Activity-Based Costing: Healthcare’s Secret to Doing More with Less

Activity-Based Costing:
Healthcare’s Secret to Doing More with Less

© 2019 Health Catalyst
Proprietary. Feel free to share but we would appreciate a Health Catalyst citation.
This report is based on a 2018 Healthcare Analytics Summit presentation given by Paula
Lounder, Director, UPMC Corporate Finance, Women’s Health Service Line Finance
Lead; Hyagriv Simhan, MD, MS, Executive Vice Chair, Obstetrical Services, UPMC; and
Beth Quinn, MSN, RNC-MNN, Program Director, Women’s Health Services, UPMC:
“Integrating Clinical Improvement and Activity-Based Costing Identifies Pathway to
Healthier Moms and Babies.”
Paula Lounder
Director, UPMC Corporate
Finance, Women’s Health
Service Line Finance Lead
Hyagriv Simhan, MD, MS
Executive Vice Chair,
Obstetrical Services, UPMC
Beth Quinn, MSN, RNC-MNN
Director, UPMC Corporate Finance,
Women’s Health Service Line Finance Lead

With gestational diabetes mellitus (GDM)
affecting up to 10 percent of pregnancies in
the U.S. every year, health systems have a
vested interest in identifying women at risk
for the condition as early as possible.
GDM—hyperglycemia, or high blood sugar,
during pregnancy—not only affects a large
population but also increases cost for
organizations and compromises care for
not one but two patients, the mother and
the baby.

Furthermore, the mother’s high blood
sugar affects the baby’s, exposing
newborns to risks including overgrowth,
trauma due to large size at delivery,
metabolic consequences, hypoglycemia,
jaundice, and increased chance of
cesarean section delivery.

For healthcare organizations today—whether
for-profit or not-for-profit, in an urban or rural
area—the biggest challenges in delivering
quality healthcare are sustainability and cost.
Because GDM affects two patients, doubling
health risks and cost, GDM is potentially a
significant opportunity area for improvement.

With mounting pressure to deliver better
care with fewer resources, health systems
face a larger threat that is often overlooked
in the journey to meet these new standards
of care: inaccurate, siloed data.
Comprehensive, actionable data—derived
through an activity-based costing (ABC)
system—improves healthcare delivery by
laying the foundation for long-lasting
clinical and administrative improvement.

Activity-Based Costing in Healthcare Unleashes
Actionable Data to Improves Outcomes
Rather than rely on traditional, outdated
costing systems, healthcare organizations can
leverage data to improve healthcare delivery
with ABC solutions, a costing methodology
that assigns a cost to each product and
service based on its actual consumption.
With ABC applied to a specific service line
(e.g., maternal-fetal medicine [MFM], more
commonly known as care for high-risk
pregnancy), service line leaders and
providers can identify a patient’s risk for
certain conditions earlier, improve patient
outcomes, and decrease cost overtime.

Activity-Based Costing in Healthcare Unleashes
Actionable Data to Improves Outcomes
Although improving clinical care processes
might seem like an obvious focus for improving
GDM, insight from ABC spurs the real change.
This sophisticated costing approach allows
service lines, such as MFM, to understand the
nuances of cost across every activity within a
high-risk pregnancy and effectively manage
these costs at a granular level, versus the
limited traditional cost accounting approach
that provides only siloed data at a high level.

A Collaborative Approach Lays the Groundwork for
Activity-Based Costing Success
Proper implementation and process changes
are critical for success in an advanced ABC
landscape; however, the importance of
collaboration cannot be overstated.
In a collaborative approach, multidisciplinary
leadership works with stakeholders from not
only the clinical arena but also operations,
finance, and information technology; each
team brings a different perspective from their
unique discipline.

In some cases, organizations may need to
restructure teams or create new ones to
foster an environment for successful ABC
(particularly if current team structure is
based on antiquated costing systems).

For example, when the University of
Pittsburgh Medical Center (UPMC) decided
to leverage ABC in its GDM improvement
efforts, the health system built a new team
around ABC.
The organization’s MFM leadership created
a multidisciplinary team that leveraged the
actionable analytics from the new costing
system to create a reliable process map
(Figure 1), including sustainable solutions.

Figure 1: UPMC’s GDM process map.

Data-derived improvements included how
to engage frontline staff earlier, identify
institutional champions, and communicate
process changes to avoid duplicate work.
The diversity of thinking and collaborative
efforts, based on accurate data, also
empowered UPMC to achieve standard-
ization and consistency in its MFM
department and across its system of
30-plus academic, community, and
specialty hospitals.

Activity-Based Costing—
The Bedrock for Effective Service-Line Management
A service-line management approach
combined with an ABC system give
organizations easy access to integrated
clinical and financial information for
specific patient populations, allowing
clinicians to immediately and more easily
identify populations at risk.

Ideally, OBGYNs would identify risks for
and signs of GDM early and immediately
refer patients to MFM providers for
diagnosis and management.
Effective management would include
reliable postpartum follow-up with a six-
week checkup and a diabetes screening
to prevent Type 2 diabetes.

Early identification and intervention is only
possible when health systems understand
the complete picture of cost across the
continuum of care for a patient.
With ABC methodology, health systems
see the “true cost” of care at the patient
level—insight traditional costing systems
can’t provide.

