Using activity-based costing in surgery

AORN Journal, Jan, 2004 by Cheryl Grandlich

ABSTRACT

* ACTIVITY-BASED COSTING is an accounting technique that allows organizations to determine actual costs associated with their services based on the resources they consume.

* THIS TECHNIQUE can be used in a variety of ways, including targeting high-cost activities, forecasting financial baselines, and supporting resource allocation.

* FOUR STEPS should be followed when applying activity-based costing to surgical procedures.

* THIS ARTICLE explores how Froedtert Memorial Lutheran Hospital, Milwaukee, used activity-based costing. AORNJ 79 (January 2004) 189-192.

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In today's competitive marketplace and with ever increasing budget cuts, health care organizations are struggling to measure and manage their costs. Facilities need to have sound financial information to make critical decisions and maximize profitability. Activity-based costing (ABC) is an accounting technique that allows organizations to determine the actual costs associated with their services based on the resources they consume. It can be used to capture the current cost of performing specific activities, help target high-cost activities, forecast financial baselines, determine cost-based package procedure pricing, identify opportunities for cost savings, and support resource allocation, among other things. (1)

USING ACTIVITY-BASED COSTING

When using ABC to determine the price of surgical procedures, several questions need to be asked. What areas of care are going to be included? What activities are involved? How much personnel time is allocated to each activity? What other resources are consumed (eg, supplies, equipment, instruments)? What are the costs of these resources? Four steps should be followed when applying ABC to surgical procedures. (2)

1. Identify time areas of care to be included in the costing project. Determine whether to include the entire surgical experience (ie, preadmission testing, preoperative care, anesthesia, surgery, postoperative care, materials processing) or just one portion of care.

2. Determine what resources will be included (eg, personnel, supplies, implants, equipment, instruments, laboratory work, pharmacy). These are cost drivers.

3. Identify specific items used or activities performed for each of these resources. For surgical procedures, use preference lists to identify all the supplies, implants, instruments, and equipment used. Determine tasks performed by personnel for each resource, and determine the time needed to complete each task.

4. Assign costs to each resource. For supplies, implants, and medications, use the direct cost of purchasing the items and the costs associated with any related soft goods. For equipment and instruments, calculate the cost per use based on the purchase price, estimated life, maintenance costs, and number of uses. For personnel, calculate both direct and indirect labor costs, including benefits.

HOW ONE HOSPITAL USED ACTIVITY-BASED COSTING

Activity-based costing can be used in many ways. Froedtert Memorial Lutheran Hospital, Milwaukee, used ABC to identify costs and charges for anesthesia care, electroconvulsive therapy, and several surgical procedures, including total knee replacements and transplantations.

ANESTHESIA CARE. With the implementation of ambulatory payment classifications (APCs), the Centers for Medicare and Medicaid Services propose to package any usual and customary costs incurred to furnish a procedure or service into the APC payment rate for that procedure or service. Consultants recommend that the actual cost for all supplies, equipment, and personnel be identified and rolled into a packaged price.

To develop this type of pricing, it was critical that all procedures at Froedtert be classified into levels based on resource utilization. It was decided to develop levels based on the American Society of Anesthesiologists' physical status classifications. (3) Level zero indicates local procedures, and level S indicates regional and spinal procedures. Patient records were reviewed retrospectively. A committee consisting of the OR director, business coordinator, inventory specialist, and service coordinators developed profiles of typical resources used for patients in each classification, and ABC was used to determine costs for each activity within each level (Figure 1). Charges then were set by the finance department. These charges now are based on cost and can be rationalized more easily to a reviewing agency.

[FIGURE 1 OMITTED]

ELECTROCONVULSIVE THERAPY. When developing procedure-based charges, ABC can be very useful. At Froedtert, electroconvulsive therapy was being performed in the postanesthesia care unit with the involvement of the anesthesia department. Costs for both services' activities were needed to determine an appropriate price to reflect the cost of this procedure (Figure 2). Resources used for each area had to be determined. Anesthesia used supplies, personnel, and medication. The postanesthesia care unit used supplies, equipment, and personnel. When costs for all the resources consumed in both areas were determined, a patient charge was created.