HEALTHCARE COSTING March 8, 2018
Contents Objectives Healthcare Costing Trends (RSM) Perspectives on Trends and Optimization of Tools (EPSi) Costing Journey Experience (Mayo Clinic) Questions and Answers 2
Objectives By the end of this webcast you will: Have an updated understanding of healthcare costing trends Gain insights on costing methods and tools deployed for increased visibility and confidence in managing profitability at a department, physician or encounter level 3
INTRODUCTIONS 4
Today s Speakers Greg Maddux, Partner - RSM Consulting John Gragg, Chief Operating Officer - EPSi Todd Wilkening, Vice Chair, Management Accounting - Mayo Clinic 5
HEALTHCARE COSTING TRENDS RSM 6
Speaker Greg Maddux Partner, Regional Management Consulting Leader Greg.Maddux@rsmus.com 816.751.1845 7 Greg works closely with key management to develop and implement tactics for improving process efficiency, operational performance and profitability results for organizations. He has worked with mid-sized to Fortune 50 businesses in a variety of industries including healthcare, insurance, manufacturing, higher education and other sectors. He specializes in cost management and profitability improvement, finance transformation, M&A integration, and shared service design and implementation to create higher performing organizations. Greg s background includes more than 25 years experience in providing consulting services, as well as experience with a Big Four firm and in private industry.
You can t manage what you don t measure. Peter Drucker 8
Healthcare Market Pressures Patient care is increasingly being moved away from hospitals and into outpatient settings, other places of care, or the home 05 01 Independent hospital organizations are looking to merge with competitors to scale administrative costs and spread the risk of a growing and diverse patient population as well as increase leverage with payers With heightened customer focus on their healthcare costs, price transparency is becoming increasingly important 04 Text Here Market Pressures 03 02 For many healthcare organizations, costs are increasing at a faster pace than reimbursement 9 Reimbursement is evolving towards value-based payment models that reward high quality and lower cost with shared savings
Costs Can be More Optimally Managed Applying the ideas of W. Edwards Deming, recent studies show that approximately one third of all healthcare costs is wasteful; this provides a huge potential for cost improvement. Percentage of Waste 5% 45% 50% 10 Production-Level: Inefficiencies in producing units of care (e.g. drugs, lab tests, x-rays, etc.) Case-Level: Inefficiencies in delivery of care Population-Level: Systemic inefficiency in performing unnecessary procedures based on diagnoses Source: Harvard Business Review
Value-Based Reimbursement is Moving Forward Momentum towards Value and Risk-based reimbursement, with CMS leading the charge 11 Source: Centers for Medicare & Medicaid Services
Framework for Healthcare Transformation 12
A Critical Need for Encounter Level Costing Frequent disconnect between cost of service delivery vs. revenue/reimbursement and value Movement towards value-based or risk-based reimbursement A critical need for an accurate view of costs & margin at an encounter level The increased number of employed physicians and care providers The need to manage patients through the entire continuum of care 13
Current State of Costing in Healthcare Costs for the same procedures may vary widely by physician and location yet not be detected At times, a lack of confidence in the accuracy of cost information across the organization delays decision making and leads to arbitrary spending cuts at the income statement level Methods for developing standard costs are often inconsistent across multiple sites and departments Standard costs are infrequently updated A culture and cadence for frequent review of procedure level margin results is often lacking Commonly used Excel and ad hoc databases have limitations for providing an efficient means to monitor and update costs, provide drill down and reporting capabilities New capabilities are needed to have accurate visibility into service/procedure level cost information core systems used by health care providers currently don t specialize in these capabilities 14
Sample Cost Breakdown at the Procedure Level Median Variable Cost per Procedure $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Physician Comparison: Total Knee Replacement Laboratory LOS Imaging Therapeutic Services OR Time Cardiovascular Supplies Pharmacy Blood $0 Dr. A Dr. B Dr. C Dr. D 15 Source: Strata Decisions
Benefits of an Accurate Costing System Improved decision making and analysis An effective costing system affords decision makers the ability to understand the cost of every process within their operating and care cycle from the billing team to clinicians Leads to more cost effective resource allocation, outsourcing decisions and greater focus on the organizations core competencies More accurate capture of costs More assignment of direct expenses to different levels (e.g. encounter, physician, procedure, etc.) Data can be extracted from your Electronic Health Records (EHR) software and ERP systems to formulate accurate costing models Measurable service line margin improvement 16
