A cost accounting system can help healthcare leaders make informed decisions about which cost management opportunities present the greatest promise and which tactics should be pursued to help the organization best meet its goals.


To succeed in the evolving value-based business model, hospitals and health systems will need to embrace cost management as a cornerstone of planning and operations. It should become an ongoing and integral management function, rather than a periodic effort. Having a robust and reliable cost accounting system provides capabilities that support this imperative organizationwide. These include the ability to accomplish the following actions.

  • Identify cost improvement opportunities
  • Establish priorities and develop initiative-specific plans
  • Monitor progress and evaluate the impact

Each of these is discussed in the following sections.

Identify Cost Improvement Opportunities

Optimizing cost management efforts requires that healthcare leaders look beyond traditional methods and information sources—such as departmental budgets using financial information, productivity based on payroll information, and supply chain management using standard purchasing and accounts payable information.

Instead, they should look toward cost accounting, which provides a means to examine costs at a much more granular level. It serves as a magnifying glass into patient- and encounter-level costing data. From there, organizations have the ability to drill down to both chargeable and nonchargeable activities and items that may not directly generate revenue but that are nonetheless vital to understanding the total cost of providing patient care.

Cost accounting also allows organizations to analyze costs across the continuum of care. General ledger and payroll data are typically organized around specific entities or departments. Cost accounting data, however, allow organizations to tie information together in ways that cannot be done using these traditional cost management data sources. To help find cost improvement opportunities relative to specific service lines, finance leaders can group data by care setting, diagnosis, procedure, physician, and post-operative and follow-up care.

Costs associated with hip and knee implants, for example, may be disproportionately high and thus represent significant opportunities for cost reduction. Having a cost accounting system allows organizations to assess important details, including how often a particular type of implant is used or how changing vendors might affect costs. For example, in the case of knee implants, organizations can answer the following questions.

  • What implants are our surgeons using?
  • How much are we spending on implants?
  • What types of procedures are we doing with those implants?
  • What is the patient or payer mix for those procedures?

With this level of analysis, organizations can thoroughly assess the full spectrum of cost management opportunities, such as whether the greatest costs are driven by variations in the vendors supplying implants or through implant procedures performed on high-risk patients.

Establish Priorities and Develop Initiative-Specific Plans

Patient care cost information can be factored into comprehensive cost containment initiatives. Finance leaders can quantify the estimated impact of a particular initiative across the continuum of care. Having this insight into costs across service lines, care sites, and episodes of care is becoming increasingly important with highly integrated delivery systems, trends toward bundled payments, and the mounting focus on the quality of care. By integrating cost accounting information into other standard financial and operational reporting capabilities, healthcare leaders can make informed decisions about which cost management opportunities present the greatest promise, and which tactics should be pursued to help the organization best meet its goals.

Once priorities are established, cost accounting systems can be used to develop a plan with clearly defined next steps. For example, encounter-level data on knee implant procedures can be analyzed at the physician level. Doing so allows organizations to pinpoint significant variations in costs between two or more physicians who are performing the same types of procedures and determine which physicians are generating the highest costs. Such data then can be shared with those physicians in helping them make necessary adjustments.

Total Knee Replacement—Average Cost Per Provider
Total Knee Replacement—Average Cost Per Provider

Monitor Progress and Evaluate the Impacts

Healthcare leaders should continuously track progress on strategic initiatives. Patient costing and decision support systems provide the best lens for monitoring progress and evaluating the real impact of many initiatives, and for examining contribution margins in patient care. For example, organizations can track cost savings over time resulting from the establishment of standardized hip replacement protocols and implant vendors.

Because many initiatives will impact different patient populations, finance leaders should isolate those populations when evaluating and reporting results. Having accurate costing methods and the ability to regularly update cost information are vital for organizations to monitor cost changes over time.

To garner the most benefit from a cost accounting system, organizations should be willing and prepared to supply adequate time and resources to support that system. Cost accounting should not be viewed as a single, part-time occupation. It requires full-time, dedicated staff who can engage and work with a wide spectrum of senior leaders and middle managers toward achieving cost management goals. Generating and maintaining valid and reliable cost accounting information requires ongoing investment in and management of people, processes, and systems.

Hospitals and health systems will need to ensure they have adequate staff with the time and expertise to accurately analyze and interpret the data. Such investment can have substantial return when the information is applied through effective, results-oriented cost management programs. The more valid the costing data are and the more organizations can demonstrate the direct causes of disproportionate costs, the better they will be able to contribute to improved financial performance over time.


Dan Seargeant, DrPH,
is vice president, Kaufman, Hall & Associates, LLC, Skokie, Ill.

Publication Date: Wednesday, October 05, 2016

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