Post-anesthesia care unit
Map 6: Discharge
Map 7: Rehabilitation
Map 8: Follow-up
visit
Level 1: Overall care cycle
Level 2: Study care cycle
Level 3: Process maps
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Process map for initial office visit
Average time
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Calculate Capacity Cost Rates (Cost per minute) for each resource (personnel or equipment)
Surgeon Registered Nurse
X-Ray Technician
Physician Assistant
Office Assistant Scribe
Total Clinical Costs ($) $ 546,400 $ 120,000 $ 100,000 $ 64,000 $ 51,000 $ 61,000
Personnel Capacity (minutes) 91,086 89,086 89,086 89,086 89,086 89,086
Personnel Capacity Cost Rate ($/min.) $ 6.00 $ 1.35 $ 1.12 $ 0.72 $ 0.57 $ 0.68
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Measuring Patient’s Cost over a Complete Cycle of Care for a Clinical Condition
Initial consultationMinutes Cost/
minute*Total
MD X1 Y1 136.13
RN X2 Y2 68.04
CA X3 Y3 6.17
ASR X4 Y4 15.74
$266.08
Surgical procedure MD X1 Y1 584.99
Anes. X2 Y2 603.89
RN X3 Y3 136.29
Tech X4 Y4 97.82
OR X5 Y5 329.16
$1752.15
Follow‐up or post‐operative visit MD X1 Y1 55.19
RN X2 Y2 13.61
CA X3 Y3 3.09
ASR X4 Y4 1.77
$73.66
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Boston Children’s Hospital’s Department of Plastic and Oral Surgery (DPOS) examined three types of office visits
Simple Skin Excision
Source: Boston Children’s Hospital: Measuring Patient Costs, HBS case 112-086
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TDABC Step 1: Develop Process Maps for each type of office visit, along with process times & resources (personnel)
Plagiocephaly
Simple Skin Excision
Craniosynostosis
Key
Consult with MD
Consult with MD
Check in with ASR
Check in with ASR
3
Prep, take to room, height and weight
Prep, take to room, height and weight
5
Take history, new patient
documentation
Take history, new patient
documentation20 18
Helmet RxHelmet Rx
3
Check‐outCheck‐out
5
Book surgery (+10 if complex pt.), billing, pre‐op patient call
Book surgery (+10 if complex pt.), billing, pre‐op patient call
Check‐outCheck‐outConsult with MD
Consult with MD
Patient chart prep, check‐in
Patient chart prep, check‐in
6
Prep, take to room, height and weight
Prep, take to room, height and weight 5
Take history, new patient
documentation
Take history, new patient
documentation
20 22
Explain scheduling, PA, call to schedule
Explain scheduling, PA, call to schedule 25.5 19 5
Check‐outCheck‐outMake referralsMake
referralsConsult with
MDConsult with
MD
Take history, new patient
documentation
Take history, new patient
documentation
Check in with ASRCheck in with ASR
3
Prep, take to room, height and weight
Prep, take to room, height and weight
5
Take photosTake photos
5 20
Pull up CT scan
Pull up CT scan
3 40 2.5 5
PhysicianPhysicianAmbulatory Service
Representative
Ambulatory Service
Representative
Clinical AssistantClinical Assistant
RegisteredNurse
RegisteredNurse
Y
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TDABC Step 2: Financial personnel calculate each resource’s $/minute Capacity Cost Rate
• Costs: All the costs (salary, fringe benefits, occupancy, support resources) associated with having that person (or piece of equipment) available to treat patients
• Capacity: The capacity (time) that each resource (personnel, equipment) has available for treating and caring for patients
• Capacity Cost Rate = Resource Cost/ Resource Capacity
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TDABC Step 2: Calculate the costs of supplying each type of clinical and administrative resource (data disguised), …
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… and estimate each resource’s available time to calculate the Capacity Cost Rates.
