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Can a True-Cost Model Save Your Hospital?

Karen Minich-Pourshadi, for HealthLeaders Media, February 13, 2012

If organizations are going to truly ferret out waste and reduce the cost of healthcare, then it's crucial to know the true cost of treatments and procedures.

Organizations will no longer be able to risk slim margins on the previously reasonable guesstimates that come from using ratio of costs to charges and relative value units.

"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," says Selivanoff in the article. "By applying this cost model, we can understand if the services we offer are value-add or not."

Micro-costing wasn't needed in healthcare until now, but healthcare reform makes it essential. It can be daunting to think about making another large change at your organization, especially after adding an electronic medical records system and preparing for the ICD-10 transition. Waiting to make these changes will not, however, diminish the degree of challenge.

Selivanoff suggests concentrating on high-volume procedures first to get at some swift savings, and then incrementally rolling out the program on a larger scale. There is some good news, though, for those organizations already operating under Lean and Six Sigma.  This type of approach will dovetail nicely with your pre-existing pursuits to uncover process inefficiency and will help you find and trim more waste. 

No one disputes that the current state of healthcare is a mess, but at this point, deciding who's to blame is less important than finding solutions. Healthcare leaders already know where to look: within their own hospitals.

Applying a new approach to cost accounting isn't going to be easy. But it won't be optional for much longer. Like it or not, changing your cost model is an idea whose time has arrived.


Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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1 comments on "Can a True-Cost Model Save Your Hospital?"


John Doub (2/14/2012 at 11:02 AM)
Agreed 100%. When I was in private industry manufacturing products, we tracked total materials and labor for every product we built, applied overhead, and knew exactly what our cost was. At my hospital they have a cost model that is probably not close to reality. Also performance, outcomes, and profitability of physicians must be part of the score card. Unfortunately in healthcare, we can't just raise the price to increase margins, so knowing the true cost and chipping away at multiple products to decrease cost is the only viable alternative. Great article and well timed.