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Cost report is first step toward cost accounting
You’ve spent hours preparing this year’s cost report. Once it has been submitted to the Health Care Financing Administration, you breathe a sigh of relief and put the process behind you. But your cost report should not be seen as a mere exercise in federal busywork. While not a perfect or even a detailed picture of a hospice’s costs, cost reports should be perceived as a tool for judging an organization’s efficiency rather than a chore heaped on it by HCFA.
"Hospices were one of the only providers that haven’t had to do cost reports," says Lisa Spoden, president of Strategic Healthcare, a hospice consulting firm based in Columbus, IN. "It has actually hurt them. Hospices have been telling payers that their reimbursement wasn’t covering costs, but why should any payer just take their word for it?"
In the long term, cost reports will yield benchmarks hospices can use to compare their costs to other hospices. In the short run, their first cost report provides a snapshot of how a hospice spends its money, from pharmacy costs to administrative services to nursing care. (For details of what should be included in a cost report, see list, p. 17.)
A detailed examination of the numbers contained a cost report can reveal how much a hospice is spending in each category per day. The total of all categories represents how much a hospice is spending per day. That total can be compared to the hospice’s current per diem reimbursement.
In order to determine cost per day, simply take the total from each cost center and divide this by the number of days of care. While this may seem like a rudimentary tool to be used in the complex task of cost accounting, some hospices may be surprised by the result. Because so many hospices have ignored costs in the past, a cost report can reveal aberrant numbers that may prompt a closer look at how money is spent in each cost center. For example, a high total figure or cost per day figure may be evident in the durable medical equipment category. This allows the hospice’s leadership to focus on that specific area to reduce costs in it.
Still, the cost report itself can provide only a limited amount of information, says Andrew Reed, CPA, president of Multiview Inc., an accounting software firm that has developed programs to help hospices complete their cost reports.
One of the ways the hospice cost report falls short of being a complete picture of how a hospice spends its money is that it’s unable to link operational data with financial data, says Reed. Also, the cost centers listed in the hospice cost report bear too much resemblance to home health care, adds Teresa Craig, CPA, chief executive officer of Hospice Systems Inc., in Largo FL, which also sells cost reporting software for hospices.
If hospices want to get full use of the numbers they collect for the cost report, they need to do a complete cost analysis beyond the cost centers listed in the cost report. For example, a sound financial analysis should include not only a hospice’s cost per day, but also cost per day by discipline, patient, or disease, none of which are required by the cost report. The only way to achieve that level of financial detail is to implement more elaborate accounting systems, says Reed.
Brush up on your ABCs
One accounting method, activity-based cost accounting (ABC), does just that by looking at cost as an element of a process rather than as an individual item that chips away at the bottom line. ABC requires hospices to determine the individual parts of a process, which allows them to look at the cost of that process from several perspectives, says Stephen Jessup, CPA, president of Jessup & Richmond, a Battle Creek, MI-based postacute consulting firm.
Traditional cost accounting can distort cost information because it requires you to assume that most costs are the result of direct patient care and ignores money spent on nonclinical processes. For example, a home visit is made
up of a number of activities — planning and scheduling, coordination between disciplines, travel, the actual visit by a nurse or aide, and documentation.
Under ABC, providers must shed their perception of a visit or patient day as a product and instead think of them as processes that are made up of a number of activities, each with an associated cost. By doing this, they can account for the vast cost differences in similar visits, draw a more accurate picture of how resources are used, and begin to make decisions about how each process can be improved from both a cost and quality perspective. Because activities are like building blocks in a process, they can be broken down and reassembled to offer different cost perspectives.
From a strategic standpoint, providers generally have three ways to improve their bottom line: raise prices, boost referrals, or reduce costs. Cost is the area over which hospices have the most control. That’s because prices are generally payer-driven, and referrals, while influenced by provider marketing, are primarily facility- or physician-controlled. The best way to manage costs is to identify processes and improve on them rather than simply cutting positions or programs to reduce costs.
In order to implement ABC, Jessup recommends following these steps:
• Management must commit to better costing.
Before ABC can be implemented, there must be management commitment to the process. This must occur at the highest level of the organization. Without leadership buy-in, it will be difficult to justify the time spent scrutinizing activities and to make the necessary changes in inefficient processes that ABC uncovers.
• Identify activities and resources.
Determine what is involved in a given process. For example, a visit is made up of a number of activities, such as nursing, travel, and medical equipment. In general, you’ll need to identify resources — the pool of costs that make up activities. This requires going back to staff or department heads and conducting interviews to find out how employees fill their days.
Follow these guidelines when identifying resources:
— Focus on the most expensive products. Hospice providers’ products typically have a high ratio of overhead and personnel costs to total costs. Link these expensive products and service lines to diagnoses or episodes of care.
— Focus on resources that have significantly varied rates of consumption by product and product type. For example, therapy is a resource that varies from one diagnosis to the next or from one episode of care to the next.
— Focus on resources that have demand patterns that don’t correlate to traditional allocation measures, such as direct labor, documentation, and billing. In other words, examine resources needed to treat a diagnosis or episode of care that are not traditionally measured by current cost-accounting methods.
Some cost items will still be missed. ABC does not account for every penny, but rather draws a broad picture of how a hospice spends its money. An attempt to be too precise will only bog down the process and require more resources to complete.
• Assign costs. This is a simple concept with complex hurdles. Much of the cost information you’ll need can be found in employees’ salaries and benefits. Beyond that, you’ll need to determine other cost items, such as medical equipment, drugs, office space, and whatever other costs your organization incurs. Each of these costs will play a role in one or all of the various processes a provider performs, such as determining how much of a nurse’s salary and benefits should be assigned to a visit or to documentation.
"The problem is that when you get hundreds of people in an organization, it gets fairly complex," Jessup says. "There is a lot of number-crunching going on, but the concept is quite simple."
In assigning costs under ABC, providers will have to abandon the notions of direct and indirect costs. ABC holds that all costs are indirect. For instance, nursing costs are traditionally seen as direct costs. ABC, however, holds that nursing costs can be divided among several activities, such as patient care, documentation, and travel. When assigning costs, providers will find additional costs that they had not associated with patient care in the past, such as administration and billing.