Disclosures - Insights · Disclosures Relevant Financial ... Test Cost Management © MFMER...

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Test Cost Management

Dave Erickson, Senior Systems EngineerSeptember 12, 2016

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DisclosuresRelevant Financial Relationship(s):

Nothing to Disclose

Off Label Usage:

Nothing to Disclose


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• Test Cost Management• Need for understanding test costs• Activity Based Costing (ABC) Tool

• Mayo Lab Cost Management Project• SBAR and Goals• Applied DMAIC…

• Findings, Analysis, Implementation• Training and Tools


Presentation Content

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Lab Test Costs – The Need for Better Understanding

• Providers under continued financial pressure• Medicare reimbursement• Third party payers • Patients needs

• Cost Management• How best to understand?


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Understanding Lab Test Cost

• The Challenge: • Understanding individual tests costs

• A Key inhibitor to knowing actual test cost…• Costs lumped together in traditional

accounting model…• Workflows are not defined separately• No distinction between…

• Amount / type of material • Amount of labor• Equipment depreciation


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Example: Effect of Spread Test Cost

• New Equipment for test “A”: $500,000

• Depreciation: $8333 / month (60 months)

• Lab volumes:• Test using new equipment = 1,000 / month• All other tests = 20,000 / month

• Actual effect on Test “A” = $8.33 / test• When this cost is spread:

• All tests incur an added $0.40 / test


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• Activity-based costing (ABC) is a:

• Costing methodology that identifies activities in an organization and assigns the cost of each activity with resources…to determine the actual consumption by each.

• Applied to test costs – The sum of these activities for each test yields the test cost.

• Exact Cost – Software tool that uses ABC principles to assign cost to individual tests.


ABC – Activity Based CostingDefinitions

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Traditional Costing

Traditional costing systems focus on direct material and labor costs, while summarizing all other costs to one or more overhead pools that are then arbitrarily allocated to products and services (tests and procedures), typically as a percentage of direct labor or machine hours.

Although adequate to value inventory for financial statement purposes, it has severe shortcomings as a management tool.

ABC Methodology Overview


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Traditional Costing

Traditional costing systems focus on direct material and labor costs, while summarizing all other costs to one or more overhead pools that are then arbitrarily allocated to products and services (tests and procedures), typically as a percentage of direct labor or machine hours.

Although adequate to value inventory for financial statement purposes, it has severe shortcomings as a management tool.

ABC Methodology Overview

Labor $ 2,329,801Benefits/Payroll taxes 776,600Materials 223,952Depreciation 51,882 Other Costs 914,875

$ 4,297,110Total Cost

Chemistry Department


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Activity-Based CostingActivity-Based Costing (ABC), with its focus on deconstructing overhead pools and directly assigning costs to products and services (tests and procedures) in a more meaningful manner, is a major improvement over traditional costing systems where a high percentage of cost is arbitrarily allocated to products and services.

ABC / M Methodology Overview Cont.


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Activity-Based CostingActivity-Based Costing (ABC), with its focus on deconstructing overhead pools and directly assigning costs to products and services (tests and procedures) in a more meaningful manner, is a major improvement over traditional costing systems where a high percentage of cost is arbitrarily allocated to products and services.

ABC / M Methodology Overview Cont.

Registration $ 343,769Order Lab Tests 214,856Phlebotomy 945,364Specimen Delivery 64,457Specimen Processing 687,538QA/QC 107,428Perform Automated Testing 1,031,306Storage/Disposal of Specimens 304,996Validate Results 214,856Reporting of Critical Values 85,942Administration/Documentation 296,598




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Traditional Budget Converted to Activity-Based Laboratory Budget

What is spent - is translated…


Labor $ 2,329,801

Benefits/Payroll taxes 776,600

Materials 223,952

Depreciation 51,882

Other Costs 914,875



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Traditional Budget Converted to Activity-Based Laboratory Budget

What is spent - is translated…


Labor $ 2,329,801

Benefits/Payroll taxes 776,600

Materials 223,952

Depreciation 51,882

Other Costs 914,875



…into Major Operational Activities

Registration $ 343,769Order Lab Tests 214,856Phlebotomy 945,364Specimen Delivery 64,457Specimen Processing 687,538QA/QC 107,428Perform Automated Testing 1,031,306Storage/Disposal of Specimens 304,996Validate Results 214,856Reporting of Critical Values 85,942Administration/Documentation 296,598



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Step 2 – Order Lab Tests

ExactCost Translates Financial Data into Operational Activities

Step 8 – Store/Dispose of Specimens

Step 9 – Validate Results Step 10 – Reporting of Critical Values

Total Process Cost = $13.02

Step 1 - Outpatient RegistrationChemistry Budget

Step 3 – Specimen Drawing

Step 4 – Specimen Delivery

Step 6 – Automated Specimen Testing: (CMP)

Step 7 – Perform QA/QC

$1.19 $.95 $1.51

$.27$1.53$1.14

$.67 $3.25 $.23

Step 5 – Specimen Processing

$2.28

CMP

CPT Code: 80053

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Workflow

WorkstationAn area with equipment for the production of Products. A Workstation can be automated or “Manual” if only manual tasks are performed.

