Angela Shelton: My Journey to Activity Based Costing in Healthcare

Angela Shelton, CFO of Jack Hughston Memorial Hospital in Alabama and FCG Prodacapo-customer published an article on LinkedIn sharing her experiences in implementing Activity Based Costing in Healthcare:

You know it’s time. In fact, if you don’t know that it’s time, then this is your official wake up call. As an industry, we now “officially” need to know what our costs are. Pricing transparency, increased competition, more stressful (and at times contentious) contract negotiations with payers, and higher deductibles creating new “shoppers” in the market are all generating the biggest question we’ve ever had to answer… “What does healthcare cost?” Whether a part of a large healthcare system with multiple hospitals, or a small rural hospital, we all need to know what the true cost is for all of our procedures so that we can manage our businesses and provide the best care at the most reasonable cost to our patients. At our facility I’ve found this information to be invaluable in dealing with all of the above mentioned issues that I knew that we had to move to Activity Based Costing to get our most accurate cost data possible. That move was not without the normal pains of growth and improvement so I thought it would be appropriate to share my own personal experience converting over to Activity Based Costing.

Choose your vendor

The first, and potentially the scariest, part of the adventure is choosing your vendor. There are a number of vendors to choose from and we vetted a number of them. Some were just out of our price range. There is a definite return on investment in getting to a place where you feel confident that your cost models are solid and believable. That being said, we all have budget constraints and so we had to choose a vendor that was reasonably priced, and yet still provided as many of the “bells and whistles” as we could get with the dollars we had to spend. Not only do you need to look at purchase price, but also review true implementation costs (including your own resources), annual maintenance costs, the need for ongoing in-house or outsourced support for the model, and hardware requirements to maintain your database. In my own journey, I found that my team underestimated the hardware requirements of the software solutions we chose. As the project progressed we found that we wanted to pull in more and more data to make the end product that much better. But that caused the resources needed to expand along with the data. So think ahead on this one.

Choose your experts.

If you already have seasoned creators and/or users of cost data in-house then you may not need to look any further. You’ll want to be certain that your in-house experts are ready for and desirous of change; however, or you may find them to be an anchor to instead of an accelerator of the process. If you don’t have the in-house talent you need to decide if you can bring in an expert on a temporary basis, or if you need to hire someone to permanently reside at your facility and maintain your cost model after it has reached its final state of perfection. I promise you that it is not “once and done”. You’ll need to tweak and perfect as well as verify that nothing has broken each and every month.

Gather your data.

Pulling all of the data in requires patience, forethought, and validation. We found challenges abounded in the pulling of data from our systems. In-house IT resources can be hard to come by when there are multiple competing projects, and we felt the crunch for time in our IT department. On top of that, expect to have to pull the same data multiple times until the cross over is correct from the source to the cost model. Our vendor came up with some great ideas to improve our cost model including the thought to pull the implant information from the implant log instead of from the charge master/item master link. Because we don’t have a specific charge for every single rod and screw in our item master we could have gotten close to the correct cost, but by matching up the implant log data with the item master data we found we were able to get even closer to the true cost of implants for our cases. But that did not come easily and without heartburn; which leads to my next thought - trust nothing.

Trust Nothing.

Throughout the process of uploading data, running the model, and validating the output we found out that there were plenty of surprises for all to share in. In one case we found that one of our main vendors was not charging what we thought they should. This lead to a deeper discussion with what was causing this higher pricing and what could or should be done about it. We also found some charge master items were orphaned without an item master link and vice versa. If you haven’t found any problems with your systems and/or your pricing during the review process, then I would say that you haven’t validated well enough.

Move forward with greater knowledge and insight.

Our new Activity Based Costing model has brought new insights into our costs vs. reimbursement. We can now view every case we do as well as slice and dice it by a multitude of parameters. “Which surgeons are the most cost efficient and why”, is a common question that we answer. Other questions revolve around profitability by payer for contract negotiations; profitability of case by implant vendor; and the decisions as to which cases should we devote more resources towards growing. There have been cases that we thought we were profitable on that we determined were not and vice versa. We have also found departments to be less profitable than anticipated. The new cost model gives us the ability to drill down into the details to answer the great “why?” questions that we have every day.

Moving to Activity Based Costing was well worth the effort for our facility and I appreciate the flexibility and added knowledge it has provided to our organization.


Author: Angela Shelton, CFO of Jack Hughston Memorial Hospital in Alabama

Article published on Linkedin