Resource Surgeon ASR RNClinical
AssistantWeeks per year 52 52 52 52Less: Weeks unavailable 8 6 6 6Working weeks 44 46 46 46Hours per day 10 8 8 8Less: Breaks, training, meetings 1.2 1.5 1.5 1.5Available hours 8.8 6.5 6.5 6.5Research and teaching 2.2 0 0 0Clinical hours per day 6.6 6.5 6.5 6.5Clinical minutes per day 396 390 390 390
Capacity (minutes per year) 87,120 89,700 89,700 89,700
Annual Cost per person $ 522,720 $ 89,700 $ 134,550 $ 71,760
Cost per minute $ 6.00 $ 1.00 $ 1.50 $ 0.80
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Plastic Surgery Department Office Visits: Ratio of Costs to Charges (RCC) Method
RCC Costs Charge Avg Reimb RCC cost RCC Profit
Plagio 350$ 224$ 210$ 14.00$ Neoplasm 350$ 224 210 14.00 Cranio 350$ 224 210 14.00
Charges $ 12,449,500 Costs 7,469,700 Reimbursement 7,967,680 RCC: Ratio of costs-to-charges 60%Average reimbursement rate 64%
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Time-Driven ABC analysis gives a completely different picture about the profitability of the three service lines
Medical Diagnosis Cost per patient Surgeon ASR RN CA Total cost Charge
Avg Reimb
TDABC Profit
Plagiocephaly 108.00$ 8.00$ 34.50$ 4.00$ 154.50$ 350.00$ 224.00 69.50$ Neoplasm skin excision 132.00 55.50 30.00 4.00 221.50 350.00$ 224.00 2.50$ Craniosynostosis 240.00 10.50 34.50 8.00 293.00 350.00$ 224.00 (69.00)$
Personnel process times (minutes) Surgeon ASR RN CA
Plagiocephaly 18 8 23 5
Neoplasm skin excision 22 55.5 20 5
Craniosynostosis 40 10.5 23 10
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Summary of Plastic Surgery Office Resources and Costs
Surgeon ASR RN CA CostAnnual Cost 522,720$ 89,700$ $ 134,550 $ 71,760 Annual Minutes 87,120 89,700 89,700 89,700 Cost per minute 6.00$ 1.00$ 1.50$ 0.80$
Process Time (minutes)Plagiocephaly 18 8 23 5 154.50$ Neoplasm skin 22 55.5 20 5 221.50 Craniosynostosis 40 10.5 23 10 293.00
Resource Supply 2 2 2 1Annual Expense 1,045,440$ 179,400$ 269,100$ 71,760$ 1,565,700$ Minutes Available 174,240 179,400 179,400 89,700
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Plastic Surgery Annual Resource Utilization
# visits (year)Plagiocephaly 5,400 Neoplasm skin excision 2,000 Craniosynostosis 800
Surgeon ASR RN CA CostResource Supply 2 2 2 1 Annual Expense 1,045,440$ 179,400$ 269,100$ 71,760$ 1,565,700$ Minutes Available 174,240 179,400 179,400 89,700
Surgeon ASR RN CA CostMinutes Required 173,200 162,600 182,600 45,000 FTE's Used 2.0 1.8 2.0 0.5 Capacity Utilization 99% 91% 102% 50%Cost to procedures 1,039,200$ 162,600$ 273,900$ 36,000$ 1,511,700$ Unused Capacity Costs 6,240 16,800 (4,800) 35,760 54,000
Total office expenses 1,045,440$ 179,400$ 269,100$ 71,760$ 1,565,700$
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Suppose we can have the RN perform some of the Plagiocephaly exam instead of the surgeon.
