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Uncovering True Costs

Karen Minich-Pourshadi, for HealthLeaders Media, February 13, 2012
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This article appears in the February 2012 issue of HealthLeaders magazine.

Healthcare reform will, if it hasn't already, have a huge impact on hospital cost systems. With shouts from Congress and consumers for healthcare to reduce costs and payers turning to bundled payments, now more than ever healthcare organizations need to know the true cost of treatment and procedures. Arriving at true cost, however, requires finance leaders to consider a new set of cost modeling tools: process-based cost modeling.

PBC, sometimes referred to as activity-based costing or micro-costing, is a form of full-cost accounting that offers CFOs a tool to better understand the resources consumed in providing the organization's products and services.

While ratio of costs to charges and relative value units are common methods for assessing the cost of operating a service line or procedure, both fall short at arriving at the true cost of a service, says Paul Selivanoff, CPA, vice president of finance at 150-licensed-bed St. Helena (CA) Hospital–Napa Valley, part of Adventist Health.

Selivanoff, who has written about the topic and helped implement PBC at Catholic Health Initiatives hospitals prior to joining St. Helena, is now putting this cost system in place across the three campuses of his organization.

"St. Helena is anticipating a much more aggressive market in the coming years. There's a heightened sense that we need to know what we can and can't afford to do. We need to know what our costs are, what the cost variations are between physicians, between patient populations, and why those costs are occurring," he says. "By applying this cost model we can understand if the services we offer are value-add or not."

PBC has proven its worth in other industries over the years, but until healthcare reform put the spotlight on cost, micro-costing for healthcare wasn't necessary. However, it also hasn't been embraced by the industry, Selivanoff says, because the initial implementation can be time consuming. It requires every resource in a service to be manually tallied and updated annually, including the quantity of labor, frequency, supplies used, and unit cost.

It can be daunting, Selivanoff says, to get this off the ground. He suggests focusing on high-volume procedures first to get at some swift savings until the program can be rolled out on a larger scale. 

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