| Pricing and cost accounting within the US medical system remain highly irrational and inaccurate, impeding efforts to curb domestic healthcare expenditures. In light of recent initiatives such as the Medicare Access and CHIP Reauthorization Act (MACRA), the Affordable Care Act, and private payer bundled payment programs, there is clear momentum away from fee-forservice reimbursement that renders current costing practices a problem that can no longer be ignored. Historical methods of cost accounting such as ratio of costs to charges (RCC) or the resource-based relative value scale (RBRVS) have little association with true resource use. True resource use or “true costs” have been shown to differ from costs recorded in traditional hospital cost accounting systems by 10% to 50%. In addition, these systems focus insularly on individual services rather than aggregating costs across the cycle of care for a given condition. Without a comprehensive understanding of care cycle costs, it therefore becomes highly challenging to measure value or constrain spending. This is particularly applicable to surgical care because value must be derived by measuring cost and outcomes associated with not only a surgical procedure, but also from all aspects of pre- and postoperative management of the associated medical condition. Indeed, when the entire episode of care is considered for major inpatient surgeries, such factors as postacute care and discretionary physician services have been shown to result in episode-level Medicare payment variation on the order of 49% to 130%. Time-driven activity-based costing (TDABC) is an accounting tool that has been used across many other industries to more effectively understand workflows and resource use to improve efficiency and quality. This is a bottom-up approach that specifies the cost of each resource involved in a cycle of care and the total time it is used. The necessary starting point in any TDABC analysis is creation of step-by-step, time-specific process maps that accurately depict the procedure or cycle of interest. These are assembled via observation of clinical spaces and interviews with relevant staff (Fig. 1A). Thereafter, it is possible to define which individuals are involved in each step and for how much time. Personnel cost per minute is estimated by dividing each individual’s total annual compensation by number of minutes available for clinical care. In this manner, the differential cost rate of individuals in varying clinical roles can be appropriately determined (ie, the per-minute cost of a physician will be different from that of a nurse). Similarly, per-minute deprecation-adjusted space and equipment costs are calculated from administrative data. The cost per minute of all resources is multiplied by associated time and then added together with consumable costs to determine overall cost. In this manner, the entirety of the care process is discretely outlined, and costs become identifiable to a high degree of specificity (Fig. 1B). Of note, in this and all instances within this commentary, “cost” refers to true resource use or expense to the institution itself for providing the service. TDABC is a modified version of ABC (activity-based costing), an earlier process-oriented approach to cost accounting. Traditional ABC relies on employee self-reported data to determine percent of cumulative workforce time spent on each activity of interest. Resource funds are proportionally allotted and then divided by frequency of task to determine cost rates. Consider, for example, a company with expenditures of $200 000 divided strictly between 70% (ie, $140 000) order handling and 30% ($60 000) marketing. If there were 35 orders and 3 marketing tasks, this would equate to a cost rate of $4000 per order handled (ie, $140 000/35) and $20 000 ($60 000/3) per marketing task completed. Although effective in more simple applications, benefits of the standard ABC approach can break down when applied to more complex workflows. Beyond often untenable time and monetary investments necessary to sustain the ABC data gathering process, complex applications are prone to inaccurate results stemming from the subjective and oversimplified input of employeesolicited data. For these reasons, ABC failed to establish a significant or durable foothold in the dynamic environment of healthcare delivery. Whereas ABC methodology relies on a two-stage approach of allocating resource costs to activities and then products, as described, TDABC more simply uses a time equation to directly allocate resource costs to products.12 By relying on observations and interviews rather than ongoing surveys, the resource investment to apply TDABC to complex processes is greatly decreased relative to its predecessor. In addition, there is less risk of inaccurate or subjective employee-reported data. In this manner, TDABC has been shown to be more amenable to healthcare applications, particularly with respect to mapping that leads to care pathway redesign. |
