Is Cost Accounting In Hospitals Important? 10 Reasons Needed to Survive

Written by Dan Michelson, CEO of Strata Decision Technology | April 01, 2014
View Original Article Here

In light of major changes in motion regarding reimbursement and care delivery models, cost has become mission-critical for every hospital and healthcare delivery system.

The movement from traditional revenue cycle management and managing the "top line" to a margin and outcomes management approach of improving the "bottom line" is driving the need to understand cost at a deeper and more actionable level.

Like electronic health records and population health management solutions from a clinical perspective, advanced cost accounting is now seen as an essential building block for competing in the future from a financial perspective.

As traditional cost accounting and financial decision support solutions have significant limitations, here are the top 10 reasons why hospitals are implementing more advanced cost accounting solutions. 

1. To understand true margins. To effectively participate in bundled or capitated contracts, it is essential to understand true margins on an episode, service line and population basis. Traditional cost accounting systems ended at the hospital door and did not provide an outpatient view, resulting in only a partial view of cost. Organizations now require advanced cost accounting solutions that provide a full   view   of   cost   coupled   with   payer   contract revenue modeling projections. Together, this reveals true margins and identifies where an organization may be losing money and how it can improve on an episode of care, service line or population basis.

2. To identify opportunities to reduce cost.
As pressure on the top line continues to increase, most organizations have initiatives in place to reduce their cost of care delivery by eight or nine figures. They need both the data and the analytics that come with advanced cost accounting to proactively identify cost reduction opportunities by service line, facility and/or cost category, such as labor and supplies. The ability to conduct variation analysis from many different angles and then drill down into cost drivers has become an essential skill set and workflow for every organization.

3. To understand total cost of care from both inpatient and outpatient costs. There is now a need to understand cost across the entire continuum of care — not just in a hospital setting. Traditional cost accounting systems don't provide the flexibility to integrate cost data from physician practices, a central component for more advanced solutions. As care continues to shift outside the four walls of the hospital and organizations pursue a population health strategy and assume risk, the ability to get a total picture of cost has become essential.

4. To bring together financial and clinical outcomes data. All organizations are working to bring clinical data (from their EHR) and financial data (from cost accounting) together to assess and improve overall outcomes. This balanced view of performance is central to reducing variation and competing in a value-based care setting and is a major driver in the movement toward advanced cost accounting. Many organizations are now educating their physician leaders on cost and margin and are effectively presenting physician variation on a service line basis. This can't be done effectively without clinical and financial data coming together.

5. To integrate EHR, ERP and EDW. Traditional cost accounting solutions did not provide the appropriate level of integration with core EHR and enterprise resource planning systems, which is critical to bringing together clinical and financial data, but also to  saving  time,  increasing  productivity  and improving accuracy. These systems also had limitations in their ability to move cost data into the enterprise data warehouse, which is now a requirement. Advanced cost accounting systems have proven integration with these systems and fit into the overall IT strategy for the organization as a source of "cost data fuel" for the overall EDW engine and strategy for the organization.

6. To integrate cost accounting with overall financial management. Traditional cost accounting solutions  were  standalone  applications.  They couldn't measure progress against cost reduction initiatives or incorporate improvements into an adjusted long-range financial plan or operating budget.  The movement toward a single platform for clinical (the EHR) has caused many to take the same approach to the financial side of the house. For many, cost accounting is now part of an integrated financial management strategy that includes long-range financial planning as well as operational and capital budgeting. This allows an organization to identify a cost savings opportunity via cost accounting and then adjust their long-range financial plan and operating budget to ensure the cost savings stick.

7. To understand how to price right. Pricing transparency has become a very hot topic for every health system. But how do you set prices without knowing your costs? Do you know whether you are making or losing money? Most organizations acknowledge they are flying blind, and they are putting advanced cost accounting systems in place to address this gap.

8. To run costing quickly and more often.
Hospitals and health systems have deployed an EHR and now have instant access to clinical outcomes data. However, the same access is not available for their financial data. The reliance on older, inefficient cost accounting systems has caused most organizations to run their costing process just once or twice per year. Most traditional systems take five days to run a costing process versus just five minutes with the more advanced systems on the market today. Since making cost data liquid (instantly accessible) is a key focus of most organizations, many are re-evaluating their needs and implementing new advanced cost accounting solutions.

9. To improve the accuracy of costing data. Most traditional cost accounting systems produced data that key stakeholders did not trust, and therefore, it did not get used. This was related to inflexibility and inefficiency  of  these  systems.  More  advanced systems have costing engines that provide the ability to model cost using multiple methodologies (RVUs, activity-based costing, time-driven activity-based costing, supply cost, etc.). The end result is more accurate and actionable data sets for the organization.

10. To make the data more actionable via executive and operational dashboards. The ongoing frustration of many finance departments is they send out reports and no one opens them. Yet they continue to send them. Advanced cost accounting solutions incorporate advanced dashboards, data presentation and reporting tools to make data user-friendly and actionable.


This is a time of immense change for all stakeholders in healthcare. The question everyone is struggling with is what do I need to do now to prepare for where we are heading?

As we shift to a system of care that is more focused on outcomes, it has become very clear there will continue to be a movement away from strictly a "top line" focus toward the "bottom line," from a clinical and financial outcomes perspective. In that light, understanding cost and true margins has moved from a "nice to have" to a "need to have." And with that movement, advanced cost accounting has become an essential competency for every healthcare delivery system.