We've all heard the saying that what is not measured cannot be managed or improved. There has never been a greater emphasis on accountability in health care, so the inability to properly measure and compare health care costs with outcomes can be a significant obstacle to achieving the value — the relationship between outcomes and cost — the industry collectively seeks.

Understanding the precise costs for every encounter, procedure or episode of care is essential in managing the delivery of services. Precision allows accurate assessments of the profitability of individual service lines, provider relationships or clinical management of a subset of an organization's population. Furthermore, as providers expand service coordination to every aspect of care, costing of services will extend beyond the walls of acute care facilities and physician practices to post-acute facilities and perhaps even in-home care.

Comparable to the growth in meaningful use of electronic health records from a clinical perspective, advanced cost-accounting tools and techniques, coupled with sophisticated revenue-cycle features, are becoming critical for health care organizations to remain competitive in the future.

When "Good Enough" Just Isn't

Traditional and varied costing methods may have sufficed in a volume-driven payment environment, when decision-making based on cost accuracy was not crucial. But yesterday's techniques no longer effectively portray the financial efficacy of an accountable care strategy.

Providers have focused on understanding costs of care in a particular setting, such as an inpatient admission for acute myocardial infarction or for a specific surgical procedure. In the future, understanding costs for units of care will remain important. However, holistic payment necessitates understanding costs across organizations and care settings and, often, over long periods of time. For example, payments for procedure bundles require that the provider understand not only the costs of delivering the procedure, but also the wraparound costs such as rehabilitation after the procedure and outpatient testing beforehand.

As such, providers may need to obtain cost data from a wide range of information technology platforms. Aggregating cost data often has required drawing from multiple systems, but the challenge becomes more pronounced with the need to perform broad cost analyses across several organizations for holistic payment methods.

Processes for costing are also changing. Providers have relied on diverse approaches to estimate and allocate costs. These approaches often result in analyses that have been "good enough" for general purposes. However, with holistic payment and the introduction of payment rewards and penalties, relying on "good-enough" estimations of cost becomes increasingly perilous.

When estimations for a bundle of care rely on the summation of a broad set of estimated costs, the confidence interval for the total costs of care becomes wider. Accuracy of the cost estimates becomes impaired once the range for an aggregation of a larger number of estimated cost variables is too wide. For example, a hospital will find it particularly challenging to identify costs of diabetes care accurately if it is trying to base its calculation on estimates of all costs associated with care provided for a patient with poorly managed diabetes. 

Moreover, in a payment environment that pays less for poorly managed care, a lack of costing accuracy becomes dangerous. For instance, a provider may think the organization has achieved positive margin on a procedure bundle when it actually has recorded a negative margin because the cost estimates were inaccurate. When the margins on a bundle are thin, sloppy cost estimates can lead an organization to believe it can tolerate reduced payment when it cannot. 

Retooling for the Future

As value-based business models are adopted, consider more modern approaches and tools for costing and cost reporting. For example, activity-based costing and microcosting, which consists of identifying and costing every resource consumed in rendering a "unit of care," appear to be on the rise; they are paving the way for deeper, truer representation of the cost for a unit of care.

In addition to scrutinizing cost details, providers will need to examine their definitions of populations and services. Attempting to set a standard cost to care for a diabetic, for example, can be dangerous if the organization assumes that all diabetics are the same. They are not. The cost to treat a poorly managed diabetic is different from that for a well-managed diabetic. Depending on the mix of diabetics, the average cost can be lucrative or disastrous.

Moreover, the payment changes in the years ahead will require not only advanced approaches to cost accounting, but also new capabilities for revenue cycle, EHR and costing system applications, as well as a much tighter and real-time integration among these systems.

As providers transition from traditional cost-accounting methods and solutions and retool their approach for costing across the continuum of care, they should consider several key technology and process questions:

Is your EHR truly an enterprise health record? To effectively participate in bundled or capitated contracts, providers must be able to share data throughout the enterprise. Every billable and non-billable care-related activity should be accounted for in the EHR. Even if a care-related activity has little or no value to the clinical workflow, it should still be possible to account for it within the EHR in a way that does not intrude on the clinical workflow. Having this capability allows a multitude of EHRs to supply the information to revenue-cycle management and cost-management systems for more accurate and timely costing.

Is your revenue cycle management system up to the challenge? They may not be able to leap tall buildings in a single bound, but today's RCM system is expected to be the super hero — or perhaps super glue — of an organization's IT infrastructure. Indeed, much is expected of these systems when providers are increasingly accountable for the efficiency, cost, quality and safety of the care they deliver.

