Introduction to Time-Driven Activity- Based Costing in ... · PDF fileCost per patient Surgeon...

Copyright © Harvard Business School, 2013

Introduction to Time-Driven Activity-Based Costing in Health Care

Driving HealthCare Value, May 2014Dublin, Ireland

Professor Robert S. (Bob) Kaplan

2Copyright © Harvard Business School, 2013

Measuring Costs: We must overcome several health care costing problems.# 1: Confusion of Costs with Prices (Charges)

o Currently, provider expenses are allocated to patient care based on charges or “relative value units”—neither of which is a good surrogate for the actual costs incurred

o Costs are not assigned to unbilled or unreimbursed processes and procedures

# 2: Wrong Unit of Analysis for Measuring Costs o Currently, costs are measured for organizational units or

individual procedures and events, not for the full cycle of careto treat a patient’s medical condition.

# 3: Economists, administrators, and policy makers believe many health care costs are “fixed”o We wish! If health care costs were fixed, we wouldn’t have a

health care cost crisis.


Measuring costs using Time-Driven Activity-Based Costing (TDABC)

• A bottoms-up approach to costing patient care based on the actual clinical and administrative processes, and resources, used to treat patients.

• Combines process mapping from industrial engineering with the most modern approach for accurate and transparent patient-level costing


Time-Driven Activity-Based Costing (TDABC)

• What activities are performed over the care cycle for a medical condition?

• Who performs each activity?

• How long does each activity take?

Determinethe Care Process

• What is the cost per unit of time for each type of personnel?

Calculate Cost Rates

• What is the cost of materials, devices, supplies, and drugs consumed during the care cycle?

Account for Consumables

• What are the drivers that determine the workload for each indirect department/area?

Allocate Indirect Costs

1

2

3

4


MD encounter

Assess appropriateness

Assess risk

Schedule OR

Procedure Recovery

Possible need for procedure

Shared decision making

Pre‐procedure testing

Tier 1,2 outcome measures

Patient problem

Tier 3 outcome measures

Patient-level outcomes and costs are measured over a complete cycle of care for a clinical condition

Source: Tim Ferris, MD, personal communication


Measuring Costs: Develop process maps for the care cycle

Map 1: Surgical

consultation

Map 2 : Pre-operative

testing

Map 3: Day of surgery pre-

operative prep

Map 4: Operation

Map 5: Post-anesthesia care unit

Map 6: Discharge

Map 7: Rehabilitation

Map 8: Follow-up

visit

Level 1: Overall care cycle

Level 2: Study care cycle

Level 3: Process maps


Process map for initial office visit

Average time


Calculate Capacity Cost Rates (Cost per minute) for each resource (personnel or equipment)

Surgeon Registered Nurse

X-Ray Technician

Physician Assistant

Office Assistant Scribe

Total Clinical Costs ($) $ 546,400 $ 120,000 $ 100,000 $ 64,000 $ 51,000 $ 61,000

Personnel Capacity (minutes) 91,086 89,086 89,086 89,086 89,086 89,086

Personnel Capacity Cost Rate ($/min.) $ 6.00 $ 1.35 $ 1.12 $ 0.72 $ 0.57 $ 0.68


Measuring Patient’s Cost over a Complete Cycle of Care for a Clinical Condition

Initial consultationMinutes Cost/

minute*Total

MD X1 Y1 136.13

RN X2 Y2 68.04

CA X3 Y3 6.17

ASR X4 Y4 15.74

$266.08

Surgical procedure MD X1 Y1 584.99

Anes. X2 Y2 603.89

RN X3 Y3 136.29

Tech X4 Y4 97.82

OR X5 Y5 329.16

$1752.15

Follow‐up or post‐operative visit MD X1 Y1 55.19

RN X2 Y2 13.61

CA X3 Y3 3.09

ASR X4 Y4 1.77

$73.66


Boston Children’s Hospital’s Department of Plastic and Oral Surgery (DPOS) examined three types of office visits

Simple Skin Excision

Source: Boston Children’s Hospital: Measuring Patient Costs, HBS case 112-086


TDABC Step 1: Develop Process Maps for each type of office visit, along with process times & resources (personnel)

