Time Defined Activity Based Costing

I wanted to spend a bit more time talking about a thoughtful piece in the September Harvard Business Review http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1 by Robert Kaplan, who originated the Balanced Scorecard, and Michael Porter, business strategy guru, and author of Redefining Health Care.

The cover of HBR points to the article’s debunking of reviews three myths about health care costs
1)     Charges are a good surrogate for actual health care costs
2)     Hospital overhead costs are too complex to allocate accurately
3)     Most health care costs are fixed.

I think the real insight of this article is that it’s hard to get more value out of health care if we don’t know what the real resource cost is.  And let’s be honest – we almost never really know what the resource cost of a service is.   Beth Israel http://managinghealthcarecosts.blogspot.com/2011/08/bundled-payment-matters-beth-israel.html physicians are walking around with a price list – but that’s the price charged –not the cost to deliver the service.  The actual marginal cost to perform an upper airway endoscopy is the physician’s time (less than 10 minutes) and the cost of sterilizing a machine – not the $1000 price tag!

Activity based costing is painfully difficult to implement – essentially someone has to stand around with a stopwatch and do “time and motion” studies.  As you can imagine, physicians aren’t thrilled with that approach, and it isn’t cheap to implement.  Kaplan has developed a wonderfully intuitive short cut – time-driven activity-based costing (TD-ABC) which uses standardized time units. 

The authors give a number of examples of health care providers who have implemented this, and decreased their resource costs while likely improving quality and reliability. The case studies include MD Anderson Cancer Center in Texas, Children’s Hospital and Brigham and Women’s in Boston, and Shon Klinic in Germany.  The examples are generally around procedures more than cognitive services- but this approach should work for cognitive services as well.

The most difficult element of implementing TD-ABC will be that it requires process maps for each activity that will be assessed.   Physicians are notoriously unwilling to standardize processes – and developing a process map requires this.  TC-ABC fits very well with LEAN and Toyota process improvement other techniques seeking to reduce waste- and gives executives a better way to measure waste.

I believe there will be unprecedented pressures over the next years to lower medical costs. Lowering prices alone won’t be sustainable – hospitals and physicians will have to figure out how to actual lower input costs. TD-ABC give hospitals and physicians a powerful accounting tool to be sure that they know where they can cut actual expenses to be able to continue to meet their mission of providing high quality health care. 

TD-ABC is also further evidence of the need to standardize medical care delivery.