Building a Flexible Cost Model

June 12, 2014
Laura Joszt

Healthcare finance teams continue to struggle to implement a costing model that not only reflects current cost-of-care realities, but are also flexible enough to be updated and revised over time.

Healthcare finance teams continue to struggle to implement a costing model that not only reflects current cost-of-care realities, but are also flexible enough to be updated and revised over time, according to the Healthcare Financial Management Association (HFMA).

In HFMA’s Healthcare Cost Containment newsletter, Jay Spence, vice president of product and industry solutions at Axiom EPM in Portland, OR, wrote that most approaches are either “too simplistic to be effective or too detailed to be maintained.”

Healthcare organizations need to find the right balance between efficiency and accuracy and increase shareholder buy-in and data sharing. In his article for HFMA, Spence outlined the 4 best practices for creating a cost accounting model that is efficient and repeatable.

1. Build an intuitive data model that links patient and financial views.

First, the organization needs to map the costs by establishing 10 to 15 cost categories that align with expenses (i.e. patient care labor, supplies, pharmacy, etc.). Then, they need to break down the cost of tests and procedures, following by allocating charge item costs to the corresponding patient record.

Finally, the organization should summarize the costs by condensing the encounter charge details.

2. Streamline data validation and reconciliation procedures.

To ensure accuracy and buy-in from key stakeholders, organizations should implement automated audit checks that trigger alerts and flag outliers. An audit should ensure that:

• General ledger accounts/dollars map to summarized cost categories

• Cost category dollars are fully represented at the charge item level

• Activity level costs, when assigned to patient detail, reconcile to category dollars

3. Refine costs using department manager input.

Spence suggests providing reports that show where year-to-date costs are coming from for department or service line managers. In order to keep the system current, organizations should engage managers to ensure revisions to activity-level relative value units or time-based estimates.

4. Provide consistent views of service line performance for decision making.

Hospital chief financial officers and service line managers should receive a review of performance trends and detailed reports. Afterward, service line managers should be consulted to understand where additional analysis or reporting may be needed.

“These strategies could help in establishing an agile cost accounting model that balances accuracy with efficiency, making cost data more timely and meaningful to decision makers,” Spence concluded. “Such a model may become increasingly valuable as bottom-line pressures on hospitals intensify in the near future.”