Plagiocephaly

Simple Skin Excision

Craniosynostosis

Key

Consult with MD

Consult with MD

Check in with ASR

Check in with ASR

3

Prep, take to room, height and weight


5

Take history, new patient

documentation


documentation20 18

Helmet RxHelmet Rx

3

Check‐outCheck‐out

5

Book surgery (+10 if complex pt.), billing, pre‐op patient call

Book surgery (+10 if complex pt.), billing, pre‐op patient call

Check‐outCheck‐outConsult with MD

Consult with MD

Patient chart prep, check‐in

Patient chart prep, check‐in

6


Prep, take to room, height and weight 5


documentation


documentation

20 22

Explain scheduling, PA, call to schedule

Explain scheduling, PA, call to schedule 25.5 19 5

Check‐outCheck‐outMake referralsMake

referralsConsult with

MDConsult with

MD


documentation


documentation

Check in with ASRCheck in with ASR

3



5

Take photosTake photos

5 20

Pull up CT scan

Pull up CT scan

3 40 2.5 5

PhysicianPhysicianAmbulatory Service

Representative

Ambulatory Service

Representative

Clinical AssistantClinical Assistant

RegisteredNurse

RegisteredNurse

Y


TDABC Step 2: Financial personnel calculate each resource’s $/minute Capacity Cost Rate

• Costs: All the costs (salary, fringe benefits, occupancy, support resources) associated with having that person (or piece of equipment) available to treat patients

• Capacity: The capacity (time) that each resource (personnel, equipment) has available for treating and caring for patients

• Capacity Cost Rate = Resource Cost/ Resource Capacity


TDABC Step 2: Calculate the costs of supplying each type of clinical and administrative resource (data disguised), …


… and estimate each resource’s available time to calculate the Capacity Cost Rates.

Resource Surgeon ASR RNClinical

AssistantWeeks per year 52 52 52 52Less: Weeks unavailable 8 6 6 6Working weeks 44 46 46 46Hours per day 10 8 8 8Less: Breaks, training, meetings 1.2 1.5 1.5 1.5Available hours 8.8 6.5 6.5 6.5Research and teaching 2.2 0 0 0Clinical hours per day 6.6 6.5 6.5 6.5Clinical minutes per day 396 390 390 390

Capacity (minutes per year) 87,120 89,700 89,700 89,700

Annual Cost per person $ 522,720 $ 89,700 $ 134,550 $ 71,760

Cost per minute $ 6.00 $ 1.00 $ 1.50 $ 0.80


Plastic Surgery Department Office Visits: Ratio of Costs to Charges (RCC) Method

RCC Costs Charge Avg Reimb RCC cost RCC Profit

Plagio 350$ 224$ 210$ 14.00$ Neoplasm 350$ 224 210 14.00 Cranio 350$ 224 210 14.00

Charges $ 12,449,500 Costs 7,469,700 Reimbursement 7,967,680 RCC: Ratio of costs-to-charges 60%Average reimbursement rate 64%


Time-Driven ABC analysis gives a completely different picture about the profitability of the three service lines

Medical Diagnosis Cost per patient Surgeon ASR RN CA Total cost Charge

Avg Reimb

TDABC Profit

Plagiocephaly 108.00$ 8.00$ 34.50$ 4.00$ 154.50$ 350.00$ 224.00 69.50$ Neoplasm skin excision 132.00 55.50 30.00 4.00 221.50 350.00$ 224.00 2.50$ Craniosynostosis 240.00 10.50 34.50 8.00 293.00 350.00$ 224.00 (69.00)$

Personnel process times (minutes) Surgeon ASR RN CA

Plagiocephaly 18 8 23 5

Neoplasm skin excision 22 55.5 20 5

Craniosynostosis 40 10.5 23 10


Summary of Plastic Surgery Office Resources and Costs

Surgeon ASR RN CA CostAnnual Cost 522,720$ 89,700$ $ 134,550 $ 71,760 Annual Minutes 87,120 89,700 89,700 89,700 Cost per minute 6.00$ 1.00$ 1.50$ 0.80$

Process Time (minutes)Plagiocephaly 18 8 23 5 154.50$ Neoplasm skin 22 55.5 20 5 221.50 Craniosynostosis 40 10.5 23 10 293.00

Resource Supply 2 2 2 1Annual Expense 1,045,440$ 179,400$ 269,100$ 71,760$ 1,565,700$ Minutes Available 174,240 179,400 179,400 89,700


