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Healthcare Financial Management, May, 1996 by James Andrianos, Mark Dykan
COST MANAGEMENT
Value in health care can be defined as the provision of appropriate care at appropriate cost. While appropriate care is the province of clinical providers, cost data usually is maintained by financial managers. Collaboration between clinical providers and financial managers therefore is essential if optimum value is to be created.
To this end, cost data are frequently given to providers for use in clinical care improvement projects. One such project has been implemented successfully at Virginia Mason Medical Center, Seattle, Washington.
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Managed care demands that clinical providers and financial managers work together to improve organizational effectiveness. Value is one measure of effectiveness. The Virginia Mason Medical Center, Seattle, Washington, has developed a value "formula" to help guide its improvement efforts. While not a true mathematical equation, the formula concisely summarizes the key ingredients related to value:
Value = Appropriateness of care x (Patient service + Outcomes)/Costs
Under this formula, clinical providers manage appropriateness, service, and outcomes while financial managers manage cost information. The value formula indicates that (1) clinical value cannot be described using cost data alone, and (2) that efforts to enhance value must enlist support from both providers and financial managers. Achieving this dual support, however, may be a daunting task.
Virginia Mason has successfully introduced cost accounting data into clinical improvement projects. Organizations planning similar undertakings may find the project design features and case examples from Virginia Mason's experience useful.
Costing method
At Virginia Mason, cost centers are grouped into two types: overhead and care-giving. Methods for allocating the overhead cost centers' period net expenses to the care-giving cost centers are established. For each overhead-loaded cost center, a relative value unit (RVU) system is used to express comparative resource consumption for each unit of service (eg, surgical procedure, medical service, or laboratory test). For example, a procedure with an RVU assignment of six should use 50 percent more resources than another procedure with a RVU assignment of four.
Different cost centers have a different basis for their RVU systems. The operating room basis is minutes per procedure, while an inpatient room charge uses the patient's acuity level. Within the cost center, however, the same basis prevails.
Using volume data for the period, the total quantity of RVUs "consumed" by the cost center is determined. Dividing this sum into total period expenses yields a cost per RVU that reflects the distribution of procedures within the specific cost center. Applying this cost to the RVU assignments for the cost center's procedures creates a reference table of costs. By integrating the cost tables with patient billing details, the costing process is accomplished. Exhibit 1 depicts a costing method similar to that used at Virginia Mason.
Project implementation
In some organizations, commitment to a value improvement project might not materialize for fear that an introduction perceived by providers as less than optimal would jeopardize the investment. Virginia Mason designed its program with features to minimize this risk.
To coordinate its value improvement projects, Virginia Mason assembled a small implementation team. Team skills that were considered critical included credible clinical experience, healthcare finance and accounting expertise, strong presentation skills, accessibility, pragmatism, and a talent for communicating to mixed audiences without using jargon. One member of the team reported directly to a senior administrator, adding credibility to the program and encouraging follow-through by all departments.
Other ways by which Virginia Mason minimized implementation risks were paying careful attention to project selection, assembling a task force, planning meetings in advance, monitoring performance, and reporting results.
Project selection. In starting its clinical value improvement project, Virginia Mason selected a target area using cost accounting reports to identify diseases and procedures with high volumes, poor margins, or notable cost variability across providers. Procedures considered "program specialties" were viewed as good candidates, as were those common to a well-defined group of physicians.
The first few projects were selected with special emphasis on potential physician involvement. "Pilot" physicians were chosen to provide checks for reasonableness in the data and give essential feedback. Physicians with records of administrative involvement or with affinities for business and statistics were invaluable champions.
Assembling a task force. The next step was to assemble a small, interdisciplinary task force for each project. A physician chaired the task force that also included a manager, nurse, pharmacist, and other individuals most aware of patient care. Adding a second physician to the task force improved the project's odds of success. The task force was encouraged to take ownership and direct the project while the implementation team's primary responsibility was facilitating the meeting and providing administrative support.
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