Transcript Cost Accounting - Society for Academic Emergency Medicine

SAEM Bootcamp
COST ACCOUNTING
Jim Bihun, MBA
Vice Chair for Finance & Administration
Vanderbilt Department of Emergency
Medicine
Disclosure of Commercial
Relationships
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None
No Off-Label Disclosures
Goals
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Overview of concepts
Understanding of different
perspectives
Better management of your
department and leadership in your
organization
Objectives
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Understand “costs” in light of health
care reform
Appreciate elements, system needs,
multiple perspectives on cost
accounting
Prepare and understand financial
proposals, monthly reports, budgets,
impact studies
Why is this Important?
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Understand what data is needed for
best decision making
Don’t be mislead
Applied knowledge is needed to gain
resources
Speak fluently with the CFO and your
funding sources!
My Background
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MBA and Health Services BA from the
University of Michigan
14 years with Vanderbilt EM
2 years in national practice
management consulting with HCA
10 years in finance and operations
with Henry Ford Health System
The Power of Data…
“In God we trust,
all others must
bring data.”
The Power of Data…
“In God we trust,
all others must
bring data.”
- W. Edwards Deming
Cost Accounting
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The study of costs, including methods
for classifying, allocating, and
assembling costs to determine
“product” costs
Purpose is to provide information to
manage costs, set charges, analyze
profitability, choose among alternatives
Cost Accounting
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Includes the area of managerial
accounting, and it overlaps with
financial accounting
Information used for effective decision
making, as well as planning and
control of operations
Importance has grown with fixed
reimbursement
The Realm of Accounting
Managerial
Accounting
Financial
Accounting
Cost Accounting
Accounting
Financial Accounting
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Purpose is to provide historic
accounting information to external
users
Prepared according to prescribed
AICPA and GAAP formats
Managerial Accounting
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Purpose is to provide accounting
information to internal users in order
to support planning and control
functions
Data is generally current or
prospective in nature
No prescribed format; varies among
organizations
Costing Methods
Methods to Arrive at the
Cost of a Product/Service
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Classify costs
Allocate costs
Assemble costs
Methods to Classify Costs
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By
By
By
By
function
traceability
behavior
relevance to decision making
Costs Classified by
Function
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Operating costs are associated with
producing the product/service
Non-operating costs are associated
with supporting the production of a
product or service
Costs by Traceability
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Direct costs can be traced directly to a
department, product, or service
Indirect costs (aka overhead) cannot
be traced directly to a product/service
Full costs include directs + indirects
Average cost = full cost / number of
services produced
Costs by Behavior
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In relation to volume or over time
Variable costs change directly and
proportionately with changes in
volume
Fixed costs remain constant in relation
to volume changes
Costs by Behavior
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Semi-fixed costs are fixed in the short
term and can vary when a longer time
horizon is considered
Marginal costs are the changes in
costs related to incremental changes
in volume
Costs by Relevance to
Decision Making
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Sunk costs have already been incurred
and will not be affected by future
decisions
Opportunity costs represent the
opportunities foregone when rejecting
an alternative choice
Methods of Allocating
Costs
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The process of allocating indirect
costs, and some directs, to
departments which generate charges
Requires determination of revenue and
expense by cost center
Requires workload statistics that best
reflect the department’s activity
Cost Allocation Methods
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Direct allocation from non-revenue
centers to revenue centers (driven by
share of workload statistics)
In step-down apportionment, nonrevenue centers allocate to each other
first, then to the revenue centers
In multiple apportionment, revenue
centers can also reallocate
Methods of Assembling
Costs
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Assemble costs by responsibility center
to hold managers accountable for their
controllable costs
Full costing allocates directs and
indirects to a product/service to
determine profitability
Differential costing only looks at
incremental costs and revenues in
making decisions
Methods of Assembling
Product Costs
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Standard Costing
Ratio of cost to charges (RCC)
Activity-based costing (ABC)
Standard Costing
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Method of identifying expected
benchmark costs for producing your
goods/services
Used in budgeting and for comparison
with actual results
Ratio of Cost to Charges
(RCC)