From Surgeon ASR RN CA CostCost per minute 6.00$ 1.00$ 1.50$ 0.80$
Process Time (minutes)Plagiocephaly 18 8 23 5 154.50$ Neoplasm 22 55.5 20 5 221.50 Craniosynostosis 40 10.5 23 10 293.00
To Surgeon ASR RN CA CostCost per minute 6.00$ 1.00$ 1.50$ 0.80$
Process Time (minutes)Plagiocephaly 10 8 39 5 130.50$
Neoplasm 22 55.5 20 5 221.50
Craniosynostosis 40 10.5 23 10 293.00
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… which requires one more RN, but saves 0.5 FTE surgeon
Surgeon ASR RN CA CostNew Resource Supply 1.50 2.00 3.00 1.00 1,438,890$ Minutes Required 130,000 162,600 269,000 45,000 FTE's Used 1.49 1.81 3.00 0.50 Capacity Utilization 99% 91% 100% 50%Cost to procedures 780,000$ 162,600$ 403,500$ 36,000$ 1,382,100$ Unused Capacity Costs 4,080 16,800 150 35,760 56,790
784,080$ 179,400$ 403,650$ 71,760$ 1,438,890$ Savings 126,810$
We handle the same volume and mix of patients while spending$127,000 less on office visits.
Surgeon time released could be used for surgeries – neoplasms, craniosynostosis – which likely are compensated much better.
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Suppose we expect a productivity increase of 6% next year
Process Time (minutes) Cost per procedurePlagiocephaly 9.40 7.52 36.66 4.70 122.67$ Neoplasm skin excision 20.68 52.17 18.80 4.70 208.21 Craniosynostosis 37.60 9.87 21.62 9.40 275.42
Cost per procedure drops by 6% but total spending stays the same:
Surgeon ASR RN CA CostResource Supply 1.50 2.00 3.00 1.00 1,438,890$
Total minutes required 122,200 152,844 252,860 42,300 FTE's Used 1.40 1.70 2.82 0.47 Capacity utilization 94% 85% 94% 47%Cost to procedures 733,200$ 152,844$ 379,290$ 33,840$ 1,299,174$ Unused Capacity Costs 50,880 26,556 24,360 37,920 139,716
Total office expense 784,080$ 179,400$ 403,650$ 71,760$ 1,438,890$
The benefit from the productivity improvement ends up in unused capacity, which allows us to handle an increased volume of patients without having to add new personnel
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Health care leaders can use TDABC to manage all their costs as “variable,” based on patient demands and process efficiencies
1. Forecast the number of patients that will be treated for each medical condition
2. For each medical condition, multiply the forecasted number of patients by the process times required for each resource over the care cycle. Sum up across all medical conditions to obtain the forecasted quantity of capacity (time) required for each resource type.
3. For each resource type, divide the total required time by the resource’s available minutes (e.g., 90,000 per year), and round up to next integer) to obtain the quantity of each resource type that must be supplied.
4. Multiply the quantity of each resource type required to meet forecasted patient needs by the cost of supplying the resource it to obtain the future amount of spending. This is next period’s budget – obtained analytically, from the bottom up, rather than by adding (or subtracting) percentages to last year’s spending by each department.
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Assigning the costs of support departments
• To assign the costs of indirect and support departments (imaging, laboratory, pharmacy, HR, IT, finance, occupancy, housekeeping),develop process models of the work performed by the resources ineach department.
• Rule of “1”: Any department with more than one person (or one piece of equipment) has more work to perform than can be handled by a single person (or single piece of equipment). By tracing where the demand of work for that department comes from, you have a logical and defensible basis for assigning the cost of that department by causal quantitative drivers, NOT PERCENTAGES.
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Support Departments: Assigning the cost of the Billing Department
Version 1.0: Estimate that each invoice takes the same time, 50 minutes, to produce and collect, independent of diagnosis or patient’s insurance carrier
Patient billing cost per visit = 50 × $1.20 = $60
Billing Services $756,0007 clerks; one billings supervisorMinutes per year (7 @ 90,000) 630,000 Cost per minute 1.20$
Consider a billing department, that spends $756,000 per year in invoicing and collecting from patients and their insurers.
