Cost Accounting and Healthcare: New Thoughts on an Old Subject
To survive in this new less money for more quality world, a new approach must be undertaken to cut cost. And how does one do that? For starters, hire someone who truly understands and can run a cost accounting department. Then go through every department with the cost accountant and understand what costs are driving the bottom line.
No, I’m not kidding. You can’t cut costs until you really understand what the costs are. This is a complex and sometimes grueling process that will lead to true and permanent cost cutting if you do it without politics and accept the results without prejudice.
Cost accounting is not a new thing. Industry has been using it for years. Why? Because they are for profit organizations who understand that for profit means they need to show a profit, grow and cut cost all at the same time. They must create better longer lasting products, with better longer lasting materials and do it cheaper. Not news to industry.
When will healthcare understand that modeling after business does not have to mean compromising patient care? In fact, it will mean better more efficient patient care in most cases.
In the September 2011 issue of Harvard Business Review, Harvard Business School professors Robert Kaplan and Michael Porter argue that a better understanding of the actual cost of care patient-by-patient can have a dramatic impact in the effort to control health care costs. They maintain that “actual costs are poorly understood, that there is a mistaken belief that many costs are too complex to allocate accurately, and that there has been an unwillingness to take the time to break down the costs of the individual components of the cycle of care.”
While this may be true, cost accounting must be paired with healthcare expertise. You cannot deduce for instance that preventative care will keep people healthier longer and will in fact reduce cost in the long run because in the long run, people will live longer and use more services. So while of course preventative services may catch things earlier, it does really not cut cost. It simply shifts cost. And in case there is any misunderstanding of course am in favor of preventative care.
Now is the time to engage real cost accounting principles combined with real healthcare process knowledge and cut costs. Practices who do not will not survive in the long run.