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Test Cost Management
Dave Erickson, Senior Systems EngineerSeptember 12, 2016
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DisclosuresRelevant Financial Relationship(s):
Nothing to Disclose
Off Label Usage:
Nothing to Disclose
Test Cost Management
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• Test Cost Management• Need for understanding test costs• Activity Based Costing (ABC) Tool
• Mayo Lab Cost Management Project• SBAR and Goals• Applied DMAIC…
• Findings, Analysis, Implementation• Training and Tools
Test Cost Management
Presentation Content
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Lab Test Costs – The Need for Better Understanding
• Providers under continued financial pressure• Medicare reimbursement• Third party payers • Patients needs
• Cost Management• How best to understand?
Test Cost Management
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Understanding Lab Test Cost
• The Challenge: • Understanding individual tests costs
• A Key inhibitor to knowing actual test cost…• Costs lumped together in traditional
accounting model…• Workflows are not defined separately• No distinction between…
• Amount / type of material • Amount of labor• Equipment depreciation
Test Cost Management
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Example: Effect of Spread Test Cost
• New Equipment for test “A”: $500,000
• Depreciation: $8333 / month (60 months)
• Lab volumes:• Test using new equipment = 1,000 / month• All other tests = 20,000 / month
• Actual effect on Test “A” = $8.33 / test• When this cost is spread:
• All tests incur an added $0.40 / test
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• Activity-based costing (ABC) is a:
• Costing methodology that identifies activities in an organization and assigns the cost of each activity with resources…to determine the actual consumption by each.
• Applied to test costs – The sum of these activities for each test yields the test cost.
• Exact Cost – Software tool that uses ABC principles to assign cost to individual tests.
Test Cost Management
ABC – Activity Based CostingDefinitions
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Traditional Costing
Traditional costing systems focus on direct material and labor costs, while summarizing all other costs to one or more overhead pools that are then arbitrarily allocated to products and services (tests and procedures), typically as a percentage of direct labor or machine hours.
Although adequate to value inventory for financial statement purposes, it has severe shortcomings as a management tool.
ABC Methodology Overview
Test Cost Management
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Traditional Costing
Traditional costing systems focus on direct material and labor costs, while summarizing all other costs to one or more overhead pools that are then arbitrarily allocated to products and services (tests and procedures), typically as a percentage of direct labor or machine hours.
Although adequate to value inventory for financial statement purposes, it has severe shortcomings as a management tool.
ABC Methodology Overview
Labor $ 2,329,801Benefits/Payroll taxes 776,600Materials 223,952Depreciation 51,882 Other Costs 914,875
$ 4,297,110Total Cost
Chemistry Department
Test Cost Management
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Activity-Based CostingActivity-Based Costing (ABC), with its focus on deconstructing overhead pools and directly assigning costs to products and services (tests and procedures) in a more meaningful manner, is a major improvement over traditional costing systems where a high percentage of cost is arbitrarily allocated to products and services.
ABC / M Methodology Overview Cont.
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Activity-Based CostingActivity-Based Costing (ABC), with its focus on deconstructing overhead pools and directly assigning costs to products and services (tests and procedures) in a more meaningful manner, is a major improvement over traditional costing systems where a high percentage of cost is arbitrarily allocated to products and services.
ABC / M Methodology Overview Cont.
Registration $ 343,769Order Lab Tests 214,856Phlebotomy 945,364Specimen Delivery 64,457Specimen Processing 687,538QA/QC 107,428Perform Automated Testing 1,031,306Storage/Disposal of Specimens 304,996Validate Results 214,856Reporting of Critical Values 85,942Administration/Documentation 296,598
$ 4,297,110Total Cost
Chemistry Department
Test Cost Management
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Traditional Budget Converted to Activity-Based Laboratory Budget
What is spent - is translated…
Chemistry Department
Labor $ 2,329,801
Benefits/Payroll taxes 776,600
Materials 223,952
Depreciation 51,882
Other Costs 914,875
$ 4,297,110Total Cost
Test Cost Management
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Traditional Budget Converted to Activity-Based Laboratory Budget
What is spent - is translated…
Chemistry Department
Labor $ 2,329,801
Benefits/Payroll taxes 776,600
Materials 223,952
Depreciation 51,882
Other Costs 914,875
$ 4,297,110Total Cost
Chemistry Department
…into Major Operational Activities
Registration $ 343,769Order Lab Tests 214,856Phlebotomy 945,364Specimen Delivery 64,457Specimen Processing 687,538QA/QC 107,428Perform Automated Testing 1,031,306Storage/Disposal of Specimens 304,996Validate Results 214,856Reporting of Critical Values 85,942Administration/Documentation 296,598
$ 4,297,110Total Cost
Test Cost Management
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Step 2 – Order Lab Tests
ExactCost Translates Financial Data into Operational Activities
Step 8 – Store/Dispose of Specimens
Step 9 – Validate Results Step 10 – Reporting of Critical Values
Total Process Cost = $13.02
Step 1 - Outpatient RegistrationChemistry Budget
Step 3 – Specimen Drawing
Step 4 – Specimen Delivery
Step 6 – Automated Specimen Testing: (CMP)
Step 7 – Perform QA/QC
$1.19 $.95 $1.51
$.27$1.53$1.14
$.67 $3.25 $.23
Step 5 – Specimen Processing
$2.28
CMP
CPT Code: 80053
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Test Cost Management
Workflow
WorkstationAn area with equipment for the production of Products. A Workstation can be automated or “Manual” if only manual tasks are performed.
