Do you know your ABCs? Activity-based costing for healthcare organizations

Healthcare finance executives: do you know your ABCs? If not, you don’t understand the true cost of patient care. Most healthcare organizations measure patient care as the costs associated between provider and patient–in the exam room or on the operating table. The true cost of care considers much more including the overhead – those medical supplies, staff salaries, building and device maintenance, and other capital expenses and miscellaneous operating costs that keep the organization running smoothly. Why is this important?

Healthcare finance executives need the statistical and operational data–in addition to the clinical–to have a much more accurate picture of organizational finances. By factoring in these costs, healthcare finance executives can better determine the actual cost of care using a tried and true approach called activity-based costing, or the ABCs.

So, why is now the time for healthcare finance executives to learn their ABC’s and turn to activity-based costing?

Three key market dynamics are spurring the shift:

• ACOs and similar value-based arrangements. Healthcare organizations entering these new models are finding themselves in new territory – taking on one or two-sided risk. Healthcare finance executives with entities in these arrangements must work to stay on top of costs and manage to budget to avoid the potential for significant losses.
• The growing buying power of patients. With the U.S. government taking steps to drastically increase price transparency in healthcare, consumers will soon have the ability to compare prices for specific services across providers in a market. With patients having the ability to “shop around” for what are typically lucrative procedures (such as knee replacements), healthcare organizations may be forced to lower prices to remain competitive, requiring a much more accurate picture of the underlying costs associated with them.
• COVID-19’s continued impact on healthcare organizations. As the pandemic persists, many hospitals are operating at a loss, and their financial future is expected to remain grim without assistance from Washington. For this reason, healthcare finance executives will be pressured to scrutinize their cost structures and account for every last penny.

With the impacts of value-based care, consumerism and price transparency, and the COVID-19 pandemic poised to continue, the time is now for healthcare finance executives to explore this time-tested accounting methodology to effectively manage and understand costs within their organizations.