Managing the cost of patient care is the top strategic priority of most hospital CFOs today. As advances in medicine enable healthcare organizations to provide more effective and specialized care than ever before, the cost of care for new technologies, human capital, medical devices, drugs, and administrative costs continues to outpace reimbursements. As healthcare shifts to more data-driven decision making, having clear visibility into key volume, cost and profitability measures across clinical service lines is becoming increasingly important for both long-range and tactical planning activities. In turn, the cost accounting function in healthcare provider organizations is becoming an increasingly important and strategic function. Decisions related to things like which service lines to grow and expand and where opportunity for operational changes or process improvement could drive hard-dollar savings all require accurate and reliable patient-level cost and profitability analytics.

Cost accounting and service line analytics to drive decisions

Relying heavily on data to make decisions that impact profitability, healthcare provider organizations need the right data in a timely fashion to answer key questions and ultimately drive decisions in their organization. Effectively using service line volume, costs, and profitability metrics to support strategic business decisions is becoming a requirement to support cost containment initiatives and maintain or even grow profitability. Hospitals are using this data to formulate integrated business planning across their lines of service and influence revenue, reimbursements and most commonly operational plans. Some of the most common questions answered with service line analytics include:

  • Which services and patients are most profitable?
  • How are shifts in volume and mix of services impacting my bottom line over time?
  • Is there opportunity to influence physician behavior to impact the cost-of-care?
  • How do we establish budgets for the delivery of patient care?
  • How do I model/forecast how shifts in volume or mix impact revenue and workload and overall profitability?

With insight into service line cost data and profitability analytics, healthcare provider organizations can make informed decisions on which service lines to grow and which might require restructuring. With continual changes in the delivery of patient care and downward pressure on reimbursements, healthcare providers need visibility into key volume and profitability to support sound strategic, financial and tactical planning.

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Challenges to efficient and accurate cost accounting and service line analytics

Unfortunately, many organizations struggle to produce accurate and timely views of service line volume, cost and profitability analytics. Ineffective costing approaches are a direct result of using antiquated technologies that are either too complex and resource intensive to be effective or too simplistic to meet their needs. Following are the three most common challenges to successful cost accounting and service line analytics.

1. Detailed Costing Frameworks Prove Inefficient

In the past, healthcare organizations mistakenly believed highly detailed cost accounting systems would, by definition, produce more accurate results. These strategies weren’t effective because they placed too much emphasis on collecting the most granular level of detail rather than identifying key drivers of cost that are consistently captured on patient records — practical data that could actually support better business decisions. With all of their excessive detail — providing breakdowns of a single activity by job class and by prep, procedure, and post procedure time estimates — costing models became difficult to change and maintain. Because of their complexity, costing models lacked the flexibility to support the dynamic nature of healthcare such as adding new procedures or revising or deleting other clinical processes. Additionally, if organizations failed to revise costing models in a timely manner, the resulting cost and profit metrics were neither actionable nor valuable. Overwhelmed with unnecessary detail and trapped by rigid frameworks, clinically-focused decision makers found it difficult to use, much less trust, costing models and numbers.

2. Overly Simplistic Methods Prove Inaccurate

In stark contrast to highly detailed frameworks, many organizations adopted percent of charge methodologies that allowed costing models to be developed at patient, procedure or even service line levels. This was a highly efficient approach to establish ‘proxy’ numbers for cost but did not provide sufficient detail to generate buy-in from clinical stakeholders. In turn, this data wasn’t used to identify true process of care differences or outliers that might influence the care delivery process — decisions that could have a bottom line impact.

3. Limited Buy-in and Management Use from Executives and Clinical Stakeholders

Another common roadblock to the strategic use of costing data is establishing trust and buy-in related to the accuracy of information being disseminated.

For many, the efficient reconciling of aggregated year-to-date patient-level volume, revenue and cost data back to the financial statements is an important tollgate prior to releasing data, and a process that is time-intensive for some, impossible for others. This is especially true if more complex patient cost assignments are done using standard costs, or highly detailed itemized activity driven methods that build-up activity related costs but have little tie back to actual posted financial expenses. And even for those organizations where auditing tollgates are in place, their antiquated decision support systems make reporting a challenge. Functioning like big calculators, the resulting output must be downloaded and reformatted in disconnected, offline Excel models. This makes reporting a time- and very resourceintensive effort. The lack of consistency, as well as the timeliness of data delivered, compromises its value, and the data does not contribute to (or influence) strategic decision-making.

