5 Nuggets of Wisdom from CFOs
2.Assess supporting infrastructure in labor costs. "We struggle with the infrastructure that supports patient care. … I don't think we have a good handle on how much is enough and how much is too much," says Edward Miller, CFO at Floyd Memorial Hospital and Health Services, a 219-bed health system in New Albany, IN.
If you are struggling to assess any area in your budget—especially labor—it may be because you are using old methods in a new era of healthcare. You need to find your true cost of each and every procedure, so you can understand if you are staffing correctly.
Though the ratio of costs to charges and relative value units are the most common methods for assessing the cost of operating a service line or procedure, these can both fall short at arriving at the true cost of a service, say several experts I spoke with recently. For instance, the 73-hospital system Catholic Health Initiatives uses an entirely different cost accounting method called process-based cost modeling to get at the true cost of a procedure. It's keeping the organization's expenses down, according to Doug Wickerham, vice president of CHI corporate finance.
There are also other cost accounting models to consider using in 2012, including micro-costing and activity-based costing. Both can be superior to the diagnosis-related groups (DRG) system.
"Hospitals are constantly looking to see which DRGs are winners and losers, but the problem is … even the DRG is only roughly 85% accurate," explains David W. Young, professor emeritus in the Health Sector Program at Boston University's School of Management.
"Activity- or process-based costing is a careful assessment of direct costs. Why does it take the tech x minutes to do the MRI, for instance? … From this, some efficiency and process improvement can take place with overhead. You can ask, 'Why do we have one person scheduled for an MRI versus a CT?' When you know those answers you can make [informed] personnel decisions," he explains.
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