Start with the Basics, then Progress to More Sophisticated Cost Models

Hospital and health system operating margins were already thin before the pandemic hit and currently remain below pre-pandemic levels. At the same time, expenses continue to rise, squeezing margins even tighter. 

Once-standard average historical costing methods no longer provide the right level of visibility into constantly shifting pricing variations. Hospitals need transparency and accuracy on the cost of labor, materials, drugs, and supplies used in patient care to better understand fundamental costs and variances among physicians, procedures, and departments.

Enterprise decision support tools can help hospitals better understand their costs and undertake efficiency initiatives to reduce costs. Automated tools mean finance staff spend less time compiling data and more time performing analyses. Axiom™ Enterprise Decision Support includes a range of costing methods from basic to advanced that allows organizations to start at a foundational level and add sophistication in measures as confidence and buy-in grow. Organizations that use more robust costing methods better understand the source of variations. 

Four Axiom users shared their experiences using various costing methodologies during a recent roundtable discussion and offered guidance on what’s working in their organization — and what’s not. 


RCC Provides Baseline Costing Data 

The ratio of cost to charge methodology (RCC) spreads general ledger (GL) costs across a set of service items in a department based on the associated charges or price. RCC can be simple to maintain but can lead to variances where prices do not align with resource utilization. Simplicity is the key, though. Even organizations that employ more advanced costing methodologies use RCC in areas where the time and effort required to develop other methods don’t add measurable value to the cost results.

West Tennessee Healthcare primarily uses RCC, says Lynn Morris, Director, Decision Support, who notes that costing data in particular areas can be difficult to obtain. “The various departments I reached out to for vendor-specific cost data said, ‘We don’t have that type of information’, or they'd send me something that didn’t provide the level of detail needed.” 

Morris says RCC works well for them at this time. Finance shares reports with the CFO and business unit managers who understand and are comfortable with RCC data. They hope to advance to microcosting methodology in the future, which is supported by their Axiom system.   

Rick West, Decision Support Specialist, The University of Vermont Health Network, believes that RCC is “the quickest, most straightforward way to implement costing because it relies on the standard charge or the average charge.”

The health network has been using Axiom Enterprise Decision Support for several years and uses RCC as a baseline for calculations before moving to more advanced methods. The downside to RCC, West notes, is that many factors that determine a particular charge have little or nothing to do with actual costs. 


Microcosting Based on Actual Costs 

AdventHealth has moved past RCCs to leverage a transaction microcost approach for drugs, implants, and other supplies that have an NDC (National Drug Code) number or stock number, notes Barry McBroom, Corporate Director of Cost Accounting. The health system has created several feeder extract files that run through Axiom’s import process to make transaction microcost data available for cost processing. This level of detailed cost data provides transparency that creates more confidence in the cost results and, ultimately, the decision support reporting and analytics.

“I am obtaining source files from our supply chain on a month-by-month basis, and I'm posting to the Axiom transaction microcost table. We are really doing data mining to ensure we are getting the data we need,” McBroom says. “It sounds complicated, but it just runs, and it works.” 

For items where the actual cost cannot be determined, AdventHealth finance staff calculates an RCC based on actual cost items at the department and revenue code level to estimate these costs, creating two buckets of costs: actuals and estimates. Any reconciling difference in costs between the actual and estimated costs and their corresponding GL costs are then allocated to the estimated cost category using RCC.  

“Separating the known costs from the estimates gives you different levels of visibility, and it gives you a much cleaner way to spread costs that you can very easily see,” says McBroom. MultiCare Health System has moved to more advanced costing methods where possible, but Wayne Zack, Manager, Financial Data Systems, says some departments and supply categories still resist microcosting methods.

“Our drugs are currently costed with RCCs because we've always had trouble getting the right units of service for drugs,” Zack says. “Even on our supplies and implants, we had a hard time getting some of the units of measure right. We need the cost at the cost item level or the CDM (chargemaster) level of measure, as opposed to the ordering level (e.g., a box or case of items). We have a good process now where we put the actual price in there, and then, in a separate cost category, we have that little bit of difference to reconcile back to the GL.” 

RVUs Weigh Relative Costs Across Departments 

The relative value unit (RVU) method is best-suited for labor expenses, spreading GL dollars based on relative resource utilization. MultiCare uses RVUs in several departments, including imaging and therapy, and what Zack refers to as homegrown RVUs for OR and ED costing. Weights for homegrown RVUs are reevaluated from time to time. Like many organizations, MultiCare uses standard CMS weights where possible to reduce workload for the costing team.

The University of Vermont Health Network recently underwent an EHR conversion. As a part of this process, finance staff chose to revert costing methodologies to simpler forms during the conversion. Previously for professional billing, the health system mapped standard CMS RVUs and work factors and used those values for costing, updating the RVUs annually.

“For hospital billing, we used internally developed RVUs and applied an 80/20 approach for departments, so full RVU studies were performed only on items that accounted for at least 80% of the gross charges,” West says. “Ideally, we would update those annually through meetings with managers.” 

Like MultiCare, AdventHealth relies on RVUs for some areas. To create efficiency, finance staff have essentially standardized RVUs across the health system. “We're using the standardized values as a relative comparison for allocation purposes,” McBroom says. The alternative is a full-blown cost study that looks at the individual department and entity and requires considerable resources to complete. 

That’s time that most finance departments just don’t have these days. Users agree that Axiom Enterprise Decision Support is crucial to ensure accurate and reliable cost data as they continue to explore and expand their costing roadmaps. 

“You've got to strike a balance between accuracy and your resources,” McBroom says. 

Learn how Axiom Enterprise Decision Support helps healthcare leaders reduce costs, optimize revenue, and improve clinical quality. 


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