Time-Driven Activity Based Costing in Healthcare: Is it a panacea for Healthcare’s cost problem?

The United States is transitioning towards value based health care and it is important to accurately capture costs in order to control costs and deliver value. Value is defined as health outcomes achieved per unit cost expended over the entire care delivery value chain. Therefore, accurate cost measurement is paramount to the success of value based healthcare.

Prior attempts at developing process-oriented cost-accounting methods such as Activity-based costing (ABC) was met with mixed results in healthcare. ABC is a resource intense process, particularly in large and complex organizations. It requires employee involvement to participate in surveys to measure resources expended for activities and processes and studies have shown that resource allocation is often over estimated. This exemplified the need for a balance between validity in costing and resources expended to achieve that validity. Robert S. Kaplan and Steven R. Andersen first presented Time-driven Activity Based Costing to overcome those limitations. It prioritizes accuracy over precision and demands fewer resources, requiring only two key parameters: the capacity cost rate (CCR) and time required to perform activities in service delivery.

In 2011, Robert Kaplan and Michael Porter presented a seven-step approach to application of Time-Driven Activity Based Costing (TDABC) in healthcare settings:

Step 1

Select the medical condition

Step 2

Define the care delivery value chain, i.e. chart all key activities performed within the entire care cycle

Step 3

Develop process maps that include each activity in patient care delivery, and incorporate all direct and indirect capacity-supplying resources

Step 4

Obtain time estimates for each process, i.e. obtain time estimates for activities and resources used

Step 5

Estimate the cost of supplying patient care resources, i.e. the cost of all direct and indirect resources involved in care delivery

Step 6

Estimate the capacity of each resource and calculate the capacity cost rate

Step 7

Calculate the total cost of patient care

University of Pittsburgh Medical Center (UPMC), an Integrated Financing and Delivery Organization restructured its multiple hospitals and departments in to service lines and instituted TDABC which resulted in $5.0 million realized savings in 2016 and $42 million cost savings opportunities identified for 2017. These organizational changes enabled improved care, cost transparency and modified behaviors that led to cost reductions and value generation at even an individual physician level. TDBAC is an important tool in the armamentarium of healthcare systems as they make the transition to Value-based healthcare.