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Land of the cost

Hospitals getting a better handle on value of care

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Inspired by changes in general industry, hospital officials are focused on improving cost accounting.

Borrowing from general industry, the University of Pittsburgh Medical Center is racing toward capturing a more accurate and detailed picture of what it costs to provide care. Armed with that data, medical center officials hope to create a more efficient delivery model.

"As an industry, we've talked for a long time about understanding costs, controlling costs, reducing costs and doing a better job of managing resources, but I would say we haven't done a great job of that," says Robert DeMichiei, senior vice president and chief financial officer for UPMC. "We've always focused on the revenue side, the reimbursement side and revenue cycle initiatives to try to increase the top line, to try to pay for everything."

As public and private payers inch closer toward more value-based reimbursement — be it bundled payment or some other form of pay for performance — hospitals will be on the hook for assuming more risk in the care of patients. Knowing the true cost of that care at the outset becomes increasingly important.

To that end, UPMC officials created their own cost-accounting system using what is called an activity-based approach, meaning that the steps in the care process are assigned a dollar value based on what they were estimated to cost. That contrasts with the broader-stroked methods, such as applying a cost-to-charge ratio approach that is in wide use, DeMichiei says.

The architect of UPMC's methodology, Pietro Ferrara, director of finance, adapted manufacturing cost-accounting techniques that combined data from separate clinical, operational and financial information systems. Ferrara, a former consultant to the Italian automaker Fiat, says UPMC identified more than 50 clinical activities for which the medical center assembled a framework to determine the cost of care for a particular patient. Examples of service groupings include imaging, interventional cardiology and laboratory.

The resultant cost data can be analyzed in a variety of ways, including at the physician level, information that UPMC doctors have found useful for clinical decision-making.

UPMC would like to have the system in place at its six hospitals this summer, and is in discussions with companies to commercialize it.

The timing may be right from a marketing standpoint. The Affordable Care Act and health care reform in general have driven increased interest by hospital leaders for improved cost accounting, says Steve Berger, president of Healthcare Insights LLC, a financial consultant that markets a cost-accounting program.

"Most hospitals don't have it," Berger says. "The ACA made a big difference and more hospitals than ever are looking at the concept."

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The opinions expressed by authors do not necessarily reflect the policy of Health Forum Inc. or the American Hospital Association