Ultimately, cost accounting problems undermine trust in costing results. Without key stakeholders accepting that numbers are accurate, senior level executives cannot rely on the information to make the strategic decisions.

Retain Detail Across Financial and Patient Views

Five strategies to make cost accounting a more strategic function

Whether your organization is plagued with inefficient or inaccurate cost accounting and service line analytics tools and processes, or you are exploring a solution for the first time, it’s important to employ best practices strategies and techniques that have proven successful. The following five best practices should be considered regardless of where you are in the journey:

1. Structure a Costing Model that Balances Efficiency with Accuracy

Healthcare provider organizations are avoiding highly simplistic patient-level (ratio of cost to charge - RCC) approaches in favor of more ‘activity-based’ approaches. Using the charge master as a proxy for activity drivers is an approach that makes sense in a hospital setting since it is well understood by department managers and is tracked consistently on patient records. And by establishing costs at this level of detail, it provides an accurate representation of the utilization of services provided on a patient-by-patient basis. Another decision point is determining how to structure costs within the costing model. This is typically part of a mapping exercise where actual GL-level expenses are summarized into summary categories, or ‘cost pools’. However, the trend is to move away from highly summarized groupings (i.e., direct labor, direct supply) into more refined categories (i.e., patient care, labor, implants, drugs). By doing so, the subsequent step to allocate and assign costs from those ‘cost pools’ to the charge item level — more broadly described as the RVU development process — can be more precise. Further, as the diagram below suggests, it is ideal if the categories developed carry-forward from financial views to patient-detail. By doing so, you retain a level of granularity that supports the downstream service line and population specific analysis.

2. Refine Activity-Based Costs with Department Manager Input

It is vital for department managers to be engaged in the refinement of ‘cost per test’ calculations for their area. Manager participation not only promotes their buy-in to the process overall, but their expert knowledge related to the delivery of patient care activities will ultimately improve the quality of the costs derived downstream at a patient level. This collaboration provides an opportunity to challenge the standard charge master as the best source of activity or detail. As an example, be critical of nursing departments where a simple room and board charger may not accurately reflect the true ‘care’ delivered patient-by-patient. Many organizations reflect acuity levels to properly capture the resources required to address more acute care patients. Costing of medical supplies is another area where traditional RVU-based costing methodologies should be replaced with more refined direct costing methods. Managers typically have knowledge of the source systems where this information is updated and stored, which can lead to automated feeds of item costs into the model.

Flexible Methodologies including, Time-Based, RVU, Direct Cost

3. Streamline Data Validation and Reconciliation Tasks

Gaining sign-off from finance on the validity of costing results is an important step in the rollout process and should happen ahead of releasing monthly or quarterly reports to key stakeholders. This presentation should be an intuitive walk-through of financial results starting with a consolidated income statement from the financials and footnoting of any variances that might exist to consolidated patient-level costs. This dialogue with finance often uncovers areas and suggests methodologies for ‘passing-thru’ specific revenues or overhead related costs directly to specific patient populations. Given Finance’s expanding role as a strategic advisor to the organization in business planning activities, gaining their confidence and trust in these numbers is important.

4. Provide Timely and Consistent Views of Service Line Performance

Once the patient-level database is audited, the information is ready for management use. However, all too often, the time and energy spent by the decision support team is allocated heavily toward preparing one-off ad hoc analysis. Instead, make a concerted effort as a decision support team to be less reactive to ad hoc requests and more proactive with comprehensive views of volume, cost and profitability trends across service lines. These reports should not be ‘snapshots’ in time — focused on a single time period. Instead they should provide ‘year- over-year’ comparisons with meaningful ‘per case’ and ‘per visit’ measures. Analysis should isolate the variables and drivers to changes in margin, including payor mix shifts, changes net revenue per case, or increased supply costs. Analytics should provide ‘drillthru’ capabilities that help analysts offer explanations related to ‘why’ variances exist.