Costing Methods Traditional costing has evolved into more sophisticated allocation methods TRADITIONAL COSTING ADVANCED COSTING RCC RVU Standard Cost VCC Costing ABC Costing Product Line Costing Expeditious approach utilizing charge as an allocation basis for costs Relative allocation of expenses based on department observed studies Designates the stored cost as the true cost and push this directly to the patient Variable costing that dynamically costs based on the charge and quantity on the patient record Create new activity codes based on charge detail and frequency of occurrence on the encounter record Assign costs to patients based on encounter cohorts, even when charges are not present 17
Example Encounter Costing Flow Costs: Map logical cost pools from the GL to profit and cost centers Activity Drivers: Charge Master Volume and other Drivers Costed Encounter: General Ledger Chargemaster CPT Codes, etc. Patient Encounter Analyze and Report by Various Attributes: Patient Care Labor Med Supplies Implant Devices Pharmacy CPT Codes (with RVUs developed & surrogates) Apply Costs based on RVU volumes at Encounter level (with attributes) Assign Direct Charges Patient Care Labor Med Supplies Implant Devices Pharmacy -Patient - Physician - Location -Payer - Department - Service Line - Other Desired Categories Facility & Indirect Costs Other Drivers Facility & Indirect Costs 18
19 Continuous Cost Improvement Framework Develop Costing Model & Platform Stratify Procedures (volume & $) Engage Key Stakeholders Pilot Costing Model (Selected Procedures) Deploy Reporting & Accountability Cadence Analyze Data & Identify Opportunities Revise & Implement Solutions Patient Outcomes Financial Results Monitor Ongoing Costing 19
Developing a Costing Model Selection Define your overall requirements for a costing model and system Engage key department/physician leaders early on Select a costing system based on future requirements Identify and select a population of higher volume and higher $ procedures Take a pilot approach, breaking the effort into phases to gain momentum Define Your Costing Model Approach and Inputs 20 Define costing approach, data requirements and data feeds from your general ledger, EHR, etc. systems Map general ledger costs into appropriate level of cost pools Assign direct charges and pull in actual Charge Master data to full extent possible Determine where to utilize activity-based and RVUs/standard costing approaches Define key attributes needed for reporting and analytics
Developing a Costing Model (continued) Engage Department Leaders and Selected Physicians Gain their agreement on costing assumptions specific to their area Design and Build Create the working model with the collected inputs Identify any gaps and develop methods and supporting assumptions to fill them Develop Reporting Views for Analysis Create reporting views illustrating cost per procedure by site, by physician and other dimensions Analyze results with Department leaders/physicians Establish clear targets and accountabilities Together, look at outcomes and cost by physician and encounter Refine and develop on-going cadence Measure Outcomes in parallel Refine and Implement Next Phases 21
Analytics Drive Cost Efficiency & Quality Data Analytics Margin and Quality Insights by: Payer Location Physician Service Line Department Major Disease Categories (MDC s), Diagnoses Related Groups (DRG s), and ICD procedure and diagnosis codes 22
PERSPECTIVES ON TRENDS AND OPTIMIZATION OF TOOLS EPSi 23
Speaker John Gragg COO, EPSi John.Gragg@epsi.io 213.505.2920 John is veteran of decision support in healthcare for more than 30 years, implementing cost accounting in over 400 hospitals nationwide. He provides comprehensive budget / decision support advisory services based on industry observed leading practices. John is a former Managing Director at Deloitte, has held key senior executive positions for leading HIT vendors like Cerner and Eclipsys, and led the consulting practices for boutique vendors like Avega and HCm. He is currently Chief Operating Officer of Allscripts EPSi business unit, and directly oversees EPSi s consulting and implementation practices. 24
Evolution of Costing Systems Pre Costing First Generation Costing Systems Mainframe Midrange Microcomputer GL only costing Cost Report Procedure Based cost accounting RCC/RVU/Standard Second Generation Costing Systems Client Server Integration with clinical data Advanced Costing Techniques Future Cloud Real-time analytics and predictive forecast models 25
Sample Decision Support Architecture
