IMA White Paper

This article is excerpted from the forthcoming IMA® white paper Cost Management in Healthcare: Status Quo and Opportunities. It has been edited and abridged for Strategic Finance. The full report will be available at bit.ly/3DDiShU.

of care provided. To build this business case, healthcare organizations must have capabilities to perform several functions:

■ Accurately and consistently report cost and other financial data on appropriate metrics developed in collaboration with clinicians

■ Drive information sharing throughout the organization by linking dashboards and individual measures to strategic goals

■ Report quality results to both internal and external stakeholders

The need for better costing and other business analytics in healthcare is both recognized and real. Many providers readily acknowledge the inadequacies of their current systems. They’re working to enhance their organizational competencies enabling optimal data utilization and to develop the systems that will lay the foundation to succeed under value-based care models and other risk arrangements. In comparison to the investments in information and analytics for clinical quality, however, investments in business intelligence on the finance side have lagged. As a result, tying cost implications to performance on quality metrics often requires a considerable amount of time-consuming, manual work. Providers also struggle to precisely quantify the financial impact of quality initiatives, although the effects of quality initiatives on metrics such as length of stay and other indirect macro indicators demonstrate when initiatives are working to reduce costs.

Costing information is clearly recognized as important as providers facilitate linking clinicians and staff throughout the organization, produce data that can verify the outcomes and financial implications of performance improvement efforts, and enable the creation of patient information repositories that will become increasingly important as providers assume risk contracts.

Innovating Costing Practices

Providers recognize the significance of the link between quality improvement and cost management efforts. They’re measuring the impact of quality and waste on their organizations and contemplating moving beyond traditional methods of cost accounting.

IMA® (Institute of Management Accountants) and the Healthcare Financial Management Association (HFMA) hosted roundtable discussions during which participants shared their perspectives on (1) how healthcare costing information is utilized to set healthcare pricing (from a patient’s perspective) and improve transparency and (2) how costing practices impact overall healthcare costs in the U.S. (see “About Our Study”). Key takeaways from this discussion include:

■ Recognition that the U.S. healthcare industry’s pricing strategy is driven by the market rather than costs, and

■ A lack of consensus with respect to the impact of costing methodologies and practices on overall healthcare costs because of the great variation in costing approaches across organizations and sometimes among different divisions within a single organization.

Despite these circumstances, there was consensus among participants that more innovative costing approaches would be incrementally beneficial to the finance function’s delivery of value to the healthcare organizations that they support. Thus, a deeper discussion emerged around activity-based costing (ABC).

Yet, as found in a 2017 study on the adoption of ABC in the healthcare industry conducted by IMA and the HFMA ( bit.ly/3ZR8GLu ), healthcare organizations generally recognize the problems associated with their current accounting systems, but most choose not to implement ABC systems despite the potential benefits (see “Costing Methodologies: Activity-Based Costing” for a detailed definition ). Figure 1 summarizes the top five reasons for not adopting ABC as documented in the 2017 study.

Most roundtable participants confirmed that the adoption of ABC or other advanced costing systems such as time-driven activity-based costing (TDABC) was out of the realm of possibilities within their organizations for the foreseeable future. When asked to identify the drivers for nonadoption, participants pointed to the complexity of deploying these systems, constraints of internal resources, and others. For example, a common issue for a healthcare system with various services in multiple locations but sharing the same integrated information system data hosting is that, given that each service might use the system differently than others within the same organization, analyzing the level of details to achieve like-kind comparison across service lines using ABC or TDABC becomes increasingly challenging.

Key Challenges in Costing Practice Improvement

While the benefits of adopting a sound and reliable costing system are obvious, barriers to achieving it can’t be overlooked. Key examples of such challenges are staggered