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Calculated by dividing departmental
charges by departmental expenses
and applying that ratio to each
product’s charge to determine its cost
Flawed, as it assumes a consistent
relationship among all products in the
group
Activity-Based Costing
(ABC)
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Uses cost drivers to assign direct and
indirect costs to products
Ideal cost drivers are activities that
pertain to each product in varying
amounts
Drivers should have a high correlation
to the consumption of the overhead
ABC for EDs
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ABC focuses on the difference
between volume-driven costs (eg, ED
visits) and activity-driven costs (eg,
specific nursing duties and time)
Without ABC, overhead may be
overallocated to high-volume products
ABC can be used to differentiate
patient cost by acuity level
An Example of ABC in the
ED
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Determine average ED nursing cost by
patient group
Use for comparison with contracted
rates
ABC in the ED
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Define patient groups (eg, ESI level)
Determine RN time (and salary) spent
in direct and indirect patient care
Build RN activity list and time needed
for each task
Allocate RN activities by patient group
and determine total RN time by group
Apply RN cost by patient group
Visit Counts by Patient
Category
Patient Category
ESI 1
ESI 2
ESI 3
ESI 4
ESI 5
TOTAL
Annual Counts
1,000
10,000
25,000
12,000
2,000
50,000
ABC Cost & Time Elements
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RN hours for 1.0 FTE = 2,080/yr
Salary & benefits cost of $50,000/FTE
Estimated that 75% of RN time is
spent in direct care, 25% is indirect
For this example, total cost of 50 FTEs
is $3,000,000/yr
RN Activity List & Times
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Take vitals
Give medication
Patient education
Charting
2 min each
4 min
10 min
5 min
# of RN Activities by Patient
ESI
1
2
3
4
5
Vitals
24
20
16
10
6
Meds
20
15
10
3
0
Pt Ed
3.5
4
3
2
1
Chart
6
6
3
2
1
Avg Hrs & Avg Cost/Patient
ESI Avg
1
2
3
4
5
Total
Hrs/Pt
4.29
3.78
2.60
1.38
0.60
2.50
Avg RN Cost/Pt
$103.10
$ 90.81
$ 62.50
$ 33.12
$ 14.42
$ 60.00 ($3m/50,000 pts)
ABC in the ED Comments
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Look at patient time spent by each job
category (eg, RNs, paramedics, techs)
Cost is driven by number and type of
staff interventions
Also include costs of non-chargeable
supplies and non-productive staff costs
when spreading costs across patient
groups
Contribution Margin &
Cost Volume Profit
Analysis
Contribution Margin
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CM= Marginal revenue – marginal cost
for an incremental volume of activity
Break even (BE) point occurs where
contribution margin/visit x activity
level = fixed costs
BE quantity = total fixed costs /
(revenue per unit – variable cost per
unit)
Cost Volume Profit (CVP)
Examples
ED Daily Revenues and Expenses
120,000
$534 rev/vst
$ Amount
100,000
Staffing (fixed) Cost
80,000
89 Visits to BE
$50 exp/vst
60,000
Other Direct (Variable) Costs
Total Direct Expenses
40,000
Revenue
20,000
0
33
66
99
Daily Visits
132
164
197
Daily CVP Graph Notes
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Fixed Costs = $43,200 / day
Break even point occurs at 89
visits/day (2,715/month)
Contribution Margin (CM) = variable
revenue – variable expense ($534 $50 = $484)
BE of 89 = $43,200 fixed / $484 CM
Add in Indirects for the
Month…
Monthly CVP Graph Notes
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Full costs = directs + indirects
Break even point is pushed further out
to 3,500 visits; 42,000/yr (vs
2,715/mo without indirects)
Indirects are typically applied on a
monthly allocation basis
And Now Consider SemiFixed Costs Over the Year
Annual CVP Notes
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“Fixed” costs can jump when volume
warrants it
Break even point moves further to the
right (eg, to 4750/mo; 57,000/yr)
Typically coincides with an increase in
staffing levels (labor costs)
CVP Observations
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Variable costs are linear with volume
Fixed costs can be modified over an
extended time horizon or volume range
“Relevant Range” concept: the
relationships between fixed and variable
costs only hold true within a relevant
range of activity or over a “limited”
time period
CVP Observations
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Different time horizons allow costs to
be viewed and reported differently
“Profit” depends on allocation of
overhead
“Profit” is not perfectly correlated with
volume
Capitated CVP Example
Capitated CVP Notes
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In a capitated environment, the
revenue line is typically horizontal
(based on $ pmpm amount x number
of lives enrolled)
“Profits” occur when costs are lowest
Low cost may be seen as skimping on
care
Costing for Decision
Making
Costing Scenarios for
Non- Routine Decisions
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Adding a new service, or dropping an
old service
Expanding or cutting back a program
Make vs. buy decisions
Establishing charges for services to
managed care companies
Costing Methodology for
Non-Routine Decisions
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Identify alternatives
Define relevant costs
Consider nonfinancial issues
Applied Costing Studies
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“The Financial Consequences of Lost
Demand and Reducing Boarding”, J.
Pines, Annals of Emergency Medicine,
Vol xx, 2011
“The Cost of an ED Visit and Its
Relationship to ED Volume”, A.