Seite 25© 2012 Schön Klinik
Total Knee and Total Hip Replacements are performed in six different locations
NeustadtTHR: ~ 1550 TKR: ~ 1050Rehab: ~ 2.700Hamburg Eilbek
THR: ~ 660 TKR: ~ 430
München HarlachingTHR: ~ 180TKR: ~ 180
VogtareuthTHR: ~ 420 TKR: ~ 340
HarthausenTHR: ~ 310TKR: ~ 340Rehab: ~ 500
Bad StaffelsteinRehab: ~ 900
Source: qed-online (2011) (1) without revisions
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The first pilot was performed at Neustadt with a highly specialized Orthopedic Department, which performed 3,000 joint replacements/year
520 beds(90 ortho / 190 rehab) 915 employees 18,000 patients / year
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I became a physician to cure patients and save lives.
You need to reduce headcount and cut costs and do it now!
Previous attempts at standardization and cost cutting had failed.
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Choosing your first pilot site for TDABC
• What medical condition should we select?
• Where should we do the initial pilot?
• Who needs to be involved in the initial pilot?
Seite 29© 2012 Schön Klinik
Select the medical condition: Knee and hip osteoarthritis
• High volume procedure (6,000 per year at Schӧn Klinik hospitals).
• Expensive procedure (Willie Sutton rule)
• Excellent outcomes data base
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Select the site: Neustadt
• Had both acute and rehab facilities at the site: can model the entire care cycle
• Extensive use of standardized clinical pathways
• Extensive outcomes data base
• Surgeons knew they were recognized as a “high performance facility” with excellent outcomes
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Obtain project sponsorshipOrganize the project
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Neustadt Clinicians and Finance Personnel colla-borated to develop the TDABC model
Finance
Cost of Supplying Resources(People, Equipment, Space)
How we deliver care today for patients
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Step 1/2: Develop process maps and time estimatesfor all processes and activities Development of process maps1.
Estimation of process times2.
Identification of relevant resource costs3.
Estimation of the available capacity4.
Determination of direct costs6.
Allocation of indirect costs7.
Calculation of treatment costs per process step5.
Addingprocess times
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Step 3/4: Identify all relevant resource costs, estimate the capacity and calculation of the Capacity Cost Rate(example: nurse)
Development of process maps1.
Estimation of process times2.
Identification of relevant resource costs3.
Estimation of the available capacity4.
Determination of direct costs6.
Allocation of indirect costs7.
Calculation of treatment costs per process step5.
Costs (€)
Capacity (min.)=
4.500,00 €
7.276 min.= 0,62 € / min.
Capacity Cost Rate(1) =
(1) numbers disguised
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Step 5: Multiply the Capacity Cost Rate and processing time to determine the total costs of processes(examples(1))
OP
/ pos
top.
Reh
ab
Professional group min. € / min. total (€)
Physicians 260,0 1,54 400,40
Nurses 400,0 0,58 232,00
Other clin. staff 67,0 0,47 31,49
Administration 19,0 0,46 8,74
Sum 672,63
Professional group min. € / min. total (€)
Physicians 134,5 1,27 170,82
Nurses 92,5 0,67 61,98
Other clin. staff 376,0 0,47 176,72
Administration 23,0 0,46 10,58
Sum 420,10
Development of process maps1.
Estimation of process times2.
Identification of relevant resource costs3.
Estimation of the available capacity4.
Determination of direct costs6.
Allocation of indirect costs7.
Calculation of treatment costs per process step5.
(1) numbers disguised
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Different assignment of “indirect costs“ with huge impact on the operating profit
Depreciation onBuilding
Depreciation onBuilding
MedicalControllingDepartment
MedicalControllingDepartment
PatientAdmission
Department
PatientAdmission
Department
LoS
91 % acute,9% rehab
30 % OR-time70 % sqm
LoS
Capacity CostRate
Number ofcases
Existing Cost SystemCalculation TDABC„Indirect costs“„Indirect costs“
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The previous assignment of costs shows significant differences to the methodology of TDABC
Existing System Calculation TDABC1. 2.