ProcedureA type of Product, that defines a series of steps followed in a definite order. Examples of Procedures include: blood drawing, instrument calibration, registration/scheduling and sample preparations (centrifuge, blood separation, patient/room preparation, etc.). Procedures can also be classified as “Activities.”

ServiceAny additional task or action, mainly administrative or general that is taken in account during the cost analysis. Services can also be classified as “Activities.”

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Concepts and Definitions

RC = Responsibility CenterWS = Work Station

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Major Cost Categories

Labor• Clinical• Non‐Clinical

Materials• Controls and Calib• Specific materials• Reagents

Supplies• Disposables• General supplies

Equipment Depreciation• Equipment depreciation• Small Misc. Medical Equip.

Overhead• Overhead consumption• Overhead expenses

Test A

Test B

Test C

Test A

Test B

Test C

Test A

Test B

Test C

Test A

Test B

Test C

Other• Consultant Data

Test A

Test B

Test C

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Fixed/Variable Cost Items

$

Volume

Variable Cost(supplies, materials)

Fixed cost(Labor , Overhead, Equipment Depreciation

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Example ABC Report:

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Process Improvement using ABC

• Using ABC tool enables laboratories to:

• More effectively manage costs • Assess financial effectiveness of standardization

and improvement• Extract data for capacity planning• Use cost information to support standardization

• compare across labs / divisions / sites (future)


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• SBAR• Situation – Describe the situation• Background – State the pertinent history. What got

us to this point?• Assessment – Summarize the facts. What do you

think is going on?• Recommendation – What are you asking for? What

needs to happen next?


Lab Test Cost Management Project

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• SBAR Situation

• Many stakeholders • Lab Operations, Finance, Revenue Analysts,

Development Technologists, Product Management, etc.

• Impacted by many inputs / outputs of the test cost process

• Recognized need for better understanding between Lab Operations and Finance groups



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SBAR Background & Current State

• Activity Based Cost (ABC) tool has been implemented, (“Exact Cost” tool)

• ABC tool provides precise detail of individual test costs in the lab

• ABC tool output merged into existing costing processes

• Introduction of ABC tool highlighted need to better define end-to-end test cost processes



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• SBAR: A/R-Assessment /Recommendation

• Need for Oversight group, responsible for:• Define and communicate best ways to use ABC tool• Prioritizes activity related to improving the costing

process and usage of tools• Understand financial/organizational decisions that

impact the costing process and provide a forum for discussion

• Provides communication to stakeholders



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• D – Define

• M – Measure

• A – Analyze

• I – Implement

• C - Control


DMAIC

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• Define• The Goal:

• Costing processes that are understood and owned• Test cost estimates that are:

• Accurate and reliable• Understood by all stakeholders (trained, ongoing

communication key)• Actionable



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• M – Measure - Steps to be Taken1. Review current test cost data2. Assess current understanding and

needs of stakeholders3. Assess current costing processes for

gaps


Cost Management Project

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• M – Measure…

1. Review current test cost data:

• Findings –• Some data errors…

• Test volumes, material costs• Accounting challenge: capturing total test

cost for tests performed in several labs



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1. Review current test cost data:

• Analyze• Root Cause analysis

• Implement• Data clean-up and fixes aimed at preventing

recurrence• Future: additional process changes and

training



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• M – Measure

2. Assess current understanding and needs of stakeholders

• Findings:• Training needed...

• Understand current data• Use of applications (Exact Cost, others)

• Need to standardize internal data• Different areas use variations on base

data, definitions



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• Analyze

• Found wide range in level of understanding among stakeholders



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• Implement• Develop training for all stakeholders• “One-pagers,” will provide…

• Overview of test cost breakdown• Reference data to provide perspective:

• …between tests• … test history / volume• … compare to benchmarks - Medicare

reimbursement



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• M – Measure

3. Assess current costing processes for gaps

• Findings:• Test cost processes have changed:

• need to update processes and owners• All-encompassing approach

• Current state processes are scattered between various areas.



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• Analyze• Review existing processes for updates• Implement new procedures if required



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• Implement• Update / consolidate procedures

• Use Excel template for New Test costing• RACI diagram – ownership and

communication• Training per changes



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Cost Management ProjectNew Test Cost Estimate

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Cost Management ProjectNew Test Cost Estimate

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Cost Management ProjectNew Processes – RACI document

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• How to Solve the Cost Crisis in Health Care• Harvard Business Review, Sept 2011


Tools for Cost ManagementBibliography

Disclosures - Insights · Disclosures Relevant Financial ... Test Cost Management © MFMER...

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