Sample Cost Accounting Maturity Model Maturity models can show the extent of adoption of best practices COMPONENT EXPLORING EXPANDING EXCELLENCE LEADING Methodology Are costing systems fully integrated with other organizational financial and nonfinancial systems? Has the organization established specific cost drivers as a measure of activity consumption by products? Ratio of Cost to Charges (RCC) There is no integration of systems. There are few established cost drivers. Combination of RCC & RVUs There is no integration of costing systems with other systems. Some data is manually fed into the costing system. There are no defined cost drivers consistent across the organization. There are some ad hoc cost drivers. All Cost Centers based on RVUs There is some integration between costing and other systems, in particular the GL. Cost drivers are defined for many products or services but validity varies. Advanced Costing methodologies The costing system is integrated with other systems, with automatic feeds as appropriate. Cost drivers have been defined for all products or services and are valid measures of cost consumption. Has the organization established specific methods to measure resource consumption? There are few established methods. No organization-wide methods have been defined. There are some ad hoc methods. Methods are defined for many activities but validity varies and many are proxy methods. Methods have been defined for all activities and are valid measures of cost consumption. 27
Value of automated costing systems Cost accounting programs enable sophisticated insight empowered by data Physician Variation comparisons to not only establish customized targets but seamlessly monitor progress & adjust as needed Financial Impact for Quality Outcomes to understand the frequency, costs, and reimbursement for each event type Population Health cost comparisons to understand episodic treatment costs and better inform negotiations of at-risk contracts 28
Physician Variation by Service Line Service Line Analysis Average Direct Cost by Provider by Product Line In total per case, and by day of stay 29
Population Health Costs by Care Setting Sample Population Health Analysis FY 16 Diabetes Total Cost of Care 30
Project Prerequisites Prerequisites for a strong Service Line reporting function 01 02 03 04 Strong Patient Financials The client should have established strong process for reconciliation of cost accounting to its hospital financials Advanced Activity Costing Procedures The client should have established a robust costing approach and methodology to drive accurate costs down to the charge level Service Line Forecasting The client should have begun the process for identifying the patient cohorts relevant to the service lines Defined Metrics for Success The client can establish categorical metrics for the monitoring of success that will be used to guide the system build 31
Readiness Efforts Readiness to adopt a cost accounting system should focus on three key areas Data Prerequisites Executive Commitment Software Tools Source data feeds from: 32 General Ledger Payroll Billing / AR EMR Supply chain Pharmacy Top down commitment by the executives in the organization is necessary for effective implementation of cost accounting systems. Automated software tools provide the foundation for a strong decision support function. Leading software packages speed the delivery of results and improve the accuracy of the data
Common Pitfalls of Cost Accounting Lack of Planning leads to inconsistent results Costs don t tie to the General Ledger All clinical activity must be accounted for Involve front line department managers to ensure buy-in Volumes must be descriptive of resource utilization Automate data capture for costing Balance between accuracy and maintenance costs Education of end users is key to support data use Lack of adequate investment in resources needed to develop and maintain accurate procedure costs 33
Case Study (John s content) How one of the nation s How Kaleida Health saved premier academic medical $29 million in one year using centers in New York saved $58 EPSi for labor and supply million using EPSi for valuebased cost management management $58 million in Medicare losses saved in just six quarters 18% improvement in Medicare loss per case 17% improvement in resource utilization 34
Case Study (John s content) How a large 4 hospital, 80 clinic community health system saved $29 million in one year using EPSi for labor and supply cost management $15 million Reduced overtime and shifts equivalent to 307 FTEs in 9 months $7 million Reduced LOS from 6.65 to 5.36 days in 7 months $4 million Reduced supply costs and reduced direct cost per case by 5% 35
COSTING JOURNEY EXPERIENCE MAYO CLINIC 36
Speaker Todd Wilkening Vice Chair, Management Accounting Wilkening.Todd@mayo.edu 480.301.4111 Todd is the Vice Chair for Management Accounting at Mayo Clinic. He is responsible for the Enterprise Management Accounting function comprising 100 FTEs located across all Mayo Clinic campuses (Minnesota, Wisconsin, Florida and Arizona). Management Accounting provides strategic, financial analytical support to all departments within the Patient Care, Education and Administration areas of Mayo Clinic. Todd has 30 years experience primarily with Mayo Clinic in various financial roles: Strategic Initiatives and Acquisitions, Controller, Accounting Systems and Controls and Internal Audit. Previous to Mayo, he worked for a Big Four firm performing auditing and consulting services with an emphasis on healthcare clients. 37
