Are You Throwing Darts in the Dark?

I was talking to a CEO of a healthcare organization recently, and I asked him what plans he had made for incorporating cost accounting into his financial processes. He admitted, a little reluctantly, that he wasn’t making plans at all. “How can I afford to go into that kind of detail?” he asked.

I didn’t pursue the conversation farther at the time, but what I’d really like to ask him is: “How can you afford not to identify your actual costs?”

I’ve watched clients struggle to determine their costs, and I know how much time, attention to detail, and personnel it takes. Even classifying costs as fixed, variable, direct or indirect is more complicated than it might seem. The alternative, however, is to operate your business without any sense of what is most profitable or where changes could be most effective.

As we are transitioning from a volume-based healthcare system to a value-based system, we have traditionally focused on quality measures, and I think our focus has been warranted. Now, however, we need to start breaking down the costs associated with the delivery of patient care. I think there are three clear reasons to do so:

Growth Depends on Making Wise Decisions on Costs

When we talk about creating a value-based system, we certainly have to consider healthcare quality. Quality, however, is only one part of the value equation, which is Value=Quality/Cost. You can’t have value unless costs are under control, and you can’t control costs until you know what they are. It’s time to focus on determining the actual costs of delivering healthcare, which I believe is the best way to increase the value provided and increase the bottom line.

Prioritizing Process Improvements Relies on Accurate Cost Accounting

Another critical part of a healthy organization is implementing process improvements in areas where the improvements will make the greatest impact. Trying to improve processes without considering costs, however, is like throwing darts in the dark. You might hit the target, but the chance of missing completely is much greater. A cost accounting system, therefore, is critical to understanding how your organization operates and directing your improvement activities.

Cost accounting also must be implemented at the patient and transaction level to be useful, and it must include all avenues of care in your health system, from acute care to outpatient services to clinics to long-term care. By performing such a granular analysis, you will be able to accurately allocate bundled payments and other shared payments as the system shifts away from transactional reimbursements.

Effective Contract Negotiation with Payers and Employers Demands Accurate Cost Calculations

Detailed information about your costs will be critical when you negotiate payer and preferred provider agreements. For example, when you negotiate with an employer under a preferred provider plan, you will know what their employees cost you on an annual basis so you can negotiate the most advantageous contract possible. Likewise, you will have the data you need to challenge terms offered by payers because you can prove what specific procedures cost. Information is power, and your long-term viability will depend on it.


I understand the dilemma facing the c-suite of small organizations. Establishing a cost-accounting system takes time, resources and personnel. And although implementing an activity-based costing system is considered to be one of the best practices, alternatives are available based on the level of precision needed for operational support. Regardless of your size, however, you must begin to focus on cost accounting and containing costs. If not, you will be driven out of business by organizations that are.


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Topics: Cost Accounting

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