After COVID-19, hospitals need to change how they do their costings

The pandemic has taken its toll on the healthcare industry and stretching it beyond its capabilities. The developed and developing worlds equally felt the brunt as the entire healthcare ecosystem was disrupted.

Fraught with unknown challenges, the healthcare ecosystem saw a significant rise in operational costs, which in turn made the cost of the treatment more expensive. However, as a cost strategist in the healthcare industry, I can say that this is not a novel situation.

A sudden surge in costs has happened before as well since changes in policy framework and insurance packages have also had their impact. And while hospitals do have scientific cost management methods in place to counter any such crisis without compromising quality of care, it’s important there should be a re-analysis and re-calibration of cost every time it goes up.

It’s important to understand that Covid is here to stay for much longer than what we initially anticipated, necessitating the need for action. An immediate step should be to quantify the damage and devise cost-effective and profitable strategies that are feasible for the patients. An essential measure in this context is scientific cost management.

To begin with, hospitals need to assess each cost element: this includes the three main factors, namely, inventory management, supply chain and manpower cost, which covers more than half of the running expenditure in a hospital. The rest comprises of marketing, operation and finance cost that should be adjusted according to the management structure.

To manage the finances well, the costs and process should be defined, evaluated, analysed and then redefined. For this, hospitals will need a suitable blend of analytical skills and costing techniques.

Following are a few costing methodologies that hospitals can implement:

RVUs costing

The Relative Value Unit (RVU) cost accounting uses the Resource-Based Relative Value Scale (RBRVS) and takes into account fee schedules, a floor capitation rate, capitation payments and the profitability of third-party payer reimbursement. By assessing this information, hospital administrations can work out a feasible cost of providing services and a more realistic fee, as well as better profitable contracts.

Kaizen costing

Deriving from a Japanese word, Kaizen means constant improvement. Basically, hospitals do not refer to the past cost data, but assess each cost activity – such as the cost of the supply chain, administration, procurement, inventory and transportation, etc. – as a new process. Moreover, to provide the operations managers a fresh look on the realignment of their resources and assigning the cost targets, it continuously adjusts all the costs incurred.

Standard costing

Here, hospitals fix a cost for various processes as per industry standards when assigning rates for certain processes. The actual expense is then compared with the fixed cost to come up with a variance. In this process, hospitals may apply two sets of standards – a standard cost profile and a standard treatment protocol.

Activity-based costing

My personal favourite method is cost accounting, which identifies the real cost of patient treatment by combining all parameters and calculating the cost at every step of the procedure. Using this method also helps hospitals to allocate resources more effectively.

This way, the hospital management can draw a comparison and figure out the deviation in the cost while keeping in view various factors such as the nature of procedure, treating doctor, patient’s location and the concerned department.

Along with these, hospitals can also use Artificial Intelligence (AI) as a critical tool for analytics, insights, and the decision-making process. This will help to understand treatment variability and cost modelling, while eliminating the waste in the system and reducing the cost by as much as 25 per cent, as per the studies.

Hospitals can also apply a mix of these methods for a more effective outcome. However, regardless of which technique or method a hospital chooses to curtail expenses, it’s essential that the strategy should be backed by data and should be consistent. More importantly, it should at not, at any point, compromise the quality of healthcare provided by the institution.

Original article in Gulf News