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7 Tips for Implementing Cost Accounting in Health Care Settings

Posted by Angie Walters, CPA, CITP on Mar 6, 2018 1:28:45 PM

Most healthcare providers today realize they no longer can pursue top-line growth as their primary means of growth and expansion. Instead, they are compelled to streamline costs, all while continuing to pursue optimal patient outcomes.

This is no easy task, and in this regard, measurement and accountability are key. As the saying goes, what is not measured cannot be managed or improved. Given an unprecedented emphasis on accountability within the healthcare realm, it’s crucial that healthcare organizations accurately measure and compare costs with outcomes. Not doing so could adversely impact value, constrict operations, affect patient outcomes, and challenge profitability.

That’s where cost accounting comes in. As healthcare systems throughout the country transition to value-based care, cost accounting has taken on an increasingly vital role in that transformation. Gaining a clear view of cost and profitability measures across clinical service lines allows organizations to see operations in a new, holistic light, then perform short- and long-range planning accordingly. In turn, the cost accounting function in healthcare provider organizations is becoming an increasingly important and strategic function.

Related Blog: The Role of Accounting in Healthcare Management

Think back to the introduction of electronic medical records technology and its eventual adoption across the healthcare spectrum over the preceding decades. Now, the cost-accounting function is facilitating the next revolution in healthcare. The question is, are you on board? 

What is Cost Accounting in Healthcare?

Simply put, cost accounting is a system for recording, analyzing, and allocating cost to specific individual services that patients receive (e.g., tests, procedures, medications, room, and board). Put another way, it’s the process of estimating and classifying costs incurred by a healthcare organization. Such costs can be analyzed at the organizational or departmental level; but increasingly, healthcare organizations seek ways to analyze them at the service/individual patient level.

Why is this needed? Consider:

The Centers for Medicare and Medicaid Services has projected total U.S. health care spending of $4 trillion by 2019 and $5 trillion by 2024. Concurrently, the Health and Medicine Division (HMD) of the National Academies estimated that one-third of the total health care spending in 2014 was wasted, while the American Hospital Association has said that hospital margins hover around two percent—and one-third of hospitals operate in the red.

Healthcare organizations can generate large revenues. But, costs associated with that revenue are also large—sometimes even more so. To effectively manage service delivery, it’s essential to understand the precise costs for every patient encounter, procedure, or care episode up front. Knowing this information at a precise level enables a healthcare organization to:

  • Accurately assess the profitability of individual service lines and provider relationships
  • Determine specific amounts to charge insurance companies and patients respectively
  • Improve services
  • Determine which services to offer, today and in the future
  • Enable management to make informed decisions.

Certainly, these are vital benefits for the core of a healthcare system. Yet, many decentralized health care systems feature post-acute facilities, home healthcare, and other assets; so as decentralization increases so too does the importance of cost accounting.

Organizations without a cost accounting system—and there are fewer and fewer each year—rely on rudimentary methods such as the ratio-of-cost-to-charge. Methods like this may have sufficed in a volume-driven payment environment when decision-making based on cost accuracy was not crucial. But they inhibit a healthcare organization’s ability to remain competitive, today and in the future.

Implementing Cost Accounting in Healthcare Settings – 7 Tips

Cost accounting in healthcare settings should be designed to streamline the process of deploying patient-level costs with efficient and repeatable methods. By doing so, the end goal is to help ensure accurate and timely reporting of performance analytics across a system’s spectrum of patient populations.

Sounds good in theory, yet too many healthcare organizations don’t take the necessary time up front to create a useful system, or invest time post-implementation for training and maintenance.

Where to start? Consider these 7 tips when considering the design and implementation of a useful cost accounting system:

  1. Get Top-Down Buy-In: Clinical personnel may not view cost accounting as a priority. They should, for it offers enterprise-wide benefits and requires enterprise-wide buy-in. Executives and senior management must lead this charge and provide the resources necessary to implement it and sustain it over time.
  2. Good data inparticularly during system implementationmeans good data out. There’s no debate that optimal cost information can boost accountability. Usable reports, therefore, will forever be elusive without accurate initial data, so make sure you design and deploy internal audit procedures that help ensure accuracy and inclusiveness of that data.
  3. Choose a system that promotes transparency across the costing process, accounts for inpatient and outpatient care settings, and offers flexible costing methodologies, including support for multiple cost assignment methods. Costs and allocations should be transparent.
  4. Implement With Precision: Healthcare systems often select a cost accounting solution without anticipating what it will take to implement it fully. In truth, these systems take months to integrate fully, and they can potentially disrupt people and processes. Take time up front to involve stakeholders in all aspects of the decision-making process, involve outside experts if needed, and make sure the right people work collaboratively before, during and after implementation.
  5. Incorporate Value Dashboards to Enable Integration Between Cost and Analytics Data: These can help you analyze cost savings when measured against value provided. Ideally, dashboards should run at the system, physician, patient, and payer levels.
  6. TrainToday and Tomorrow: It’s vital that stakeholders are prepared to move forward with implementation from day one, so they should be trained on all aspects of the system, from cost accounting concepts and use, to basic cost accounting calculations and more.
  7. Tend the Garden: “Set it and forget it” doesn’t apply in the realm of cost accounting systems. These systems require ongoing maintenance. If you make the commitment up front, stick with it over time.

For more information about our Medical Practice Niche or the services we offer, please contact our medical team by using our contact form below or call Angie Walters directly at 214-635-2547.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article. 

Topics: Medical