Plastic Surgery Annual Resource Utilization

# visits (year)Plagiocephaly 5,400 Neoplasm skin excision 2,000 Craniosynostosis 800

Surgeon ASR RN CA CostResource Supply 2 2 2 1 Annual Expense 1,045,440$ 179,400$ 269,100$ 71,760$ 1,565,700$ Minutes Available 174,240 179,400 179,400 89,700

Surgeon ASR RN CA CostMinutes Required 173,200 162,600 182,600 45,000 FTE's Used 2.0 1.8 2.0 0.5 Capacity Utilization 99% 91% 102% 50%Cost to procedures 1,039,200$ 162,600$ 273,900$ 36,000$ 1,511,700$ Unused Capacity Costs 6,240 16,800 (4,800) 35,760 54,000

Total office expenses 1,045,440$ 179,400$ 269,100$ 71,760$ 1,565,700$


Suppose we can have the RN perform some of the Plagiocephaly exam instead of the surgeon.

From Surgeon ASR RN CA CostCost per minute 6.00$ 1.00$ 1.50$ 0.80$

Process Time (minutes)Plagiocephaly 18 8 23 5 154.50$ Neoplasm 22 55.5 20 5 221.50 Craniosynostosis 40 10.5 23 10 293.00

To Surgeon ASR RN CA CostCost per minute 6.00$ 1.00$ 1.50$ 0.80$

Process Time (minutes)Plagiocephaly 10 8 39 5 130.50$

Neoplasm 22 55.5 20 5 221.50

Craniosynostosis 40 10.5 23 10 293.00


… which requires one more RN, but saves 0.5 FTE surgeon

Surgeon ASR RN CA CostNew Resource Supply 1.50 2.00 3.00 1.00 1,438,890$ Minutes Required 130,000 162,600 269,000 45,000 FTE's Used 1.49 1.81 3.00 0.50 Capacity Utilization 99% 91% 100% 50%Cost to procedures 780,000$ 162,600$ 403,500$ 36,000$ 1,382,100$ Unused Capacity Costs 4,080 16,800 150 35,760 56,790

784,080$ 179,400$ 403,650$ 71,760$ 1,438,890$ Savings 126,810$

We handle the same volume and mix of patients while spending$127,000 less on office visits.

Surgeon time released could be used for surgeries – neoplasms, craniosynostosis – which likely are compensated much better.


Suppose we expect a productivity increase of 6% next year

Process Time (minutes) Cost per procedurePlagiocephaly 9.40 7.52 36.66 4.70 122.67$ Neoplasm skin excision 20.68 52.17 18.80 4.70 208.21 Craniosynostosis 37.60 9.87 21.62 9.40 275.42

Cost per procedure drops by 6% but total spending stays the same:

Surgeon ASR RN CA CostResource Supply 1.50 2.00 3.00 1.00 1,438,890$

Total minutes required 122,200 152,844 252,860 42,300 FTE's Used 1.40 1.70 2.82 0.47 Capacity utilization 94% 85% 94% 47%Cost to procedures 733,200$ 152,844$ 379,290$ 33,840$ 1,299,174$ Unused Capacity Costs 50,880 26,556 24,360 37,920 139,716

Total office expense 784,080$ 179,400$ 403,650$ 71,760$ 1,438,890$

The benefit from the productivity improvement ends up in unused capacity, which allows us to handle an increased volume of patients without having to add new personnel


Health care leaders can use TDABC to manage all their costs as “variable,” based on patient demands and process efficiencies

1. Forecast the number of patients that will be treated for each medical condition

2. For each medical condition, multiply the forecasted number of patients by the process times required for each resource over the care cycle. Sum up across all medical conditions to obtain the forecasted quantity of capacity (time) required for each resource type.

3. For each resource type, divide the total required time by the resource’s available minutes (e.g., 90,000 per year), and round up to next integer) to obtain the quantity of each resource type that must be supplied.

4. Multiply the quantity of each resource type required to meet forecasted patient needs by the cost of supplying the resource it to obtain the future amount of spending. This is next period’s budget – obtained analytically, from the bottom up, rather than by adding (or subtracting) percentages to last year’s spending by each department.


Assigning the costs of support departments

• To assign the costs of indirect and support departments (imaging, laboratory, pharmacy, HR, IT, finance, occupancy, housekeeping),develop process models of the work performed by the resources ineach department.