ABC generates the true cost, or actual
cost, of GDM by allowing for every
contact the patient has at the healthcare
organization throughout her pregnancy
and after delivery.
This true cost includes primary costs
(e.g., administrative costs and provider
costs) and the cost of secondary support
systems that are often unaccounted for.

By revealing quality data at the patient level,
ABC helps organizations generate patient lists
by physician, facility, procedure, or diagnosis.
ABC also allows all teams across the system
to easily sift through large amounts of
actionable data and present findings much
faster than with traditional costing.
Improvement teams can write queries to
automatically identify at-risk populations,
eliminate waste and costly inefficient
processes, and immediately intervene
for at-risk women.

Aligning Cost and Quality Means Specialized Care
Reaches Patient Subgroups
Aligning cost and quality through ABC
allows health systems to target specific
patient populations and thoroughly review
subpopulations of larger groups to create
more targeted preventive interventions.
The new cost data empowered UPMC to
tailor care to the subpopulations within
the MFM group, rather than delivering
the same care to all women experiencing
a high-risk pregnancy.

For example, the data revealed that
women within the MFM group who
experienced two or more conditions—
aside from being high risk—incurred nearly
a quarter of all GDM expenses.
With that data, UPMC implemented a
different set of care standards that
addressed the other health conditions
earlier and watched them more closely
throughout the pregnancy.

UPMC also implemented other interventions
in its diagnostic and screening processes,
based on this new insight, that clearly
defined best practices when caring for a
high-risk pregnancy.

Out of all the babies born
to mothers with GDM, 48
percent had neonatal
outcomes and incurred
54 percent of episode
expenses.
On average, GDM
pregnancy episodes at
UPMC were more costly
by approximately $4,000
per patient and a
cesarean section more
costly by $12,000 more
per patient.
By merging cost and quality data, ABC revealed the following areas
UPMC had not previously targeted because the old costing system
didn’t identify them as opportunities:

Executive Leadership Support Proves Crucial for
Activity-Based Costing Impact
Gaining executive sponsorship and clinician
engagement is also imperative in creating a
new pathway to ABC success.
When leaders, both clinical and non-clinical,
understand the benefits of the sophisticated
ABC approach—as it reveals supply and labor
costs, assigns cost to multiple activities within
a department, and uses a fluid cost
mechanism—they can mold the cost
strategy and its features to fit the health
system’s unique needs.

Once the ABC foundation is laid, the team
leading the change must collaborate and
create an environment in which a flexible,
iterative approach—based on reliable,
actionable data from the new ABC model—
can be successful.
With buy-in at the executive level and
clinical champions on the forefront, team
leads are empowered to deviate from the
standard course and roll out practices to
support the new strategy.

At UPMC, the support and positivity of its
leadership team led to more effective results.
As the team fine-tuned their approach to treat
women with GDM, they were careful to make
sure the new processes were sustainable
and scalable across other service lines
throughout the system.

ABC Approach Scales Other Service Lines—Leads to
High-Quality, Cost-Efficient Care
As organizations implement the ABC approach
and see reduced costs and improved clinical
outcomes, they have tremendous opportunity
to spread the wealth.
Relying on ABC to understand data across an
entire service line, such as MFM, allows
leadership to take advantage of economies
of scale cost savings by implementing similar
changes for other service lines.

ABC Approach Scales Other Service Lines—Leads to
High-Quality, Cost-Efficient Care
For example, leaders can roll out the same, or a
similar, standardized education plan they used
within one service to all providers and hospital
administration serving the OB population.
Leadership can also scale new interventions,
based on the ABC data, across other service
lines, including best-practice alerts within the
EHR, standardized education plans across
other hospitals and clinics, and process
improvements to ensure consistency and
a seamless experience for patients and
their families.

ABC Improves Neonatal Outcomes, Decreases Cost
UPMC’s improved neonatal outcomes and
better practices for high-risk pregnant patients
were due to many factors, leadership support,
collaborative environment, etc.)
By offering cost insight at a detailed level, the
ABC approach, combined with leadership
support, was the perfect recipe for success
within the high-risk pregnancy population, and
now other service lines.

The GDM initiative illustrated the value of
tying detailed cost data closely to a clinical
improvement project, engaging stakeholders
early for assistance with multiple levels of
intervention, and identifying other areas in
which to repurpose these new principles.

Clinical solutions can seem straightforward
and even easy to apply, but the reality of
delivering better care while utilizing fewer
resources is nuanced and complex, requiring
a range of experts throughout the
brainstorming and problem-solving phase—
but only after ABC methodology is in place.

With the power that comes from easy-to-
access, reliable data at a granular level,
healthcare organizations can leverage data
through ABC to prioritize problem areas,
eliminate waste, and make a plan that tackles
all touchpoints of the pregnancy journey,
leading to decreased costs and improved
outcomes for mothers and their newborns.

For more information:
“This book is a fantastic piece of work”
– Robert Lindeman MD, FAAP, Chief Physician Quality Officer

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Click to read additional information at www.healthcatalyst.com
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Activity-Based Costing: Healthcare’s Secret to Doing More with Less

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Activity-Based Costing: Healthcare’s Secret to Doing More with Less