How do you know if your Cost Accounting Solution is The One?

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Unlike the Sci-Fi classic “Weird Science,” about creating the perfect mate using computer software, you’re not going to be able to find one cost accounting solution with every single feature perfectly hand-picked. Nor is there a healthcare cost accounting “one size fits all” solution for every healthcare organization.

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I will share 10 traits I think are important for healthcare cost accounting solutions so you can make an educated decision on which are most important to you. On the surface, many see it as a matter of software sophistication and, quite frankly, price point - but there are many levels of compatibility to consider.

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1. Beautiful on the inside and out.

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I recommend refreshing your cost model once a month, but at the very least once a quarter. This should not be an arduous task. A good costing software will protect you from yourself by supplying you with easy-to-use buttons, wizards, forms, error handling, and reconciliation reports. If your costing software is still in a mainframe environment, you have every reason to have a wandering eye.

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Also, don’t forget about what’s going on that you can’t see on the front end. Cost accounting logic is quite complex, but with optimized code, performance should not be a huge concern for you. Unless you are running several large hospitals through your costing model all at once, overnight processing for regular monthly maintenance should not be a thing. Anywhere between 30 minutes (for Critical Access) to 4 hours (large hospitals) is reasonable. It’s great if you can find software that can do even better than that!

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2. Gets along with your friends.

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Your costing solution should be automated and well-integrated into several key healthcare systems – at the very least, your general ledger, billing system, and/or EMR. However, more opportunities in costing will be afforded to you when you start establishing linkages to your materials management, surgical, pharmacy, lab, and other systems.

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The “complete package” gathers data from several financial, clinical, and quality systems and uses it to provide information about cost containment as it relates to revenue cycle, clinical operations, staff productivity, capital asset management, vendor and insurance contract management, and of course, patient outcomes. I have not personally seen all of this in one solution yet, but several costing solutions are heading in this direction, so there is certainly a lot to be excited about.

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“The more automation and integration the better...to a point. Don’t forget the Law of Diminishing Returns.”

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3. Focuses on You.

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In healthcare, there are multiple types of cost models available to you. For this article, I’m not going to go into the pros and cons of each. For more information on the differences between the cost models, check out my healthcare costing white paper, “Achieving Clinical and Operational Excellence,” co-authored with Oracle’s Healthcare division.

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Your healthcare facility may start with Ratio of Cost to Charge (RCC). Your costing solution has an obligation to encourage and enable you to grow toward Activity-Based and Micro-Costing. The process of going from no patient-level costing to RCC to ABC is an evolution. In fact, in accordance with the 80/20 rule you may make the business decision not to invest the time to apply ABC to all your cost centers, so a costing solution that offers Hybrid approaches is a MUST HAVE.

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4. Really Understands You.

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Whenever practical, it is best to assign costs directly to the patient instead of allocating through a weighting system. If you know which pharmaceuticals were administered to the patient, and by linking to the pharmacy system you know how much the per dose cost is, then by all means, put that cost directly on the patient.

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Due to improved data integration between materials management, pharmacy, EMR, and other clinical systems, I’ve seen more and more direct costing capabilities emerge in the last few years. I expect this level of costing to become almost commonplace in the not-too-distant future. Even if you’re not yet ready for direct patient costing, ask your cost accounting vendor if they will be prepared when you are ready.

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5. Easy as ABC, 123, do re me.

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From a healthcare perspective, Activity-Based Costing (ABC) means one or more drivers (Surgical Minutes, Square Feet, Pounds of Laundry) will be used to assign costs against one or more activities (Nursing Care, Sterile Processing, Dietary) for a particular cost object (Procedure, DRG, Patient). Therefore, there are several features that can be important to sustain an ABC system.

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• Option to create numerous drivers per department and activity. The more the better; unlimited is best. It can be overwhelming to identify appropriate drivers. You may want to bookmark this longer article I've written, Cost Correlation, to test if you are using the right drivers for your activities.

• There may be activities performed in your department you are not capturing per your initial activity master list. Using the chargemaster or some other standard activity list for your cost model can be a great start. However, I would think of this as the humble beginnings of an ever-evolving activity list. Your "starter" activity list may be too granular, or not granular enough. It may have activity codes that need to be removed, and others that need to be added. A costing solution that allows you to edit your activity list creates a cost model that is more responsive as your departments change and you learn more about actual versus assumed operational processes.

• Ability to cost to different cost objects as desired. You may want a cost object such as encounter, patient, service, supply, or diagnostic group, just to name a few. There are many layers to your patient service line data and you should be enable to explore the profitability of those many facets.