ProcedureA type of Product, that defines a series of steps followed in a definite order. Examples of Procedures include: blood drawing, instrument calibration, registration/scheduling and sample preparations (centrifuge, blood separation, patient/room preparation, etc.). Procedures can also be classified as “Activities.”
ServiceAny additional task or action, mainly administrative or general that is taken in account during the cost analysis. Services can also be classified as “Activities.”
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Test Cost Management
Concepts and Definitions
RC = Responsibility CenterWS = Work Station
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Test Cost Management
Major Cost Categories
Labor• Clinical• Non‐Clinical
Materials• Controls and Calib• Specific materials• Reagents
Supplies• Disposables• General supplies
Equipment Depreciation• Equipment depreciation• Small Misc. Medical Equip.
Overhead• Overhead consumption• Overhead expenses
Test A
Test B
Test C
Test A
Test B
Test C
Test A
Test B
Test C
Test A
Test B
Test C
Other• Consultant Data
Test A
Test B
Test C
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Test Cost Management
Fixed/Variable Cost Items
$
Volume
Variable Cost(supplies, materials)
Fixed cost(Labor , Overhead, Equipment Depreciation
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Test Cost Management
Example ABC Report:
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Process Improvement using ABC
• Using ABC tool enables laboratories to:
• More effectively manage costs • Assess financial effectiveness of standardization
and improvement• Extract data for capacity planning• Use cost information to support standardization
• compare across labs / divisions / sites (future)
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• SBAR• Situation – Describe the situation• Background – State the pertinent history. What got
us to this point?• Assessment – Summarize the facts. What do you
think is going on?• Recommendation – What are you asking for? What
needs to happen next?
Test Cost Management
Lab Test Cost Management Project
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• SBAR Situation
• Many stakeholders • Lab Operations, Finance, Revenue Analysts,
Development Technologists, Product Management, etc.
• Impacted by many inputs / outputs of the test cost process
• Recognized need for better understanding between Lab Operations and Finance groups
Test Cost Management
Lab Test Cost Management Project
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SBAR Background & Current State
• Activity Based Cost (ABC) tool has been implemented, (“Exact Cost” tool)
• ABC tool provides precise detail of individual test costs in the lab
• ABC tool output merged into existing costing processes
• Introduction of ABC tool highlighted need to better define end-to-end test cost processes
Test Cost Management
Lab Test Cost Management Project
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• SBAR: A/R-Assessment /Recommendation
• Need for Oversight group, responsible for:• Define and communicate best ways to use ABC tool• Prioritizes activity related to improving the costing
process and usage of tools• Understand financial/organizational decisions that
impact the costing process and provide a forum for discussion
• Provides communication to stakeholders
Test Cost Management
Lab Test Cost Management Project
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• D – Define
• M – Measure
• A – Analyze
• I – Implement
• C - Control
Test Cost Management
DMAIC
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• Define• The Goal:
• Costing processes that are understood and owned• Test cost estimates that are:
• Accurate and reliable• Understood by all stakeholders (trained, ongoing
communication key)• Actionable
Test Cost Management
Lab Test Cost Management Project
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• M – Measure - Steps to be Taken1. Review current test cost data2. Assess current understanding and
needs of stakeholders3. Assess current costing processes for
gaps
Test Cost Management
Cost Management Project
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• M – Measure…
1. Review current test cost data:
• Findings –• Some data errors…
• Test volumes, material costs• Accounting challenge: capturing total test
cost for tests performed in several labs
Test Cost Management
Cost Management Project
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1. Review current test cost data:
• Analyze• Root Cause analysis
• Implement• Data clean-up and fixes aimed at preventing
recurrence• Future: additional process changes and
training
Test Cost Management
Cost Management Project
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• M – Measure
2. Assess current understanding and needs of stakeholders
• Findings:• Training needed...
• Understand current data• Use of applications (Exact Cost, others)
• Need to standardize internal data• Different areas use variations on base
data, definitions
Test Cost Management
Cost Management Project
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2. Assess current understanding and needs of stakeholders
• Analyze
• Found wide range in level of understanding among stakeholders
Test Cost Management
Cost Management Project
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2. Assess current understanding and needs of stakeholders
• Implement• Develop training for all stakeholders• “One-pagers,” will provide…
• Overview of test cost breakdown• Reference data to provide perspective:
• …between tests• … test history / volume• … compare to benchmarks - Medicare
reimbursement
Test Cost Management
Cost Management Project
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Test Cost Management
Cost Analysis “One pager” elements
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Test Cost Management
Cost Analysis “One pager” elements
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Test Cost Management
Cost Analysis “One pager” elements
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Test Cost Management
Cost Analysis “One pager” elements
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• M – Measure
3. Assess current costing processes for gaps
• Findings:• Test cost processes have changed:
• need to update processes and owners• All-encompassing approach
• Current state processes are scattered between various areas.
Test Cost Management
Cost Management Project
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3. Assess current costing processes for gaps
• Analyze• Review existing processes for updates• Implement new procedures if required
Test Cost Management
Cost Management Project
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3. Assess current costing processes for gaps
• Implement• Update / consolidate procedures
• Use Excel template for New Test costing• RACI diagram – ownership and
communication• Training per changes
Test Cost Management
Cost Management Project
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Test Cost Management
Cost Management ProjectNew Test Cost Estimate
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Test Cost Management
Cost Management ProjectNew Test Cost Estimate
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Test Cost Management
Cost Management ProjectNew Processes – RACI document
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• How to Solve the Cost Crisis in Health Care• Harvard Business Review, Sept 2011
Test Cost Management
Tools for Cost ManagementBibliography