• Rule of “1”: Any department with more than one person (or one piece of equipment) has more work to perform than can be handled by a single person (or single piece of equipment). By tracing where the demand of work for that department comes from, you have a logical and defensible basis for assigning the cost of that department by causal quantitative drivers, NOT PERCENTAGES.


Support Departments: Assigning the cost of the Billing Department

Version 1.0: Estimate that each invoice takes the same time, 50 minutes, to produce and collect, independent of diagnosis or patient’s insurance carrier

Patient billing cost per visit = 50 × $1.20 = $60

Billing Services $756,0007 clerks; one billings supervisorMinutes per year (7 @ 90,000) 630,000 Cost per minute 1.20$

Consider a billing department, that spends $756,000 per year in invoicing and collecting from patients and their insurers.

Seite 25© 2012 Schön Klinik

Total Knee and Total Hip Replacements are performed in six different locations

NeustadtTHR: ~ 1550 TKR: ~ 1050Rehab: ~ 2.700Hamburg Eilbek

THR: ~ 660 TKR: ~ 430

München HarlachingTHR: ~ 180TKR: ~ 180

VogtareuthTHR: ~ 420 TKR: ~ 340

HarthausenTHR: ~ 310TKR: ~ 340Rehab: ~ 500

Bad StaffelsteinRehab: ~ 900

Source: qed-online (2011) (1) without revisions


The first pilot was performed at Neustadt with a highly specialized Orthopedic Department, which performed 3,000 joint replacements/year

520 beds(90 ortho / 190 rehab) 915 employees 18,000 patients / year


I became a physician to cure patients and save lives.

You need to reduce headcount and cut costs and do it now!

Previous attempts at standardization and cost cutting had failed.


Choosing your first pilot site for TDABC

• What medical condition should we select?

• Where should we do the initial pilot?

• Who needs to be involved in the initial pilot?


Select the medical condition: Knee and hip osteoarthritis

• High volume procedure (6,000 per year at Schӧn Klinik hospitals).

• Expensive procedure (Willie Sutton rule)

• Excellent outcomes data base


Select the site: Neustadt

• Had both acute and rehab facilities at the site: can model the entire care cycle

• Extensive use of standardized clinical pathways

• Extensive outcomes data base

• Surgeons knew they were recognized as a “high performance facility” with excellent outcomes


Obtain project sponsorshipOrganize the project


Neustadt Clinicians and Finance Personnel colla-borated to develop the TDABC model

Finance

Cost of Supplying Resources(People, Equipment, Space)

How we deliver care today for patients


Step 1/2: Develop process maps and time estimatesfor all processes and activities Development of process maps1.

Estimation of process times2.

Identification of relevant resource costs3.

Estimation of the available capacity4.

Determination of direct costs6.

Allocation of indirect costs7.

Calculation of treatment costs per process step5.

Addingprocess times


Step 3/4: Identify all relevant resource costs, estimate the capacity and calculation of the Capacity Cost Rate(example: nurse)

Development of process maps1.







Costs (€)

Capacity (min.)=

4.500,00 €

7.276 min.= 0,62 € / min.

Capacity Cost Rate(1) =

(1) numbers disguised


Step 5: Multiply the Capacity Cost Rate and processing time to determine the total costs of processes(examples(1))

OP

/ pos

top.

Reh

ab

Professional group min. € / min. total (€)

Physicians 260,0 1,54 400,40

Nurses 400,0 0,58 232,00

Other clin. staff 67,0 0,47 31,49

Administration 19,0 0,46 8,74

Sum 672,63

Professional group min. € / min. total (€)

Physicians 134,5 1,27 170,82

Nurses 92,5 0,67 61,98

Other clin. staff 376,0 0,47 176,72

Administration 23,0 0,46 10,58

Sum 420,10

Development of process maps1.







(1) numbers disguised


Different assignment of “indirect costs“ with huge impact on the operating profit

Depreciation onBuilding

Depreciation onBuilding

MedicalControllingDepartment

MedicalControllingDepartment

PatientAdmission

Department

PatientAdmission

Department

LoS

91 % acute,9% rehab

30 % OR-time70 % sqm

LoS

Capacity CostRate

Number ofcases

Existing Cost SystemCalculation TDABC„Indirect costs“„Indirect costs“


The previous assignment of costs shows significant differences to the methodology of TDABC

Existing System Calculation TDABC1. 2.

