Surgery Departments are significant cost centers in most acute care hospitals. Effective cost management and accounting for these departments therefore are top priorities for hospital management, but often are difficult to achieve. Departmental and Supply Chain managers typically struggle with cost-containment initiatives due to physician preference items (PPIs) and the lack of availability of low-cost, high-efficacy alternatives for implants and other surgical case needs. Evolving surgical techniques and advancing technologies further complicate the identification and management of costs. Staff members responsible for tracking and accounting for costs within Surgery Departments face enormous challenges.

An “ideal approach” to solving these challenges for an accurate accounting of surgical costs would involve standardizing and limiting the wide breadth of variation of similar procedures, supplies, equipment, medications, and instruments used in surgical suites. However, most hospitals and health systems have found this approach to be unrealistic and difficult, if not impossible, to implement. This is particularly true for organizations trying to manage surgical suite-related data—which come in many different forms from many different sources—with traditional costing solutions. Traditional costing systems are not able to accurately account for costs related to surgical suites by patient, provider, procedure, or many other characteristics.

To address these challenges and improve the validity of cost information from the Surgery Department, hospitals need a modern cost accounting system that is extendable, configurable, and transparent.

The Benefits of an Agile, “Extendable” Data Model

Many legacy cost accounting systems rely on billing or charge information, and require data to be supplied in a structured way based upon a rigid data model. Such systems cannot provide accurate cost accounting for Surgery Departments.

By contrast, a cost accounting system with an extendable data model—meaning one that allows data to be captured from any number of care systems and sources—is particularly valuable in gathering complete cost information from a surgical or operating room system and other sources.




Figure 1 compares the level of detail for surgical costs within the operating room that can be provided by a robust cost accounting system versus the level of detail captured by a traditional system. Information captured by the modern, extendable system in this particular example includes cost data related to medications, supplies, implants, instruments, and surgical providers for each operation at the picklist (i.e., the list from which a user can make a selection) line-item level. Detailed tables with these data can be used in a variety of ways that take advantage of the extendable data model, thereby adding value.




A Configurable System Meets an Organization’s Specific Costing Needs




Implementing an extendable data model is the first step toward an accurate costing method for the Surgery Department. The second step and element of value in improving the cost accounting system’s results involves leveraging or tailoring the costing design and calculations to meet the organization’s specific needs. A system that is flexible and configurable can use any type of data, from any source, and create encounter cost items or cost objects to store variable and fixed costs by category.




Configuring a system to use surgical data to improve the validity of costs may include the following:




  • Using actual implant information, documenting items wasted as well as those charged
  • Capturing and costing both chargeable and non-chargeable supplies and medications used during the surgery
  • Using surgical minor equipment data to allocate depreciation and maintenance to only those cases or patients that/who actually received treatment with this equipment
  • Using the instrument data to directly apply disposable and non-disposable instrument costs, and to allocate surgery support costs
  • Calculating labor costs based on provider information, which generally includes hospital staff, such as nurses and operating room technicians who assisted with the operation
  • Using actual time data to calculate costs beyond direct labor costs; for example, operating time data can enable more equitable allocation of major equipment and environmental services costs; actual visit time data for physician offices can enable more equitable allocation of costs for pre- and post-operative care required for costing bundled surgical case rates.




Transparency Optimizes Reliability




Extending the costing data model and configuring a system to leverage non-traditional source data require a high degree of transparency. Such transparency enables costing professionals and end users to validate the costing calculations, which ensures that results are reliable and trusted.




A high level of costing accuracy is particularly critical to gaining support within the physician community for cost- and quality-related change-management initiatives. Physician leaders will not accept “black box” calculations with cost data from standardized inputs, and invisible, therefore questionable, calculations or intermediate results. A transparent system allows all inputs and intermediate calculations to be validated. For example, it is vital to identify at the patient level within the costing calculations the actual invoice costs for supplies, medications, and instruments, as well as surgical times based on actual procedure start and stop times.




Reconciling and validating costs in a transparent manner also help to create an efficient and repeatable process that can be supported by well-defined data. Efficiency is improved by identifying errors and omissions early in the costing process and reducing the likelihood that those errors will be repeated.




Lastly, transparency allows the cost accounting model to evolve and improve as new and more detailed data become available to the organization.




Key Elements of Modern Cost Accounting Systems




In today’s data-rich but cost- and outcomes-focused environment, hospitals and health systems must deploy a cost accounting system that is supported by a data model that can be extended, tailored, and sustained by end users without vendor intervention. The ability to configure the system in a flexible way, integrating new data sources, ensures that the costing system can evolve as leading healthcare providers and payers adopt additional advanced costing techniques.




Transparency is critical to gain the trust of all who use the costing results. The costing system must support multiple costing methods within the same department and have the ability to reconcile results. Applying these concepts of extendibility, configurability, and transparency in the nation’s Surgery Departments is of paramount importance for today’s acute care organizations.




Dan Seargeant, Dr.P.H. (, Vice President and Product Manager of Decision Support Solutions of Kaufman, Hall & Associates, LLC, can be reached at 847.441.8780.