To achieve continuous improvement, management must be informed. In healthcare, as with other businesses, the key is understanding the interrelationships of activities and taking actions to minimize waste and eliminate non-value-added costs. Simply put, that's whatactivity-based costing and activity-based management are all about.

The ABC model

ABC provides a better and more detailed cost model by allocating costs to activities based on the resources they consume. The model, shown in Figure 1, links processes and resources.

For example, the case management department may assign case managers to specific clinical departments of service lines. In the traditional cost accounting model the case manager cost is allocated to other departments based on some gross measure such as patient days. This "peanut butter" allocation method assumes that case management is a generic commodity that is the same for an OB patient as a frail elder cardiac surgery patient. Not likely.

The ABC model would look at each patient population and examine the case management process for each. What are the activities involved? How much case management time is consumed by each activity? What other resources are consumed? From this, more detailed,cost allocation a more accurate picture or cost emerges. More importantly, the relationship between activities and resources is more clear, making cost reduction easier. Adding appropriate quality, patient satisfaction, outcomes, and clinical performance measures makes any process improvement more intelligent and less likely to reduce the quality of care.

ABC and Healthcare

More and more, healthcare enterprises are finding that their accounting systems do not provide useful operations management information. Typically, it's historical, after-the-fact data which offer little insight into the sources of operational inefficiency. In many cases, it's not traditional cost accounting information at all, it's charges masquerading as costs. There's little wonder why healthcare managers have difficulty identifying performance improvement opportunities.

In their quest to reduce costs and develop an advantaged marketplace position, healthcare providers are discovering ABC. It offers an approach and the type of information required to realize performance breakthroughs:

• It recognizes that cost and quality are the direct result of the activities providers undertake to deliver services to their patients.
  
• It is business-process and end-product focused, and invites cooperation, rather than competition, between functional departments.
  
• It is developed based on the process knowledge and insight of those directly involved in the delivery of the service. In the case of patient care, physicians, nurses, therapists, et al, participate and contribute to its development.
  

As a result, activity-based cost information is both intuitive and logical. In short, it makes sense to those charged with the responsibility for improving performance and provides them with transparent information on the cost ramifications of their decisions. Example applications include:

• Evaluating the cost implications of alternative clinical pathways
• Streamlining care delivery practices across the care continuum
• Decision-making regarding management levels and spans of control
• Enhancing staff utilization by time of day
• Resourcing consolidated departments/deployed functions
  

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Our OnLine Workshop, Variance Management Systems, will show you how to do it, and why. While you're there check out the other OnLine Workshops.

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References

If you would like to know more about activity-based costing, here's some reference literature to get you started, all are available - with other important healthcare improvement books - through our Bookstore, or through their individual links:

Forrest, Edward, Activity-Based Management: A Comprehensive Implementation Guide (New York: McGraw-Hill, 1996).

Cokins, Gary, An ABC Manager's Primer: Straight Talk on Activity-Based Costing (Burr Ridge, Ill: Irwin Professional Pub., 1993).

Turney, Peter B. B., Common Cents: The ABC Performance Breakthrough (Hillsboro, OR: Cost Technology, 1992).

Brimson, James A., Activity-Based Management: for service industries, government entities, and nonprofit organizations (New York: Wiley, 1994).

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Partners

Joule Management Technologies, Inc.

Joule Management Technologies (JMT) is a performance services firm located in Atlanta, Georgia. The firm focuses on providing healthcare providers with the information and analytical tools required to assess, reach consensus and implement improved operating practices and organizations. JMT is a leading provider of activity-based costing and activity-based management solutions to the healthcare industry.

The JMT BASIS is an activity-based costing system developed to support the continuous improvement of healthcare clinical and business processes. It features include a database of over 700 activity-based clinical pathways. These pathways define administrative, clinical, service and management activities across all major patient populations. The system facilitates the modeling of client-specific care delivery practices and the answering of "what-if " questions. Its applications include benchmarking performance, evaluating alternative care delivery approaches, preparing budgets, and determining managed care contract costs.

If you would like more information on JMT and their products and services, you should call Gary Shows at (770) 384-0700 or send him an e-mail at gpshows@mindspring.com.

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