Timely and Consistent Views of Volume, Revenue & Cost Trends

5. Assign Accountability to Clinical Service Lines

Even with a well-implemented costing methodology and effective reporting, many organizations fail to achieve value from their investment in decision support because no one ‘owns’ the results. To ensure action is taken on opportunities identified, many organizations are aligning their organization structures along clinical service lines. This approach helps foster a sense of ownership and accountability around service line performance and provides the executive attention and support needed to implement changes.

Kaufman Hall’s approach to cost accounting and service line analytics

Kaufman Hall’s Axiom® Healthcare Suite provides the frameworks needed to perform accurate patient-level costing but also offers the flexibility and control needed to address unique requirements when needed. With this, hospitals and health systems effectively streamline the process of developing patient level costs with efficient and repeatable methods that ensure timely and accurate reporting of performance analytics across patient populations. The following paragraphs highlight the key components of Kaufman Hall’s solution for efficient and accurate cost accounting and services line analytics.

Streamline Data Reconciliation and Validation Tasks

The platform’s configurable data model ensures that hospitals and health systems can efficiently integrate data from a variety of financial and patient-centric sources to develop a rich data source. Import processes are easily automated with system notifications and audit checks that streamline data validation and reconciliation processes. By streamlining these important data validation functions, time and resources are allocated away from tedious auditing tasks toward more strategic analysis and decision support functions.

Manage Cost Attributes and Overhead Allocations

As the business of healthcare is constantly evolving, many healthcare organizations are struggling with outdated cost accounting tools and processes that don’t offer the flexibility to address their changing needs. In contrast, Kaufman Hall provides organizations with the flexibility to assign operating expenses into any number of cost pools, such as direct variable labor, direct variable supplies, and high-cost devices. This level of flexibility and control ensures that resulting patient-level costs have the level of granularity needed to support actionable management reporting.

Efficiently Validate RVU’s and Charge Item Costs

Kaufman Hall also streamlines the review and update of RVU’s by Department Manager with intuitive on-line modeling. Automated notifications trigger when on-line models are available for review. Intuitive views and instructions guide managers thru the update process. Built-in workflow tools help to streamline this update and review process by monitoring the process associated with changes or updates to cost factors and RVU’s. With these automation tools, the important process of validating charge item costs becomes an efficient and repeatable process.

Cost accounting data process flow

Deliver Trended Views of Service Line Analytics

Kaufman Hall’s built-in reporting tools empower Finance professionals to deliver insightful views of volume, cost, and profitability measures across clinical service lines. With highly flexible and configurable formats, users are provided with actionable information. Trended views of key indicators and analytics can be presented at any dimension, including by Service Line, DRG, Physician and Payer. And with powerful ad hoc reporting capabilities, users can quickly drill from consolidated reports to the underlying details, including to patient- and charge item- detail levels. These interactive reports can be accessed online through the Web-client, or distributed automatically (including e-mail delivery).

Leverage Service Line Metrics to Improve Planning Accuracy

With Kaufman Hall’s unified approach to decision support, Finance can more accurately model the impact that changes to service line growth will have across revenue and expense plans. This integrated approach helps align strategic planning functions – such as growth and investment plans that are being evaluated to key service lines – with the impact modeling and budgeting that is performed across nursing and ancillary departments.


With the pressure on healthcare provider organizations to deliver and sustain healthy financial outcomes, having access to a trusted source of service line cost and profitability analytics has never been greater. High-performing organizations are leveraging new technologies and implementing efficient and repeatable processes that can balance accuracy with efficiency so information is more timely and accurate than ever before. While it may seem pretty daunting, organizations should choose at least one strategy and begin working to put it into practice today.

Meet the Authors
Jay Spence

Jay Spence

Vice President of Healthcare Product Management and Strategy
Jay Spence is Vice President of Healthcare Product Management and Strategy with Kaufman Hall’s Software Division. In that role, he focuses on shaping and executing the firm’s software strategy and product roadmap ensuring Kaufman Hall solutions continue to evolve to address the changing needs of healthcare organizations.
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