330 michelson and pandey

HFMA Dixie

February 19th

3:30pm ET

A Crash Course in Cost Accounting and Cost Reduction

Dan Michelson Chief Executive Officer

Strata Decision Technology

Tushar PandeyDirector of Consulting Services, Decision Support

Strata Decision Technology

Today’s TopicsSix quick “lessons” in our crash course

1. Why do we need Cost Accounting?

2. How does Cost Accounting work?

3. What Cost Buckets should we use and how should we allocate overhead?

4. What Costing Methodologies should we use?

5. How is Advanced Cost Accounting different?

6. How can we leverage cost data to take action and drive out costs?

©2015 Strata Decision Technology

Historic Announcement…

NewsFOR IMMEDIATE RELEASEJanuary 26, 2015 Contact: HHS Press Office

Better, Smarter, Healthier: In historic announcement, HHS sets clear goals and timeline for shifting Medicare reimbursements from volume to value

In a meeting with nearly two dozen leaders representing consumers, insurers, providers, and business leaders, Health and Human Services Secretary Sylvia M. Burwell today announced measurable goals and a timeline to move the Medicare program, and the health care system at large, toward paying providers based on the quality, rather than the quantity of care they give patients.

HHS has set a goal of tying 30 percent of traditional, or fee-for-service, Medicare payments to quality or value through alternative payment models, such as Accountable Care Organizations (ACOs) or bundled payment arrangements by the end of 2016, and tying 50 percent of payments to these models by the end of 2018. HHS also set a goal of tying 85 percent of all traditional Medicare payments to quality or value by 2016 and 90 percent by 2018 through programs such as the Hospital Value Based Purchasing and the Hospital Readmissions Reduction Programs. This is the first time in the history of the Medicare program that HHS has set explicit goals for alternative payment models and value-based payments.

% of payments

Program 2016 2018

Medicare payments to quality or value through alternative payment models, such

as Accountable Care Organizations (ACOs) or bundled payment arrangements

30% 50%

Traditional Medicare payments to quality or value via programs like

Hospital Value Based Purchasing and the Hospital Readmissions Reduction Programs

85% 90%


A Major Shift…

RCMREVENUE CYCLE

MANAGEMENT

MOMMARGIN & OUTCOMES

MANAGEMENT

2014 2017

% OF INSURED

COVERED BY

PAYMENT

APPROACH

LOW

HIGH

2015 2016


2018

The Financial Challenge

1 Centers for Medicare & Medicaid Services, Office of the Actuary, 2012 data2 Annual Cost of Waste in the US Healthcare System according to a 2012 CBO report3 HIMSS Innovation Survey 2013

BY THE NUMBERS

2.2%

Hospitals are struggling

The average operating margin for hospitals is

~2.2% (1/3 have negative operating margins)1,2

$700B

There is significant waste…and opportunity

Over $700B spent on healthcare annually is considered waste (overuse, misuse, variation,

inefficiency, harm)2

#1

Cost reduction has taken center stage

Finding cost reduction solutions has emerged as

the #1 priority for healthcare providers3


As revenue shrinks

and margins tighten,

providers have identified

cost reduction as

their #1 priority

Facing reimbursement pressure, hospitals must dramatically lower their cost structure and reduce waste while delivering outstanding care in order to remain viable.

1 HIMSS Innovation Survey (2013)

26%

40%

46%

51%

52%

54%

64%

65%

New Patient Acquisition

Service Expansion toNew Markets / Populations

Hospital ReadmissionReduction

Better Manage Risk andValue-Based Payments

Medical Error Reduction

Improve KnowledgeSharing & Management

Improve PatientSatisfaction

Cost Reduction

Hospitals and Health Systems Must Cut Costs to Survive

HIGHEST PRIORITY FOR HEALTHCARE PROVIDERS1


$330M

$220M

$40M

$200M

$1B

$300M

$150M

$100M


Everyone has a target…

Physicians are Ready to Engage in Driving Down Costs

Physicians play a key role in reducing healthcare costs. However, they don’t have access to cost data. Closing this gap represents one of the most significant opportunities to drive value in healthcare.