Bamezai, G. Melnick, A. Nawathe,
AEM, May 2005
New Business Pro Forma
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VA Staffing Proposal for 1.5 MD FTEs
Indiv Avg Cost
Revenue
- Expense
= Margin
$414k
$462k
($ 48k)
Dept’s Marginal Cost
$414k
$372k
$ 42k
Marginal cost is based on a new MD starting salary
(that’s typically what the Dept will hire for backfill);
Avg cost is based on who actually goes to the VA
The Cost of Expanded MD
Coverage
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Determine the cost of starting a
physician-in-triage program
Staffed 24 hrs/wk (Mon & Tue, 12 hrs
daily)
Identification of marginal costs
Prepare revenue forecast (marginal,
not average)
Annual Budgeting
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Salary budget
Non-salary budget
Forecasting visits and collections
Rate and volume variance analysis
Rate Volume Variance
Analysis Problem
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What’s going on?
Where’s the problem?
What to do?
Example of Monthly Rate
& Volume Variances
Item
Actual
Visits
5,500
RVUs
20,000
Collected $ 750k
Budget
5,000
18,000
$ 700k
Variance
+10.0%
+11.1%
+ 7.1%
These are volume variances, with the
second two caused by rate variances
Rate Variances
Item
RVU/Visit
Coll/RVU
Coll/Visit
Actual
3.64
$37.50
$136.36
Budget
3.60
$38.89
$140.00
Variance
+1.1%
-3.6%
-2.6%
Unfavorable Coll/RVU rate variance may
be due to changed payor mix, delayed
payments, or increased denials
Management Controls
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Allow managers to monitor
performance and take appropriate
corrective action when needed
Benchmarking of Costs &
Productivity
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ED cost per visit
Faculty salaries (by rank, longevity)
Faculty RVU productivity (per year, per
hour, or per visit)
Physician visits (per hour or per year)
Physician clinical hours (per year, per
week, or per day)
My Benchmarking Sources
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SAEM Salary Survey (for total MD
compensation, annual clinical hours by
job title, starting pay)
AAMC salary survey (by faculty rank,
school type, geographic area)
AAAEM annual survey (for clinical
hours, visits, coding, payer mix, RVUs)
Others such as UHC (RVUs) and
Academic MGMA (salaries, RVUs)
Use Cost Data to
Negotiate:
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Rates with payers, or your internal
share of bundled payments
Amount of hospital support
Faculty salary increases, staffing ratios
Budgets, approval of new programs
Savings from initiatives
Costs on the National
Radar
Cost Accounting and
Quality Management
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Total Quality Management (TQM)
philosophy is that prevention is
cheaper than cure
Focus on doing things right the first
time, avoiding rework
High quality is the key to low cost
Take Time for Planning
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Consider the costs of improving quality
Consider the potential savings
resulting from quality improvement
The organization must design a
system to prevent failures
Focus on those costs which directly
affect the quality of patient care;
“value-added costs”
Total Cost Management
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Cost accounting must change from
being reactive to being proactive
Focus on sharing cost information with
all levels of employees
Focus on improving the quality in the
value-added areas
Selectively reduce non-value-added
costs
National Perspectives on
Cost
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Payers
Employers
Individuals
Providers
Economists / government / society
Costs in Light of
Health Care Reform
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Cost reduction, shared savings
Cost shifting (pushing costs or
payment expectations from one group
to another)
Cost per member per month
Cost sharing
– Patient perspective
– Provider perspective
– Insurance plan / employer perspective
Should We Be Worried?
Cost Reforms
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Bending the “cost curve”
Value-based purchasing
Case rates, bundled payments
Sustainable growth rate (SGR) reform
ACOs
Accountable Care
Organizations (ACOs)
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Local health care organizations that
can be held accountable for the quality
and cost of care for a defined group of
patients
Involves investment in systems of care
and provider integration, taking
financial risk
Cost Reduction Fallacies
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From what baseline?
Savings are NOT equal to average cost
per case x number of cases avoided,
or number of days of reduced LOS x
avg cost per day
Typically, just a fraction of variable
costs
Questions for Designing
Cost Information Systems
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What information is needed
When is information needed
How much detail is needed
Has a broad group been surveyed for
their input?
Widespread organizational access?
How complicated is it to use?
Cost Accounting System
Needs
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Ability to identify and track the cost of
activities
Method to link and allocate activities
and their costs to “products/services”
produced
Methods to rationally allocate
supporting resources
“People” System Needs
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Need to audit and ensure the quality
of your cost data
Focus on responsiveness to customers
Teamwork is essential
Health care needs us to take up the
challenge and apply these concepts
Cost Accounting Summary
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What is cost accounting
How costing is done
Contribution Margin and Cost Volume
Profit concepts
Costing for business planning and
analysis
Cost accounting & health care reform
System needs
Thank You!
[email protected]
615-936-1323