Urgent — Need a summary write up on the attached peer reviewed research paper

1. 250+ words summary about this research by John Anthony

2. Please Use the APA 6E guide only

3. Turnit report

Patient-Level Costing and Profitability: Making It Work
hfma.org/Content.aspx

Gary Cokins, Raef Lawson, PhD, CMA, CSCA, CPA, CFA, and Rob Tholemeier

Increasing changes in how insurers pay for health care in the United States and public
pressure to reduce the overall cost of care are forcing healthcare organizations to move away
from revenue-centric approaches to maintain their financial stability. This move requires
placing a greater emphasis on measuring, managing, and monitoring the cost of providing
care and the resulting profit margins—a change that is necessary even for not-for-profit
healthcare organizations.

To reduce costs, provider organizations must take a substantially different approach to
managing costs. Measuring costs must involve a consumption view of how resource
expenditures (e.g., employee salaries, materials, supplies, power) are used for procedures,
treatments, surgeries, and the like by individual patients.

Traditional costing approaches in health care, such as those based on ratio of costs to
charges (RCCs) or relative-value units (RVUs), are inadequate. RCCs and RVUs use broad
averages that do not reflect cost accounting’s causality principle: Costing should reflect the
cause-and-effect relationship between costs and the consumption of resources by cost
objects (e.g., patients, procedures) that cause costs to be incurred.

The Data-Driven, Consumptive Approach
A more accurate method of measuring costs is to adopt a comprehensive patient-level cost
management analytics approach using data that already exist in a provider’s clinical and
financial systems. The IT used in health care generates substantial transactional data that can
be converted into cost data for each patient, in real time, as costs are incurred. This
information is continuously produced, but rarely used.

Industries such as aviation, manufacturing, transportation, and retail are spending billions of
dollars equipping their plants, trucks, planes, loading docks, and workers to produce the kind
of cost data needed to improve their analyses and decision making. Most healthcare
organizations already have information systems in place that are automatically producing
such robust source data, which can be used to enable accurate cost reporting. In health care,
however, there often is a large gap between the availability of actual cost data and an
organization’s ability to use such data for insights and decision making.

Complying with the Causality Principle

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https://www.hfma.org/Content.aspx?id=62679

Healthcare data—both clinical information and usage logs—reside in electronic health records
(EHRs), barcode scanners, pharmacy and lab systems, imaging machines, and nearly every
other device and computer system used around the hospital. These rich but neglected data
streams contain massive amounts of useful data that can be used for measuring costs. If that
information were gathered up, stored, analyzed, and converted into financial terms, and then
presented using modern data visualization technology, it would display, in real time, an
accurate, detailed, and actionable picture of patient costs. Comparing patient level billing with
prices and net revenue collected for these costs enables profit margin analysis. This
comparison allows an organization to know where and on what services it is making or losing
money, by how much, and why.

This approach to use of data for costing is very different from and much more useful than
traditional methods, which rely on dividing up the general ledger accounting system’s cost
account line items into cost pools, a cost accounting term, that are then allocated using RVUs
or RCCs. Although the traditional costing methods are appealing on the surface to
accountants because they fully allocate all of the consumed expenses into output costs, they
are deficient because of their noncompliance with the causality principle, which is the most
essential principle of valid cost accounting.

Most managers react to the term “cost allocation” with dismay. They recognize that cost
allocations that do not reflect the causality principle simultaneously over-cost some items and
therefore must under-cost others because the total costs must be allocated. Thus, although
the total allocated cost is correct, individual patient encounters are costed in error and
therefore are misleading. The magnitude of cost error for each item can be substantial, often
massive, when not using causality to trace, connect, and assign expenses to those items.

Cost accounting approaches that use the periodic, grossly aggregated data from the general
ledger are based on broad averages for cost calculations and loaded with guestimates. These
approaches are valid for external financial and statutory reporting required by government
regulators and investors. They also will satisfy external audit requirements. But they cannot
provide the detailed, accurate cost information that healthcare managers require to gain
insights into the business required for effective decision making.

The Business Case for Patient-Level Costing
Patient-level cost reporting and analysis based on causality relationships avoids the
deficiencies of traditional costing methods used in health care. It can identify variances
among the costs of individual patient treatments for similar conditions and outcomes. The
purpose is help answer questions on considerations such as why costs are different when one
would think they would be similar.

Imagine healthcare managers examining a graph of the distribution of the cost variations for
each patient (which most likely would be not a bell-shaped curve but would be skewed left or
right). Such a review would create the now-needed conversations to investigate why different
patients with similar conditions cost so much more or less to treat than others. More

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important, these explanations would lead to actions to reduce costs.

