Activity-based Costs for Healthcare Changing the Outlook for all of Healthcare

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Without fail, every year brings the news that healthcare costs are on the rise, yet many are asking what have received as a benefit over the previous year to warrant these increases. The same question is being asked within the healthcare community, too. It goes without saying that new medical advances and techniques deserve some share of financial value, but that is a small portion, not the millions of dollars of increase each year. So, the healthcare industry has taken a step back and looked for an answer to the cost increase, and the found a solution in an unlikely place: the manufacturing industry. Adapting to their needs, the activity-based costs for healthcare, or ABC for short, are being implemented to uncover problems within an organization and within the industry as a whole.

The general concept of ABC, whether in the manufacturing or healthcare industries, is understand the costs involved to produce or provide a given product or service, and know how to allocate monies to eliminate waste while being efficient in the work process. I hope you’re not thinking that this should be a simple practice to establish. Because, it is far from the truth. Right now, healthcare charges are more a set of checking a box and coding the right treatment over truly understanding how much it truly costs to take care of each individual patient.

We all like to think that we are unique in some way or another, however, physiologically we are much the same. When a person breaks their arm, there are a set of standard procedures that happen, including x-rays, materials used for casts, and follow-up visits. But, each break is a bit unique: some require a more in-depth look at the break, thus an MRI maybe required. What if the break is on a child and on a growth plate in their arm? We also know that people don’t heal the same way, or some people’s extracurricular life may reinjure the break. So, it is necessary to be much more detailed and uncover the cost for each patient so as to better understand the cost involved in care.

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Information is collected on a patient such as:

  • Clinical documentation
  • Billing information
  • Electronic Health Record (EHR)

Then a closer picture of the current situation is needed:

  • What is the length of stay
  • What ailment(s) is/are involved
  • What kind of staffing needs were covered
  • What materials and services were utilized
  • How many follow-up visits were there

One of the characteristics that became apparent as healthcare organizations began to implement activity-based costing is that communications and information was segregated. This wasn’t necessarily intentional, but was a product of piece-meal growth in the industry. Unfortunately, healthcare has lagged behind most other industries when it has come to bring on new technologies and new ways of thinking. It hasn’t been all that long since the EHR system was adopted, even though client information has been digitized for some time in most other businesses.

With the addition of the EHR system, a virtual wall was built to help protect patient information, but this created a separation of a lot of vital information that helped patient to receive better care. It also drove the cost of healthcare up because less communication was happening between departments and facilities. With less communications, information was not conveyed in a timely manner, double testing sometimes occurred, duplicated records were also sometimes created, and so on. Basically, this was a pool of inefficiencies that added to time and expenses across the board.

An important characteristic of activity-based costs in healthcare is that it tears down these walls. By no means does this compromise the integrity of patient information, but instead connects the documentation and all information to avoid redundancies or duplications. This also allows the cost accounting to look at each specific patient and handle that patient as an individual with unique statistics and input to the system database. If you need to find a detail of expenses, you need all the data available.

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Understand that this method of working with data is not less labor-intensive, but is in fact more. For this reason, there are many people in diverse industries as well as in healthcare who are apprehensive to implement it into their practices. In a small business or industry, the return on investment for the time and effort required does not pay off. However, within the realm of healthcare, most organizations will find much more beneficial information and thus a return on their labors many times over. But, a new mindset is needed by those that are handling the data, those that are implementing this kind of system and those that are participating in collecting and verifying the data. Details are the name of the game, not just a code with a cost attached to it.

“Two activity that absorb the same direct costs canuse very different amounts of overhead. To change the way in which costs are counted, you have to know where they are spent.” The Economist

Activity-based costs in healthcare or ABC isn’t something revolutionary, nor is it something that will solve all the financial ambiguities in an organization, but can be the tool that brings that organization into a better fiscal standing as well as improving the care and outcomes of patients under their attention.