Activity Based Costing in the Healthcare System

No one wants to implement changes in their life if there is no payout or reward at the end.  This also goes for large companies and organizations, too, in fact, almost more so because there are many people involved, usually a lot of money and a fair amount of upheaval.  One of the main reasons that a business would change their standards and practices would be to improve their financial outgo as well as improving their goods or services. This is very much the case with the healthcare industry and the continually rising costs of care with no significant improvement to outcomes to reflect the increase in costs.  As such, prominent figures and decision makers in healthcare have sought out a tool that would change the industry from the inside out. Activity Based Costing (ABC) is that tool and the change that is worth making.  But, what is the Activity Based Cost uses that could warrant such a large overhaul of a system that seems to be working?

To better understand the uses, it is necessary to understand the fundamentals of what ABC is, especially in the realm of healthcare.  ABC has been used in many other industries, especially manufacturing, for quite some time with great success. There are some basic steps that can clarify what goes into the process of ABC.

Identify Costs

Activity Based Costing

To provide any good or service, there are costs involved.  These costs can be somewhat easy to identify, such as tools and vehicles for a plumber to unclog a sink, or the parts to build cellphone at a cell phone manufacturing facility.  There are also man-hours and facility costs that are part of the overhead costs that come with any business. But, other costs may not be as easy to identify such as insurance, taxes or training.  All costs associated with running a business should be accounted for. This is a time and detail intensive step that many people like to cut corners on. Because this is such a critical step and one that is foundational to revelations later, taking shortcuts is not an option.

Create Cost Pools

Activity Based Costing

Cost pools are the division and allocation of costs involved in running a business.  The pools usually consist of primary and secondary categories, but some might also include a tertiary pool, too.  The primary cost pool will be the direct expenses tied to providing care in a single department. These costs are usually easy to isolate because they correlate with a product or service clearly.  Secondary and tertiary cost pools deal with costs to keep the doors open and meeting government regulations costs. These are essential to understanding, due to the fact that they are not insignificant in the big picture and also contain great amounts of information as to total costs for the company, business or organization.

Where is the Money Going?

Activity Based Costing

In a manufacturing facility, it is somewhat easy to see where the money is being spent because you purchase specific items to produce a product, and the production line has its direct costs related to it.  If there are several production lines and products, it still is probably quite easy to identify where expenses are going and if there are problems within a specific production line. However, in the healthcare business, the allocation of supplies and other materials may not be as easy to follow due to the fact that some materials are used in several different departments and for different uses.  The way in which expenditures can be followed is to track what supplies, materials, equipment, and man-hours a patient utilizes. The information on each patient is stored in a data warehouse, which can then apportion costs on a per patient and per department basis. Accuracy and details are the names of the game here, too.

Comparing the Data

Activity Based Costing

Once all the relevant data is available, and you have a large collection of people from which to draw significant patterns from, it is time to see the fruits of your labor.  ABC in healthcare can begin to reveal patterns, understand better where money is being spent, but also allows for deeper insights into other functions in an organization, which uncovers things like:

  • Opportunities to reduce costs
  • Savings on supplies and materials
  • Transparency in variations and procedures
  • Finding a way to be more efficient while eliminating waste

Information has a way of uncovering the good and the bad within any organization, and as long as you are willing to see all resulting data as informative, you are able to then make the right changes.

Assign/reassign Costs

Just as with processes and procedures, data may help to clarify where money should be classified.  It is a good idea to look over the cost pools and to make sure expenses are being grouped into the right pool.  What may have seemed like a secondary cost could be better ranked in the primary cost pool.  This may also be the case with costs that would have been set up in the tertiary cost pool, too.  When you are able to understand where money is actually being spent, and not just simply stated that it goes toward supplies, you can then more clearly state the exact cost of each patient.

Act on the Information

Activity Based Costing

Data means nothing without action.  When waste is detected or when cost savings can be employed but are not, nothing has been gained and the whole process is for not.  However, when you have data-driven information that indicates areas for improvement, it is much easy to create a plan of action, show those who will be implementing the change, and get everyone on the same page.  No one really likes change, yet when there is proof that costs can be reduced, that patients will see more positive outcomes and the organization will work more efficiently, you are more likely to find resistance inside the system.

There is truly many activity-based costs uses when everyone is willing to do their part from there very first steps through the discovery and then implementation.  The rewards may not be immediate, but that is the way with most things in life; hard work and sacrifices lead to tangible results.