Admittedly, each patient will present a situation that is unique to some extent (e.g., age, acuity,
unanticipated complications from other ailments), but the use of analytics can separate the
signal from the noise. That is, analytics can hold constant one or more variables enabling
visibility into what factors cause the variation. Individual or aggregate patient-level costs can
be compared on a wide variety of variables and parameters—including the following, for
example:

Time of service
Inpatient versus outpatient
Whether the patient was referred from the emergency department
Specific care giver
Individual technicians or administrators
Specific facilities within a system
Consumption of labor, supplies, and medications

See related sidebar: The Use of ABC for Indirect Expenses

Accurate cost information will enable managers to propose alternatives that can lead to
standardized procedures and treatments. Managers will be better equipped to influence
physicians and nurses to apply best practices and treatment protocols based on data and to
reject outdated, less effective, and more costly practices.

The Math and Benefits of Patient-Level Costing
Patient-level costing is event-driven, rather than focused on a fixed time period as with period-
based cost systems (e.g., by month). As costs occur, the data are accumulated in real time.
Because the data are generated, gathered, and held at the discrete cost-item level, patient-level
cost analytics that are data-driven and provide a consumption-view allow easy aggregations
and deeper dives into the information. For example, patients can be compared in terms of their
time in the operating room or drug costs at a summary level. Any observed anomaly, variation,
or difference of interest can be explored and examined with granularity.

One can understand patient-level costing as “bottoms up” costing with a consumption view.
The process starts with each patient. Patients place demands on activities, such as the work
of employees performing procedures and the supporting equipment and the usage of supplies
and drugs. These activities, in turn, generate expenses—salaries and the cost of the supplies,
drugs, equipment, and facilities used. This data-driven approach provides the most accurate
methodology for accurate costing—direct costing. The sidebar on the opposite page describes
how activity-based costing (ABC) similarly applies the consumption view for indirect expenses.

A Call to Action

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https://www.hfma.org/Content.aspx?id=62682

Unfortunately, despite the benefits that can be achieved both in improved quality of care and
in reduced cost, data-driven patient-level cost analytics are infrequently used in the United
States. Of the hundreds of American healthcare provider executives and representatives
whose costing practices we have observed, only a few healthcare organizations are engaged
in or have plans to implement patient-level cost measurement, management, and monitoring.
This situation exists despite successful implementation of such systems (in whole or in part)
both here and in other parts of the world. The rarity of patient-level costing in the United States
is a significant contributing factor to the nation’s high cost of care compared with the rest of
the world.

Barriers
There are three major reasons healthcare provider organizations do not embrace patient-level
costing.

The potential to disrupt established processes and meet with resistance from staff
Physician resistance to changing their treatment protocols
A lack of urgency to make a change

Other reasons include a reluctance to have greater financial transparency, anxiety from being
measured and held accountable, and weak organizational leadership. Notice that IT is rarely a
barrier: IT systems typically are already in place and proven.

All of these barriers can be overcome—and indeed have been by providers that have adopted
patient-level costing. So long as the reporting system is presented as a means to improve
patient satisfaction (sometimes as part of a lean management or quality management
program), the staff can be expected to enthusiastically accept and leverage the system.
Physicians know that changes are imminent. They respond much more favorably to a cost-
reduction discussion using actual costs rather than RVUs, RCCs, or charges they know do not
accurately represent the true cost of treating their patients.

A key to successful implementation can be to start with a specific department or diagnosis-
related group (DRG) and build on successes and lessons learned from that pilot project. For
example, a total joint replacement project can yield positive cost savings in a matter of weeks.

Constructing an enterprisewide patient-level costing system beyond a department or DRG also
is feasible. Techniques include starting with rapidly prototyping the costing system’s
enterprisewide design at a high level and then using iterative remodeling to quickly arrive at a
production costing system for the entire healthcare facility that is repeatable, reliable, and
right-sized—that is, not too complex but having sufficient cost accuracy.

The healthcare industry is changing, and organizations must evolve to remain competitive.
This evolution should include adopting progressive, internal management decision-focused
costing practices such as patient-level cost analysis and applying ABC. What is needed now is
for each healthcare organization’s leadership to possess the vision and willpower to adopt
such practices. This vision can foster culture where the users of cost information trust the

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information provided by their accountants, see the costs as consistent and reflective of the
resources and processes they manage, and most important, use it to make better decisions,
thereby improving the competitiveness of their organizations.

Gary Cokins is the founder of Analytics-Based Performance Management LLC in Cary, N.C.

Raef Lawson, PhD, CMA, CSCA, CPA, CFA, is vice president-research and policy at IMA.

Rob Tholemeier is an adjunct analyst at Chilmark Research in Punta Gorda, Fla.

Publication Date: Tuesday, January 01, 2019

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mailto:gcokins@garycokins.com

mailto:rlawson@imanet.org

mailto:rob.tholemeier@earthlink.net

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