With regard to advances in costing approaches, the RCM system should function as the keeper of all activities, which is possible only if it is fully integrated with the organization's costing systems and EHR. For example, it should be able to aggregate care data from disparate sources and feed the data into the EHR to help guide clinical care decisions. The RCM system also should support drill-down activities at the patient level with discrete time stamps. It should provide more detailed, timely and accurate information into costing systems and provide feedback into the EHR to support greater efficiency of clinical operations.

Do you know where to cut costs? Health care providers have spent decades strengthening their revenue identification and charge capture tools and systems. Now, with an agenda that focuses not only on managing the top line, but also on improving the bottom line, providers must hone their skills in removing waste from the system. Thus, they need to understand cost at a deeper and truer level to identify cost-reduction opportunities or determine more cost-effective care alternatives, such as shifting care delivery from a physician to a nurse practitioner. Indeed, the ability to conduct variation analyses across the continuum and through different lenses, as well as being able to drill down into cost drivers, is becoming critical for all providers.

Do common definitions prevail? Speaking the same language goes a long way toward avoiding confusion. For example, is the definition of "unit of care" consistent among all the providers that are collectively assuming risk? Similarly, are your definitions of fixed, variable, incremental, direct and indirect costs common among the contracted players? Additionally, from a process standpoint, will costing take place at the episode level, clinical service level, encounter level, charge code level or elsewhere? The importance of being precise in both terms and processes cannot be underestimated.

How current and accurate are your data? The old cost-accounting systems were notorious for data access and quality issues, rendering them somewhat ineffective; their use was infrequent at best. New demands require timely analysis of cost and margins across service lines and along the continuum of care, so data must be current and instantly accessible. In fact, providers should transition from cost-computation models that use the previous fiscal year's data as standard cost for the current fiscal year to computation models that refresh data at least monthly. In a rapidly changing environment, last year's data are no longer good proxy for making decisions.

Are your interfaces up to snuff? As mentioned previously, some providers are achieving even higher levels of variable cost accuracy using the microcosting model. The type of cost elements that will be subject to microcosting will have an impact on the complexity of cost-system implementation. For instance, if labor, materials and pharmaceutical costs are within the scope of microcosting, existing interfaces to key feeder enterprise resource planning and revenue-cycle systems may need to be reviewed or rebuilt. Similarly, the capture of staffing and utilization data by shift and the measurement of labor costs require tweaks to the payroll, human resources, and revenue cycle systems and interfaces.

Can leaders act on your data? Most organizations generate far too many reports, many of which simply go unread. Today's more advanced revenue-cycle and cost-accounting solutions provide user-friendly executive dashboards that improve transparency and facilitate proactive management of key performance metrics. The same way an organization cannot improve what it cannot measure, it cannot act on data that show no clear direction.

In addition, the time frame for action will shrink. Finding out that you are losing money on a population 60 days after the fact is too late. This is particularly true as margin pressure increases. The reporting must be done in real time so that problems can be corrected before too much financial damage has occurred.

The Age of Transparency

Making a healthy margin and demonstrating value to purchasers of care are critical success factors for health care organizations. Research highlighted by the Robert Wood Johnson Foundation and others has shown there is almost a complete lack of understanding of how much it costs to deliver patient care — and little is known about how prices are derived.

As the conversation in health care eventually turns to price, spurred by the Centers for Medicare & Medicaid Services proposed price transparency rule, the need for an organization to understand its actual costs will only grow in importance. After all, how can a provider effectively set its procedure prices without knowing its true costs and, therefore, its margins?

A costing approach that is comprehensive, accurate and modern — and backed by technologies that enable providers to collaboratively make decisions based on cost data that previously were unavailable — is essential for success. Partial, manual, retrospective assimilation of costs does little to facilitate effective decision-making. Nor does it enable detailed, timely and accurate financial reporting to internal and external stakeholders.

Furthermore, in this age of transparency, the relationship among the EHR, revenue-cycle management and costing systems is of utmost importance, with data becoming an enterprise's key strategic asset.

As the industry emphasizes the identification and capture of all costs to determine the actual cost of care, the implementation of newer technologies and advanced costing methods should hold a prominent place on every provider's strategic plan. But, as with all technology implementations, use of these systems without careful consideration of the organization's needs and processes regarding their use will hamper their effectiveness.

John Glaser, Ph.D., is the CEO of the health services business unit of Siemens Healthcare in Malvern, Pa. He is also a regular contributor to H&HN Daily.