 

6. Charming personality.

 

The below features are great to have and most costing solutions will offer at least some of these.

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• Separation of costs into several categories such as: Fixed/Variable, Direct/Indirect, Patient Care/Business Sustaining, and Salaries, Wages & Benefits/Medical Supplies/Purchased Services.

• Rolling period costing – eliminates the issue of having useless cost data the first few months of your fiscal year.

• New costing logic – option to override previous costing periods with new logic or to apply only on a going forward basis.

• Reclassifications – Account to Account, Department to Department, Facility to Facility for a specific dollar amount, percentage, or in total. It can also be quite helpful to have the ability to create “dummy departments” to group dollars more appropriately for proper costing. For example, I recommend grouping all implants into a single cost center for a better matching of resource consumption, however, you may not have an implant department in your general ledger.

 

7. What you see is what you get.

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Once you’re ready to do your service line margin analysis, it is absolutely critical to compare your costs to Net Revenue, not Gross Revenue (Total Charges).

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Some costing solutions offer a bolt-on product that does reimbursement estimation for you. This is a fantastic feature to have, but make sure you fully understand how it is computed. At the very least, actual payment and historic ratio adjustments should be considered in the calculation.

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For the best possible estimate, I like the following components for your net revenue algorithm at the patient level and in this order:

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• Actual payments and/or adjustments. Be careful here not to automatically assume account has been paid as much as it will be just because a patient made an upfront co-payment of $25 on a $100,000 account. This seems obvious to a human-being like yourself, but computer logic doesn't differentiate unless it's told to.

• Insurance contract estimates, especially if you're already paying a third party contract management vendor, such as MedAssets, McKesson, or PMMC for that information.

• Self-pay adjustment percentage by Age Bucket. Depending on the granularity of your insurance plan data, you can make this even more accurate by breaking out between "true self-pay" and "self-pay after insurance". This is a break out I would recommend anyway based on today's high-deductible patient population - of which I am also a member.

• Bad Debt adjustment percentage by Age Bucket.

• Historic payment and/or adjustment ratios. These ratios may be based on 3-months', 6- months', or a year's worth of patient historic data. Usually a lag of at least one month is prudent. It could be at the most granular insurance plan level or a more summarized financial class level. There are pros and cons of each of these options. Therefore, some software will let you configure to your business needs and comfort level.

 

8. Good Communicator.

 

You should not need a computer science degree to navigate your profitability reporting tool. Drag and drop is best!

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The reporting tool should have standard reports to help you troubleshoot and reconcile the cost model while you are updating it. I appreciate it when the costing solution I’m using gives me gentle reminders and tool tips; much better than the silent treatment.

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It must also provide insightful reports once the cost data is deemed to be ready for use. You should be able to easily make inferences based on both ad hoc and standard reports.

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“What-If” and Predictive Analytics are at the high-end of the reporting spectrum, and won’t always be offered. If that is something important to you, make sure and ask about it before buying, otherwise you may have to perform that analysis yourself, offline.

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9. Fun to Hang Out With.

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Rest assured, there will be many long walks on the beach with your implementation team. However, this time should feel productive and not drag on beyond the promise of your contract, seemingly into infinity. Ask what the average length of your vendor’s costing implementation is. Also, referrals from previous clients can be a good idea.

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Implementation will go smoother if your costing vendor has an implementation team consisting of a seasoned project manager and professionals experienced in technology, data analytics, cost accounting, AND the business of healthcare.

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10. Your future together.

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You should be enjoying a meaningful relationship with your costing solution. There are several things I think are critical in establishing that long-term partnership:

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• Services & Maintenance package – make sure you fully understand what is offered. What is included and what do you have to pay extra for? Determine what kind of internal resources you have. Can you handle the maintenance and continuous improvement of your cost model in-house, or is it best to contract with your costing model vendor and/or a third-party consultant for some of the professional services you will need?

• Training & Documentation – How will training and communication look like one year down the road? What will it be on Day One?

• Road map – You want to know that they are your partner and that they’re in it for the long haul: what is the road map for future improvements, and are they sharing that information with you on a consistent basis?

 

Before making any commitments, a cost/benefit analysis must be used to determine which features are the most important to YOU based on your price point, your ROI expectations, and the value you are trying to deliver to your health system.

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In the end, you may find that your existing costing software has everything you need and you simply need to add a little spark and database magic to renew that relationship, but you will never know what's right for you until you stop to consider what you really want.