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UPMC's Homegrown Tool for Activity-Based Costing

May 05, 2014

Calculating the true cost of care is essential for evidence-based medicine, reduced variation of care, and the new world of value-based purchasing. UPMC built its own tool for use across its 22 hospitals.

Figuring out how to calculate the true cost of care in relation to patient outcomes is one of the biggest challenges hospitals face as reimbursements move toward value-based models.

While getting a handle on cost may not be easy to do, it will be critical for standardizing and improving clinical decision-making, says Robert DeMichiei, chief financial officer at University of Pittsburgh Medical Center, which is in the process of rolling out a new system-wide cost management system across its 22 hospitals.

"Healthcare is changing from a model that has always relied heavily on fee-for-service reimbursements. With the stress from commercial payers and government payers, everyone is now moving to reduce healthcare spending," DeMichiei says, adding that cost reductions have to be made smartly so as not to negatively impact clinical results.

"We are moving into a world with finite resources, but we also have to have exceptional outcomes," he says.

Building a Costing System

A new activity-based costing system was piloted last year at UPMC Mercy and UPMC Presbyterian hospitals. It aggregates clinical, operational, and financial information from multiple information systems within the organization. Computer modeling tools, along with internally developed algorithms, are then used to match supplies, blood products, equipment use, and more than 50 clinical activities to specific patients, leading to precise and transparent data on cost and outcomes.

"We started planning about three years ago and started in earnest to develop this system about two years ago," DeMichiei says. "We needed something that would give us absolute transparency into cost and quality measures. We absolutely have to have a detailed costing system.…We see a critical need for that in the new accountable care world and the new volume-to-value world."

While the original plan was to purchase the software from a vendor, DeMichiei says after careful review of all available products, UPMC realized none was sufficient for its needs and decided to build its own.

"We looked at all the other systems and technologies that were available in the market. We didn't set out to build our own system, but we looked at a number of vendors and their systems were all rooted in the old systems," he says.

The cost management system will be rolled out quickly in other UPMC hospitals. "We'll start the new fiscal year having about 90% of our hospitals live on the system," DeMichiei says.

Increasing Physician Engagement

Having detailed and accurate information on cost by physician, by patient, by facility, by diagnosis, and by episode of care allows UPMC to engage its physicians in a deeper conversation about clinical best practices because time is no longer being spent questioning the quality of the data, DeMichiei says.

"One of the things we are seeing is engagement and discussion with our physicians," he says. "We are now dealing with facts and empirical evidence around quality and cost. We didn't have the best information before, and it wasn't transparent. We ended up having more conversations about the numbers and whether or not they were right. Now it's a richer dialogue."

Don Riefner, UPMC's vice president of finance, says physicians are "welcoming the data."

"In reality, cost is one of the inputs into the discussion about evidence-based medicine and best practices," Riefner says. Whether it be for competitive reasons or because they know patients are going to be sharing in more of the cost…physicians see that it is in everyone's best interest to reduce cost. They now believe that it is a relevant part of the discussion."

Reducing Variations in Care

Drilling down into the data will also hopefully reduce variations in care and resource utilization, Riefner says.

"One of the things we've been able to highlight with quality and cost data is variation of practice among physicians doing similar procedures, because they are all trained differently and have never been presented with the data.…Outcomes may be similar but there may be different amounts of blood used or a different type of implant used. It gets the thought process going of how does one physician get the same outcomes but at a different cost," he says.

Using evidence-based medicine to standardize clinical practices will be key to bringing down cost, DeMichiei adds. "We are not arguing about the outcomes. However, in achieving those outcomes, we are looking at cost, and we are seeing in some cases significant cost variation.…It brings on a dialogue to say, 'Why are you using more resources to achieve the same outcomes?' It has led us to developing clinical pathways that are more efficient."

'It's a Heavy Lift'

While DeMichiei acknowledges the significant challenges involved in rolling out a new system-wide cost management tool, he says the support the project has received from UPMC's board and senior leaders has been "exceptional."

"I was in a meeting [recently] with all of our hospital presidents, and what I'll tell you is there is so much information, and it's so rich and so detailed, that the questions are in the hundreds," he says. "We have such a thirst now. We are trying to put governance in place and standardize the reporting because we have such a groundswell around wanting this information."

DeMichiei believes that increasing cost transparency and using the data to drive decisions about how best to use resources is the only path forward given the changes that are coming to healthcare.

"I don't know any other way to do this if you think about what the end game has to be," he says. "I believe changes in benefit plans will transform healthcare in the U.S. right now the patient has no skin in the game and no concern for cost at all because it's being paid by someone else. With co-insurance now the price matters, so therefore cost matters. Providers are going to have to be cost competitive.…You need specific, real data."

"It's not fun. It's hard work," he adds. "It's a heavy lift, but you have to be able to do it."

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