How can activity-based costing improve healthcare decision-making?

1 What is ABC and how does it differ from traditional costing?

Traditional costing methods, such as fee-for-service or capitation, assign costs to products or services based on simple averages or predetermined rates. These methods do not capture the complexity and variation of healthcare delivery, and may lead to inaccurate or misleading cost information. For example, traditional costing may not account for the different resources and time required to treat patients with different conditions, comorbidities, or preferences.

ABC, on the other hand, identifies and measures the activities that generate costs in healthcare, such as diagnosis, treatment, testing, or administration. ABC then assigns costs to products or services based on the amount and type of activities they consume. This way, ABC provides more accurate and granular cost information that reflects the actual resources and processes involved in healthcare delivery. For example, ABC can show the difference in costs between treating a patient with a simple infection and a patient with a complex chronic disease.

2 Why is ABC useful for healthcare decision-making?

ABC can help healthcare managers and providers make better decisions by providing them with more relevant and reliable cost information. This can be done by improving quality and efficiency, optimizing resource allocation and budgeting, enhancing value-based care, and supporting pricing and reimbursement strategies. For example, ABC can help identify and eliminate waste, redundancy, and variation in healthcare processes; allocate resources to the most cost-effective interventions or to the most profitable or strategic markets or customers; measure the cost-effectiveness of different interventions or the return on investment of quality improvement initiatives; and set prices that cover costs and generate margins or negotiate contracts that align incentives and risks.

3 How to implement ABC in your healthcare organization?

Implementing ABC in your healthcare organization requires a systematic and collaborative approach. This process begins with defining the scope and objectives of your ABC project, such as focusing on a specific product or service, department, or segment. After that, you must identify and map the activities that generate costs in your scope. To do this, you may use process flowcharts, interviews, or observations to document the steps, inputs, outputs, and resources involved in delivering healthcare. Additionally, you need to collect and analyze data on the costs and drivers of each activity. This can be done by using accounting records, timesheets, or surveys to measure the direct and indirect costs and the volume and frequency of each activity. You must also assign costs to products or services based on the activities they consume. Finally, you should report and use the ABC results for decision-making by utilizing dashboards, reports, or simulations to communicate and visualize the ABC results. This will allow you to identify and evaluate opportunities for improvement, optimization, or innovation.

4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?