Acute
Revenues(1): 10.226 $
Costs: 8.924 $
Profitability: 12,7 %
Acute
Revenues(2): 9.897 $
Costs: 8.119 $
Profitability: 18 %
(1) PCC – including all revenues of privately and statutory insured patients of the orthopedic department(2) DRG revenue for a TKR; 1€ ~ 1,41$; all numbers disguised
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Variance Analysis
Suppose the personnel cost at Site 2 for knee replacement was $5,400 while at Site 1 was $4,624
Total Cost Variance = $5,400 - $4,624 = $ 776 (U)
• Site 2 used 3,600 minutes at an average cost per minute of $1.50
• Site 1 used 3,400 minutes at an average CPM of $1.36
•Input price variance = ($1.50 – 1.36) × 3,600 = $ 504 (U)
•Quantity (efficiency or productivity) variance= (3,600 – 3,400) × $1.36 = $ 272 (U)
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We can view the variance analysis graphically
III IV
I II
Pure Price Variance Joint Variance
Price Variance
Efficiency Variance
3,400 Site 1 quantity of
minutes
3,600 Site 2 quantity of
minutes
Site 2cost per minute
Site 1 cost per unit
$1.50
$1.36
$ 504
$272
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Neustadt Munich Variance
Personnel Costs € 2,058 € 2,988 € 930. U
Personnel Minutes 1,392 2,043 € 962.5 U
Average Cost/Minute € 1.48 € 1.46 € 32.5 F
(my calculation)
The 45% cost difference (unfavorable cost variance of €930) is caused by the unfavorable personnel productivity variance at Munich.
Personnel Time and Cost Variances: Neustadt versus Munich
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Benefits from Variance Analysis
Variance analysisPrice: Difference in CPM for each Personnel Type
Quantity: Difference in Number of Minutes (activity duration and
LOS)
Price: Difference in Mix of Personnel Types
Variation in Total
Personnel Costs
1
23
Seite 43© 2012 Schön Klinik
Lessons Learned
With the combination of meaningful cost assignment and process mapping we really understand for the first time the true cost of a medical condition.1.
With TDABC we have great visibility into areas where substantial and expensive unused capacity exists.2.
The imprecise assignment of costs may result in wrong strategic decisions.4.
With TDABC we are able to have more constructive and better informed discussions with our medical professionals.5.
TDABC reveals powerful new ways to improve our processes and to restructure our daily care delivery.3.
The combination of accurate cost measurement and systematic outcome measurement together with benchmarking is the key to unlock the full potential of value in our organization.6.
TDABC as a „must“ for an effective management of resources and for improving value
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Time-Driven ABC provides a common platform – a single version of truth – for productive discussions among clinical & administrative personnel.
By standardizing on this procedure and we can achieve consistently excellent outcomes
at lower cost.
We can skip this process and save $120
per patient.
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TDABC helps providers manage their costs
Process Improvement and Redesign
Personnel and
Resource Utilization
• Eliminate process steps and variations that do not contribute to improved patient outcomes
• Redesign processes to reduce waste and idle time
• Optimize processes and interventions over a complete cycle of care
• All clinicians work at the “top-of-their license” →health care personnel, equipment and facilities have very different productivities and costs; who should be doing the work, where, and how?
• Use existing capacity to serve larger volume of patients or Reduce unused capacity of people, equipment, and facilities
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TDABC also provides the foundation for bundled payment contracts
• Offer Bundle Payment Reimbursement: Understand costs over the full care cycle to prepare for implementing bundled payments
Pricing
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HBS Cost Team is currently collaborating with multiple health care delivery systems
30 hospitals participating in joint replacement program
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HBS cost measurement & management project areas
•Chronic kidney disease
•Care transitions/preventing readmissions
•Congestive heart failure
•Diabetes•Primary and psychiatric care for patients with intellectual disabilities
• Bariatric surgery• Cervical spine surgery• Child birth and pregnancy• Heart valve replacements and
repairs• Head and neck cancers• Hysterectomies• Mastectomies• Joint replacements• Neurosurgical procedures• Observation patients• Prostate cancer surgeries and
radiation treatments• Rotator cuff repairs• Tonsils & adenoids
Chronic and Primary Care Episodic Care
Ancillary and Indirect
• Radiology
• Billing