Why hospitals urgently need modern cost accounting in a value-based world

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Health spending is expected to reach $ 6 trillion by 2027, up from $ 3.6 trillion in 2018, according to CMS national health spending projections.

Spending projections mark an average annual increase of 5.5%, which exceeds the projected 4.7% annual growth of the U.S. economy, meaning that by 2027, healthcare spending could be close to ‘one-fifth of the country’s gross domestic product, the California Health Care Foundation reported. in May 2019.

Soaring healthcare costs – along with pressure from patients, payers and providers to reduce these expenses – makes cost accounting more important than ever to healthcare organizations, according to the COO and founder of the Organizational intelligence Jeff Lambert.

During an April 20 webinar sponsored by Organizational Intelligence and hosted by Becker Hospital ExaminationMr. Lambert discussed the fundamentals of cost accounting systems for recording and analyzing the costs of patient services. He also explained why healthcare organizations have more to gain than ever by integrating reliable and accurate cost accounting systems into their financial management routines.

An urgent need for reliable and up-to-date cost accounting data

About 70 percent of hospitals have already installed an automated cost accounting system, Lambert said, citing research from HIMSS Analytics. However, this same research showed that only 9% of hospitals with automated cost accounting systems had an advanced next-generation solution. A majority of them either have legacy systems that are decades old or simply lack modern functionality.

According to Lambert, many healthcare organizations lack key data information due to the belief that it is too difficult, expensive or resource intensive not only to implement, but also to maintain systems. cost accounting.

There are several reasons why cost accounting has gained this unsavory reputation. For starters, outdated cost accounting systems are not user-friendly, require significant staff involvement to implement, and do not easily accommodate data changes.

Mr Lambert said legacy systems also use “rudimentary” cost accounting methodologies, such as the cost-to-expense ratio method, which provides less reliable results than the advanced hybrid costing model or the establishment. costs by activity.

In addition, because they rely on methodologies that do not fully take into account the resources and associated costs, widely used existing systems are particularly poorly suited to ACOs. Without proper methods of cost accounting, hospitals involved in ACOs – who take on greater financial risk as part of their model – will find it “virtually impossible to make informed decisions that will improve financial results to meet corporate goals. ACO, ”said Lambert.

“Ultimately, these methodologies did not result in actionable data,” he explained. “They just weren’t accurate and therefore untrustworthy of management.”

A new era of valuable cost data

Lambert suspects health leaders in many organizations are making decisions every day without access to vital cost information. This kind of data, however, will be critical as hospitals move away from the fee-for-service world and embrace value-based models of care. Higher volumes will no longer directly translate into higher profitability, Lambert said. Thanks to this “delicate” transition, hospitals that have higher productivity supported by effective cost accounting will come out ahead.

“As more healthcare revenue contracts are tied to value-based purchases, hospitals need to focus more on containing costs and learning to correlate unit revenue with unit costs, as well as take into account various quality results, ”said Lambert. .

According to Lambert, cost accounting data can have immediate benefits in areas critical to successful value-based care, such as service line reporting, contract negotiations and performance improvement initiatives. financial and clinical.

Cost accounting can also help healthcare organizations identify otherwise overlooked savings opportunities, improve budgeting and planning capabilities, provide segmented clinical and financial analysis, and inform performance improvement initiatives. , added Lambert. For these reasons, he said, cost data can – and should – be used in all hospitals, with a significant investment on the part of executives and senior leaders.

“Healthcare organizations need to understand the relationship between cost of care and quality outcomes in order to maximize their ability to provide high quality care at lower cost,” he said. “[They] need and will benefit from the establishment of a decision-support cost accounting system. The data derived from these systems will be absolutely necessary to provide services through the changes taking place. “

Click here to access a recording of the webinar.

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