~20% Only 1 in 5 MDs could correctly estimate the cost for common

orthopedic devices

>80% Over 8 of 10 MDs would consider

cost as a key criteria in the selection of a medical device

PHYSICIANS AT SIX MAJOR HEALTHCARE SYSTEMS WERE ASKED TO ESTIMATE THE COST OF 13 COMMONLY USED ORTHOPEDIC DEVICES

(ESTIMATES WITHIN 20% OF ACTUAL COSTS WERE CONSIDERED CORRECT)1

Physicians don’t know… …but do care about cost

n =503 MDs at orthopedic departments at Duke, Harvard, University of Maryland, Mayo, University of Pennsylvania, Stanford, and Washington University

1Survey Finds Few Orthopedic Surgeons Know the Costs of the Devices They Implant, Health Affairs, January 2014.


Linking Clinical and Financial Outcomes Will be Critical


Source: Harvard Business Review, The Strategy That Will Fix Healthcare (October 2013)

The Absence of Accurate Cost Information…“Astounding”

“The absence of accurate cost information in health care is nothing short of astounding”

“The existing systems are wholly inadequate”

“Healthcare organizations are flying blind in deciding how to improve processes and redesign care”

“Understanding true costs will finally allow clinicians to work with administrators to improve the value of care”

Michael PorterProfessorHarvard Business School

SIGNIFICANT MARKET OPPORTUNITY FOR COST

ANALYTICS SOLUTIONS

While hospitals and health systems understand the need to dramatically cut their cost structure, they cannot make informed decisions due to a lack of information.

Less than 10% of health systems have an advanced cost accounting solution

10%

51%9%

30%

Advanced Decision Support Legacy Decision Support

Self-Developed No System

Decision Support Market Penetration

Source: HIMSS Analytics, Company Analysis


Today…in Michigan


How do you price…when you don’t know your cost?


“10 Reasons Hospitals are Shifting to Advanced Cost Accounting”


The Top10 Reasons Hospitals are Shifting to Advanced Cost Accounting

10. To Understand True Margins

9. To Identify Opportunities to Reduce Cost

8. To Understand Total Cost of Care from

Both Inpatient and Outpatient Costs

7. To Bring Together Financial + Clinical

Data

6. To Integrate with Organization’s EHR,

ERP and EDW

“10 Reasons Hospitals are Shifting to Advanced Cost Accounting”

Source: Becker’s Hospital Review, 4-1-2014

5. To Integrate Cost Accounting with

Overall Financial Management

4. To Understand How to Price Right

3. To Run Costing Quickly/Frequently

2. To Improve Accuracy of Costing Data

1. To Make Cost Data More Actionable

via Dashboards


Six quick “lessons” in our crash course today






6. How can we leverage our cost data to take action and drive out costs?


Payor/Financial Class

Patient Type

Service Line

Understanding Profitability


Making The Vision Reality…Enterprise Profitability


The Costing Process

Decision Support

EHR

ERP

EDW

Clinical & Financial


1. Department Level Costing (Align GL to Revenue Data)

– Reclassification – moving/aligning direct dollar

– Overhead Allocation – allocating indirect dollars

2. Charge Level Costing (Assigning department expenses to charge codes/activities)

– Charge Allocation (RCC, RVU, CCR, % Markup, etc)

The Costing Process Cont.






4. What costing methodologies should we use?




Looking at Cost Types

Describes cost source and cost type

– Fixed: Not impacted by volumes (maintenance, utilities)

– Variable: Increases with Volume(supplies, salaries)

– Direct: Directly related to patient care (lab, ICU)

– Indirect: Indirectly related to patient care (IT, Finance)


Looking at Cost Components


Looking at Cost Components Cont.

• Categorization of expenses used in cost reporting and allocation– Recommendation: Align with income statement line items

– Recommendation: Typically between 10-20 cost components

• Cost components can contain indirect and direct dollars – Salaries and Wages (indirect and direct)

• Cost Component can also be specific to a cost type– Recommendation: Typically between 10-20 cost components


Sample Cost Buckets

Salaries• Physicians• Non Physician Medical

Practioners• RN - Patient Care• RN - Nonpatient Care• LPN• Allied Health Professional• Allied Health Technical• Management• Specialized Professionals• Clerical and Admin• Service and Support• Research

Other• Employee Benefits• Medical Supplies• Pharmaceutical Supplies• Other Supplies• Purchased Medical Services• Purchased Services - Other• Repairs and Maintenance• Utilities• Rent• Insurance• General• Depreciation and Amortization


Must-Have Statistics

• Can be used to allocate expenses rather than using manual percentages

– Helps to automate costing

– Can be updated monthly, quarterly, or yearly

- Recommendation: Find the right balance!