Acute

Revenues(1): 10.226 $

Costs: 8.924 $

Profitability: 12,7 %

Acute

Revenues(2): 9.897 $

Costs: 8.119 $

Profitability: 18 %

(1) PCC – including all revenues of privately and statutory insured patients of the orthopedic department(2) DRG revenue for a TKR; 1€ ~ 1,41$; all numbers disguised


Variance Analysis

Suppose the personnel cost at Site 2 for knee replacement was $5,400 while at Site 1 was $4,624

Total Cost Variance = $5,400 - $4,624 = $ 776 (U)

• Site 2 used 3,600 minutes at an average cost per minute of $1.50

• Site 1 used 3,400 minutes at an average CPM of $1.36

•Input price variance = ($1.50 – 1.36) × 3,600 = $ 504 (U)

•Quantity (efficiency or productivity) variance= (3,600 – 3,400) × $1.36 = $ 272 (U)


We can view the variance analysis graphically

III IV

I II

Pure Price Variance Joint Variance

Price Variance

Efficiency Variance

3,400 Site 1 quantity of

minutes

3,600 Site 2 quantity of

minutes

Site 2cost per minute

Site 1 cost per unit

$1.50

$1.36

$ 504

$272


Neustadt Munich Variance

Personnel Costs € 2,058 € 2,988 € 930. U

Personnel Minutes 1,392 2,043 € 962.5 U

Average Cost/Minute € 1.48 € 1.46 € 32.5 F

(my calculation)

The 45% cost difference (unfavorable cost variance of €930) is caused by the unfavorable personnel productivity variance at Munich.

Personnel Time and Cost Variances: Neustadt versus Munich


Benefits from Variance Analysis

Variance analysisPrice: Difference in CPM for each Personnel Type

Quantity: Difference in Number of Minutes (activity duration and

LOS)

Price: Difference in Mix of Personnel Types

Variation in Total

Personnel Costs

1

23


Lessons Learned

With the combination of meaningful cost assignment and process mapping we really understand for the first time the true cost of a medical condition.1.

With TDABC we have great visibility into areas where substantial and expensive unused capacity exists.2.

The imprecise assignment of costs may result in wrong strategic decisions.4.

With TDABC we are able to have more constructive and better informed discussions with our medical professionals.5.

TDABC reveals powerful new ways to improve our processes and to restructure our daily care delivery.3.

The combination of accurate cost measurement and systematic outcome measurement together with benchmarking is the key to unlock the full potential of value in our organization.6.

TDABC as a „must“ for an effective management of resources and for improving value


Time-Driven ABC provides a common platform – a single version of truth – for productive discussions among clinical & administrative personnel.

By standardizing on this procedure and we can achieve consistently excellent outcomes

at lower cost.

We can skip this process and save $120

per patient.


TDABC helps providers manage their costs

Process Improvement and Redesign

Personnel and

Resource Utilization

• Eliminate process steps and variations that do not contribute to improved patient outcomes

• Redesign processes to reduce waste and idle time

• Optimize processes and interventions over a complete cycle of care

• All clinicians work at the “top-of-their license” →health care personnel, equipment and facilities have very different productivities and costs; who should be doing the work, where, and how?

• Use existing capacity to serve larger volume of patients or Reduce unused capacity of people, equipment, and facilities


TDABC also provides the foundation for bundled payment contracts

• Offer Bundle Payment Reimbursement: Understand costs over the full care cycle to prepare for implementing bundled payments

Pricing


HBS Cost Team is currently collaborating with multiple health care delivery systems

30 hospitals participating in joint replacement program


HBS cost measurement & management project areas

•Chronic kidney disease

•Care transitions/preventing readmissions

•Congestive heart failure

•Diabetes•Primary and psychiatric care for patients with intellectual disabilities

• Bariatric surgery• Cervical spine surgery• Child birth and pregnancy• Heart valve replacements and

repairs• Head and neck cancers• Hysterectomies• Mastectomies• Joint replacements• Neurosurgical procedures• Observation patients• Prostate cancer surgeries and

radiation treatments• Rotator cuff repairs• Tonsils & adenoids

Chronic and Primary Care Episodic Care

Ancillary and Indirect

• Radiology

• Billing

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