History / Background Procedural Costing 25+ years Began in Labs with Cost / Test Expanded in 1994 to all billed products with Allscripts EPSi tool Incorporated TDABC in 2013 Another application for our costing tool set 38
Mayo Approach EPSi Tool Governance-EPSi Oversight Multi-disciplinary groups who govern the tool, data, reporting, etc. Enterprise Analytics (5 FTE) manages the tool Data interfaces G/L, Billing, Cost Factors Runs all processes costing, reimbursement Reconciles data Management Accounting partners with EA on development of procedural costing 39
40 EPSi Utilization EPSi provides a billing view of a patient s continuum of care Includes patient demographics, clinical information and financial data Application in clinical analyses, research studies, practice optimization, marketing studies and contracting Users of the data include marketing, finance, contracting, planning, researchers, practice 40
Practice Optimization Manage to Reimbursement (MTR) Oversight team selects departments Generally MS-DRGs with greatest potential Enterprise multi-disciplinary team led by MD and Administrator Tasks performed include: Value stream mapping (current and future) Analyze outliers Review/discuss practice variation Estimate potential cost savings 41
Manage to Reimbursement Type of Cost Savings have included: Reduced Length of Stay Enhanced Recovery pathways Standardized practice patterns Staffing to workload changes Elimination of unnecessary tests and procedures Reduced blood utilization 42
Manage to Reimbursement Example of monitoring tool used to track savings from an MTR project 43
Time Driven Activity Based Costing (TDABC) Mayo Clinic had the need to better manage its limited resources, identify costs for specific patient care cycles, and analyze variances in processes and cost for related patient care cycles. The TDABC approach is a measurable method of determining patient value based on the total costs of resources used to care for a patient s condition over the care cycle. TDABC is a bottoms-up approach to costing patient care based on the actual clinical and administrative processes and resources used to treat patients TDABC combines process mapping with the most modern approach for accurate and transparent patient-level costing. 44
Mayo Approach TDABC Leadership group providing oversight and identification of opportunities Collaboration with Harvard Business School Multi-disciplinary team led by MD and Administrator Tasks performed include: Value stream mapping (current and future) Time identification (studies) Costing by Management Accounting Opportunities assessment and review 45
TDABC Utilization Implement when you need detailed cost and/or timing data to make an informed decision TDABC analysis is best utilized when you are attempting to: 1. Compare two or more related processes and determine the most cost effective 2. Prioritize specific areas within a broad cycle of care for process improvement 3. Determine financial impact of potential process improvements 4. Measure cost of unused capacity 5. Ensure that clinicians are working at the top of their license 46
Gonda 2: Colonoscopy with Propofol 09/29/2014 47
Mayo Clinic TDABC Project Examples 48
Governance and Sustainability Driving a culture of transparency and accountability requires: Establish executive-level and service line cost/margin management teams Service line teams should be comprised of Cost Accounting and Service line/department leaders and selected physicians Develop clear targets, accountabilities, and meeting cadence to drive cost analysis and margin management Tie to patient outcomes, balancing cost and quality Quarterly review of Service Line/Department and Service Line progress readout session with Executives Align with performance evaluation and compensation Provide sufficient training on methods and outcomes 49
Success Factors in Costing Initiatives Avoid overly detailed, complex costing frameworks Avoid overly simplistic costing spreads not tied to key activities/drivers Assign actual costs and integrate EHR charge master and general ledger data to full extent possible Ensure buy-in and management use from executives and clinical stakeholders Take balanced approach: Patient satisfaction and quality measurements must be used in conjunction with cost metrics Leverage technology that can provide the necessary detailed costing assignments, reporting and analysis, and is easy to maintain Standardize service line and other definitions in every reporting system to avoid confusion and ensuring assumptions and drivers are more accurate and meaningful Empower leaders at multiple levels to become subject matter experts, becoming resources to others in the organization 50
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