DIRECT METHOD SEQUENTIAL/STEP-DOWN METHOD SIMULTANEOUS/RECIPROCAL METHOD

Allocate Overhead Expenses

Increasing accuracy of costing results

Allocation of overhead expenses as indirect dollars to revenue department. Example: IS and Accounting


• Allocates overhead costs only to revenue generating cost centers

• No interaction between overhead cost centers prior to allocation

Advantages:• Simplistic costing model• Easy to use and maintain

Disadvantages:• Inaccurate costing results

DIRECT METHOD SEQUENTIAL/STEP-DOWN METHOD SIMULTANEOUS/RECIPROCAL METHOD

Overhead Methods - Compare and Contrast

• Allocates overhead costs one cost center at a time to remaining overhead and revenue generating cost centers in a cascading manner

• One-way interaction between overhead cost centers prior to allocation

Advantages:• Simplistic costing model• Easy to validate

Disadvantages:• Costing results not very precise

• Allocates overhead costs to revenue generating cost centers by fully recognizing the mutual services provided among all overhead cost centers

• Full two-way interaction between overhead cost centers prior to allocation

Advantages:• Precise costing results• Easy to maintain

Disadvantages:• More complex to understand and

validate


Increasing accuracy of costing results

What Costing Methodology Should You Use?

1. Standard Cost: ‘hard coded’ based on charge code

2. RCC: ratio of cost to charge

3. RVU: relative value unit

4. CCR: ratio of cost to charge at the test level (encounter level)

5. % Markup: reverse markup charge schedule (encounter level)

6. Supply Cost: acquisition cost (encounter level)

7. Activity Based Costing (ABC) – allocation to chargeable and non-chargeable activities

8. Time Driven Activity Based Costing (TDABC) – identify max capacity


Cost Accounting is Not One Thing (e.g. TD-ABC)

Private & Confidential ©2015 Strata Decision Technology

RELATIVE VALUE UNIT

(RVU)

ACCURATE

FLEXIBLE

COVERS MOST COST

TYPES

REQUIRES SOME

MAINTENANCE

SUPPLY/INVOICE

BASED

VERY ACCURATE

TRACKS PREFERENCES

TIMELY TRENDING OF

COSTS

REQUIRES ADDITIONAL

INTEGRATION

% MARKUPS

ALLOWS ACCURATE

COSTING OF BUNDLED

SUPPLIES

FOR SUPPLIES ONLY

DEPENDENT ON

ACCURACY OF CHARGES

AND MARKUP SCHEDULE

RCC

EASY TO UNDERSTAND

& MAINTAIN

ASSUMES COSTS ARE

PROPORTIONAL TO

CHARGES

OUTDATED

ABC

EASY TO UNDERSTAND

IN CLINICAL SETTINGS

COMPLEX TO

IMPLEMENT

TDABC

IDENTIFIES EFFICIENCY

BASED COST SAVINGS

VERY LABOR INTENSIVE

TO IMPLEMENT

APPLICABLE TO LABOR

ONLY

ChargeDirect Labor

Indirect Labor

PhysicianLabor

SuppliesAsset Cost

Contracted Services

Other

CHEST X-RAY

(2 VIEWS)

3 1 1 1 1 1

CHEST X-RAY

(4 OR MORE VIEWS)

4 1 1 1 1 1

HIP

(1 VIEW)

6 1 3 1 1 1

HIP

(2 VIEWS)

6 1 3 1 1 1

The RVU approach

• Determine RVU’s for each charge for each cost category


Every patient is different …so why is their cost the same?

PATIENT ACCOUNTING & MEDICAL RECORDS

DE

C

I

S

I

O

N

SU

P

P

O

R

T

PRACTICE MANAGEMENT

GENERAL LEDGER

& PAYROLL

Traditio

nal D

ata Eleme

nts

OR SUPPLIES/IMPLANT

COSTS FROM SURGICAL

SYSTEMS


Unit Charge Qty RVU AVERAGE COST RVU + AVERAGE COST

Hip Implant $8,500 1 200.0 $4,000 $4,200

OR Level 3 Per Minute $200 120 3.5 $12 $5,640

All Other Expenses $5,000

$14,840

The Impact of Advanced Methodologies

Variable LABOR

Expense

Variable SUPPLY

Expense

TOTAL Variable

Expense

Unit Charge Qty RCC RCC RCC

Hip Implant $8,500 1 $1,000 $3,000 $4,000

Hip Implant OR Time $9,600 1 $3,300 $1,500 $4,800


$13,800

Unit Charge Qty ABC ACQUISITION COST ABC + ACQSTN COST

Hip Implant - Uber Max $8,500 1 $400 $5,000 $5,400

OR Level 3 Per Minute $200 120 $50 $13 $7,560


$17,960Patient Level … More Accurate Cost of Care

Medicare Payment

Would You Grow This Service?

