Gregg Cristoff provides a brief education on cost analysis and Activity Based Costing (ABC) in particular, and the importance of it when trying to develop a strategy for surviving managed care.
As managed care progresses further toward capitation, and financial risks are shifted to the practitioner, cost information is imperative before determining the acceptance of any managed care contract.
In the past, most chiropractors were satisfied knowing that for whatever amount they billed the patient’s insurance companies, their facility would receive, with a few exceptions, a prescribed amount of reimbursement–usually 80% of the bill for patients that had indemnity insurance plans. This reimbursement schedule led to a revenue system that could be quite volatile. Revenue could fluctuate depending on the volume of patients treated and the fee amount charged by the medical practice. If the practice was interested in generating greater revenue, it could intensify its efforts to increase on one or both of these variables. Unfortunately, the days of this type of reimbursement system are coming to a close.
Welcome to the cost cutting environment of managed care. The rules are different as a result of insurance companies making predetermined reimbursement arrangements with chiropractors. Due to this fixed reimbursement agreement, the ability to maximize revenue is minimal. Just by bringing in more patients and increasing your fee for service does not result in the practice increasing its revenue. Since revenue is then fairly constant with this type of reimbursement system, medical providers must focus on two factors that have the ability to control their net income. These two factors are: cost to deliver a service and service utilization. The likely winners of this current system will be the providers that have the ability to minimize costs and service utilization without jeopardizing the quality of the patient outcome and satisfaction.
A practitioner’s ability to survive managed care will largely depend on using cost and utilization information. As a Network Administrator of a statewide PPO, too often I hear about physicians accepting managed care contracts without knowing what it costs the physicians to perform the service in the first place. The axiom of putting the cart before the horse comes to mind in these situations. While having this information in the past may not have been a necessity for physicians, because of the financial risks involved in capitation, it has become a must. Without being able to predict cost per procedure and utilization information, the acceptance of a capitated contract could likely lead to catastrophe. For this reason, every chiropractor’s practice that is preparing for capitated products should consider adopting strategies for determining costs.
Currently, one of the preferred approaches for costing health care services is the Activity Based Costing (ABC) system. This system is one that traces costs first to activities and then to products and services. As related to health care, activities are defined as, “All patient care and administrative functions performed to deliver health services and operate a group practice.” To begin this type of analysis, an activity map must be developed. Activity mapping involves mapping activities in an illustrated sequence–i.e., a flowchart of all activities performed to deliver a complete medical procedure. This illustration would include all activities from the time the patient makes initial contact with your office until treatment is completed and the bill is paid in full. The objective of this type of illustration is to define as many activities as possible that comprise each procedure. This allows for greater insight as to where costs are being generated.
Next, after the flowchart has been developed, comes the tedious task of assigning costs for each of the activities performed. While the overhead costs associated with equipment/supplies are rather easy to conclude and assign to the corresponding activity, the challenge lies in determining costs for resources involving people. Since a large portion of a practice’s expense involves salaries, payroll taxes, insurance benefits, and pension benefits, it is important that physician and staff time are accurately recorded for each activity. The best way to arrive at such data involves the laborious chore of recording the mean time needed to perform such activity. These time measurements can then be coupled with employee salary and benefit expenses to arrive at a cost figure for this resource. Finally, these resources (people, equipment, supplies, and building costs) can be added up to arrive at a cost per procedure figure. Though the cost may slightly vary from patient to patient, this costing method will provide for a good baseline figure to be used when analyzing capitated arrangements.
Besides developing cost estimates for performing medical services, a second benefit of ABC is that it allows you to separate cost components involved in each procedure–i.e., determining the costs that are involved in preparing a claim to the insurance company. By generating this information, each practitioner can use the time measurements as a tool for determining the efficiency of his staff. Additionally, since a baseline cost has been determined, the practice can now analyze these activities to determine if they can be performed at a lower cost. It is possible that after analyzing these costs, out-sourcing some services or changing the functions of your office may result in cost savings.
Whether ABC or some other cost accounting method is used, doing some type of cost analysis is needed. Since every practice has different costs involved in running the business, there is no universal cost figure that can be suggested. It is possible that as a result of doing such an analysis, the practice can accept competitive reimbursement rates and still be profitable. Conversely, they also may find that they need to find ways to manage or reduce their costs. The reason for conducting a cost study is quite simple: profitability cannot be realized if cost exceeds price.s
Gregg Christoff is the Network Administrator for PCPI, a Florida PPO initiated by the Florida Chiropractic Assoc-iation. Before joining PCPI, Mr. Cristoff received a graduate degree in Health Service Administration from University of Central Florida. While pursuing his degree, Mr. Cristoff conducted a year long cost analysis for a cardiology practice in Orlando, Florida. Please contact Mr. Cristoff at 407-291-2035.