Revolutionizing Costing in Healthcare - Part 7

Don't Overlook Overhead Costs

By Doug Morrell, Chief Cost Engineer

?Introduction

Make no mistake about it, cost accounting in healthcare can be difficult. Healthcare operations are complex (who knew?), resulting in complex cost models. Frequently, upper management discovers the cost accounting team has other skills such as financial planning and analysis, work redesign and budget preparation. Cost accounting can easily be put on a back burner and then become stale. For those and other reasons, many organizations are satisfied (or relieved) to get their direct costing completed, but then rush through indirect (overhead) costing using high-level allocation statistics. It's "good enough". Or is it?

Overhead costs typically comprise anywhere from 35% to 50% of an organization's expenditures. I believe this justifies more than a cursory evaluation of overhead cost methodology. If we break overhead costs down according to the source drivers, this effort can become less daunting and further improve the overall accuracy of cost accounting.

General Overhead Cost Sources and Drivers

Overhead cost centers (i.e., departments) can be categorized based on generalized workload and expense drivers. Potential departmental categories include:

• Patient-facing non-billable services, aka "patient care support".
• Patient-driven non-billable financial services.
• Interdepartmental organizational support.
• Infrastructure support.
• Other miscellaneous costs.

Non-Billable Patient Services

Departments whose workload is primarily driven by patient volumes are prime candidates for data harvested from advanced EMR or Revenue Cycle systems. Development of activity codes created from either time stamp data or other patient-specific data elements will prove to be an effective strategy to determine the true costs of these non-billable services. In this manner, these traditionally indirect costs can be treated as pseudo-direct costs.

Interdepartmental Organizational Support

Departments providing services to other departments need to determine their “customers” and the tangible measures of how these customers are supported. Pushback on this approach can be expected as data collection may be viewed as a burdensome task. Automated data capture of workload sources and volume may be possible in many cases. These statistics may need only be updated a few times per year.

Infrastructure Support

Infrastructure support costs can be wide-ranging and therefore difficult to attribute to specific cost drivers. Breaking down these costs into more granular categories may help, such as:

• Bricks and mortar (depreciation/amortization/interest expense)
• Information Technology (hardware/software/network)
• Utilities
• Grounds
• Security

Other Miscellaneous

Other miscellaneous costs can be challenging to allocate effectively. Drilling into these costs may yield material expenses which should be reclassified as direct costs, such as malpractice insurance, medical director fees, and advertising campaigns. Some costs may be attributable to specific service lines as pseudo-direct (support) costs directly allocated to specific patient accounts.

Summary

?Quantifying the true burden of overhead costs at the patient level is an effort I believe has strong merit and ROI. Why treat upwards of 50% of your costs with simplistic cost models? With a small amount of incremental effort, you can make a big improvement to your cost accounting program.