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TAKING SERVICE LINE P& Anne Farmer, Vice President For most healthcare organizations that have a Decision Support system, one of the initial objectives for the system was service line profitability reporting. However, not all would Previous efforts at rolling out service line reports may have resulted in skepticism about the accuracy and some difficult questions from service line and department managers. (What about teaching costs? What about GME payments? Does The cost accounting data is not maintained as it needs to be, due to a lack of resources, or to the fact that cost accounting is part of another department such There are too many caveats to the cost There is a need in many healthcare organizations to enhance the accuracy of service line reporting, so that the output is credible as well as timely. Top-level allocations using arbitrary statistics will not produce accurate information for decision-making. COST ACCOUNTING CONSIDERATIONS ove the accuracy and timeliness of cost information as part of service line profitability analysis. Assigning direct costs to service lines: The accuracy of direct costs by service line is, of course, dependent on the cost accounting standards in place. Are RCC’s (ratios of cost to charge) being used to assign costs to the charge code (i.e. service item) level, or has 1 the organization gone through a process of collecting cost accounting data from the clinical and department managers? The necessary resources should be in place to ensure that the cost standards are kept up-to-date. Wherever feasible, automated interfaces should be developed: For example, costs of O.R. supplies as well as drugs can be updated on a monthly basis if these interfaces are in place. Patient-specific costing: Although charge codes have been the traditional intermediate product in a cost accounting system, and the means of assigning direct costs to the patient level, some organizations are supplementing their cost accounting systems with additional data, at the patient level, to enhance the accuracy of cost information. Examples would include: Operating Room: Bringing in data from Nursing: Integrating acuity or nursing intervention data to assign nursing costs to the patient level, and thus reflect patient-to-patient variability. Transitional Care/Subacute Unit: Using RUG’s levels to assign TCU nursing costs to patients based on an assessment of acuity. Maternity: Calculating laboring minutes to assign costs of the Maternity department to moms based on actual times (vs. the single charge code for a “normal delivery”, which assigns one flat cost to all deliveries, based on an average delivery time). The common thread among these costing strategies is that they represent patient- specific costing efforts and will enhance the accuracy of cost information at the patient and service line level. Move costs from indirect to direct: Certain costs that directly support clinical departments, but happen to flow through non-revenue producing departments, should be considered part of the direct cost of a servic e line. Examples would include: Radiology In addition, there may be other costs that are expensed to overhead cost centers, but in fact should be treated as direct costs. These would include: Major movable equipment depreciation FICA and other benefits Teaching costs (the portion of intern/resident/faculty time that is patient “Assign” overhead costs – vs. “allocate” : Although activity-based costing (ABC) has not taken off in healthcare as it did in other industries in the 1990’s, healthcare has borrowed some of the ABC concepts over the past several years. Healthcare organizations have 2 made an effort in their costing systems to move away from top-down, arbitrary allocations of overhead costs, and towards a more accurate assignment of overhead costs to the appropriate departments. This means that additional data may be necessary to supplement the Medicare cost report statistics. An example might be the Another aspect of activity-based costing is assigning overhead and fixed costs more accurately to the patient and service line level. Organizations should review their Program-specific costs: Certain costs may relate to a particular program and, in theory, Contract management systems: contract management module that will calcul DSS users have wrestled with various approaches to handling these adjustments. Should they be incorporated in DSS or not? Many organizations have not brought these adjustments into DSS, and hence not into service line P&L’s. However, NOT including these can have an impact on service line profitability. For example, Graduate Medical Education (GME) payments most often relate to specific services/departments. If these payments are not incorporated on a P&L, the profitability of the affected service lines is 3 include or exclude such adjustments. When reporting on payment variances, for example, these adjustments would be excluded so that actual payments can be readily Supplementing data: Bad debt – to GAAP or not to GAAP?: Although a majority of organizations handle bad debt as an expense within their DSS/Cost Accounting systems, in accordance with can also be interfaced into DSS. AUDIT PROCESSES Departments or services that are NOT billed within the primary billing system and thus are not part of DSS, and Cost auditing: Ensuring that cost information is meaningful at the service line level means reviewing costs at various levels. Audit reports, as part of a costing model, are typically run at the department level. While a department-level review is important, reviews at the charge code and service line level are equally as important. Below is a suggested outline for a cost review process: Department cost review: Direct costs, including any reclassified costs Fixed/variable assumptions Allocation of overhead costs Charge code level cost review Direct costs by charge code 4 Comparison of actual cost per unit to price Comparison of allocated variable cost to the variable cost standard Allocation of overhead and fixed costs across charge codes Service line level cost review Direct and indirect costs Comparison of cost per case to prior period EDUCATION Lastly, education should not be overlooked as a necessary component of the effort to improve service line profitability analysis. Users of the information need to be educated on the approaches that were taken, the key assumptions that are in place, and the data With some effort on the part of the DSS team, the quality of service line P&L reporting 5