$13,800

$14,840

$15,200

-$2,760

$1,400

Variable Cost Per Case Margin

∆$1,040RCC Labor & Supplies

ABC + Supply Acquisition CostTRUE COST

$15,200$17,960

RVU + Average Supply Cost∆$3,120

$15,200 $360


Medicare Payment

Would You Take 110% of Medicare in Exchange for More Volume?

$13,800

$14,840

$16,720

-$1,240

$2,920

Variable Cost Per Case Margin

∆$1,040RCC

ABC + Acquisition CostTRUE COST

$16,720$17,960

RVU + Average Cost∆$3,120

$16,720 $1,880


FEATURES:

• NOT user-friendly

• Incredibly slow

• Data is not

integrated

• Data is not used

• System has low

utilization

Traditional Decision Support


Advanced Cost Accounting

USES A COMBINATION OF METHODOLOGIES TO PRODUCE THE

MOST ACCURATE COSTING

Creates the Foundation for Defensible Pricing and Effective Contracting

Analyze Cost Holistically andfor Specific Populations

ACCOMMODATES DIFFERENCES IN PRICING, ACUITY, & SALARY

PER PATIENT

INCLUDES SERVICES PROVIDED THROUGHOUT THE CONTINUUM

OF CARE

COSTS ARE UPDATED REGULARLY

FLEXIBLE w THOROUGH w ROBUST

ALGORITHMS TO DISCERN EXCESS CAPACITY AND EXPENSE

EXPENSES AND SERVICES ARE ALLOCATED TO SPECIFIC PATIENT

POPULATIONS

Know Your True Cost to Provide Care

Accepted by Clinicians and Leaders

Drives to Action


Your Call to Action:

Leverage Data to Drive Out Costs


Cost Savings Initiatives are Falling Short

55%

44%

44%

27%

26%

Difficult to Quantify & Track Savings

Difficult to Keep Track of Projects

Lack of Accountability

Projects Don't Produce REAL savings

No Staff to Lead Projects

Source: Strata Decision Survey (n=100 providers)

88%of providers have cost savings initiatives underway

(Range: $50-$400M)

17%are hitting the target

WHY COST SAVINGS INITIATIVES UNDER DELIVER


MIND SET

SKILL SETTOOL SET

Requirements…


Cost Improvement in Action at CentraCare

• Cost of Variation of 65% of Inpatient Volume (17,500 Cases)• $11.3M in Savings • $4M in savings for top 10 DRGs alone

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

LOS Supplies DiagnosticTesting

Pharmacy Therapy Other

Mill

ion

s

Savings by Cost Driver OpportunitySize

# of Opps Total Savings

% of Savings

$500K+ 4 $2.7M 23%

$100-$400K 21 $4.7M 42%

<$100K 184 $3.9M 34%

Total 209 $11.3M

There is no silver bullet…everything has to be on

the table STREAMLINE Systems & Structures

• Benefits• PTO days• Capital

Budget/ Depreciation

• Insurance/ re-insurance

• Outsourced Services

• Consulting Services

• Duplicate IT systems

• Supply Chain

ELIMINATE VARIATION in

Care

• Implants • Physician

preference items

• High cost drugs

• Duplicate Imaging studies

• High cost labs as inpt

• End of life care

PURPOSE-BUILT

Org Structure

• Defining roles to fill distinct purpose

• Defining goals for roles

• Using data to drive accountability for results

LEVERAGE TECHNOLOGY for productivity

• Automate routine work

• Automate processes with rules based technology

• Identify and eliminate duplicative processes

LEAN OUT MGT

Structure

• Create ‘flow’ within a directors span of functions

• Bring functions together than work together often

STAFF to Demand

• Match staffing levels to volume levels

• Match skill level to skill needs

FLEX to Volume

• Adjust staffing levels to fluctuations in volume


Brainstorm, Validate, Then Operationalize Savings

Compare cost per case among physicians

Understand the labor cost and labor requirements to care for a population of patients

Negotiate favorable contracts

Identify opportunities to streamline administrative processes

Manage populations effectively across the continuum of care

Drive accountability for measurable results

With good cost data…


330 michelson and pandey

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