EXECUTIVE SUMMARY

• Radiology is a pivotal part of the patient’s experience within a healthcare organization and has traditionally embraced new technologies. It is now time to embrace new management methodologies.
• With the changing winds in reimbursement, activity-based methods (ABC and ABM) will assist us to maximize our resources, reduce costs, and increase our efficiencies to maintain the quality of care.
• We have embraced new technologies, but we have implemented them on top of old processes. Without embracing new methodologies we may never maximize our new technology.

The healthcare industry is under increasing pressure to provide quality care in a financially responsible manner. As radiology professionals, we also shoulder that responsibility, but face some of the toughest challenges. The management approach which has been universally adopted by other industries, and is now showing promise in healthcare, is Activity-Based Costing (ABC) and Activity-Based Management (ABM). ABC and ABM provide the ability to control cost, increase throughput, enhance the customer experience, and improve quality. The combination of these new management methodologies with new technologies will provide insight that will allow you to operate your department in a cost-effective and efficient manner.

Current State of Radiology

Radiology resources—in particular, staff and equipment— are presently being stressed. For years, we have been experiencing staffing shortages. According to a recent survey conducted by the American Society of Radiologic Technologists (ASRT), “We are and we will be faced with staffing shortages.”¹ Many of these positions are hard to fill. For example, PET/CT has become a blended position, blending the skills of a nuclear medicine technologist with the skills of a CT technologist. Radiologic technologists are truly specialized resources and we must utilize their skills in the most efficient and productive manner possible. And we are constantly being asked to increase our throughput to meet our community’s needs. Therefore, our equipment utilization is approaching its highest levels. Looking at our equipment as a resource, we must also ensure that we are using it in an effective and efficient manner.

If that wasn’t challenging enough, we also face the demands of reimbursement—eg, the recent reductions in reimbursement from the Centers for Medicare and Medicaid Services (CMS) and the Medicare Payment Advisory Commission (MedPAC). Adding even more pressure on our industry is the call by government and employers for hospitals to provide pricing transparency. One of the best ways to prevent this “perfect storm scenario” from affecting healthcare is for the industry to better manage its resources by starting with the knowledge of the “true cost” for the services we provide. Historically, healthcare providers have only been able to estimate their cost. Costs have typically been allocated rather than being assigned to the activities performed. This cost accounting methodology has been employed for years and has not evolved with our technology.

Using New Technology for Performance Improvement Is Only Half the Battle

The mounting pressure to improve quality and lower cost is forcing hospitals to invest heavily in technologies designed to improve performance. Among these new technologies is the electronic medical record (EMR), hospital information system (HIS), radiology information system (RIS), and picture archive communication systems (PACS). For years, most vendors and hospital managers focused on small bits and pieces of the workflow process. For example, an RIS will streamline the workflow process from patient registration through order entry, scheduling, and billing. And the workflow process for most PACS systems is limited to the imaging portion “perform test,” basically targeting the process from image acquisition, distribution, and transcription to final report.

The introduction of new workflow technology has made a difference. However, these new technologies may not support the entire departmental and service line process. How many times have we seen new technology deployed using old or established management processes? We quickly realize that the system/application will not meet the proposed performance projections and we are often left wondering why.

The answer may be found in that we have embraced new technologies, but we have implemented them on top of old processes. These old processes are composed of numerous activities (an activity may be defined as each step the technologist performs during the patient encounter). Or even worse, we have increased the number of activities without evaluating their value. Without embracing new methodologies we may never maximize our new technology.

A New Approach for Healthcare: Activity-Based Methods

Activity-based methods offer a completely different approach to how we define cost and manage operations. ABC focuses on the strategic view of cost to answer the question, “What do things cost?” On the other hand, ABM focuses on the operational view of cost to answer the question, “What causes cost to occur?” While these questions appear similar, their focus is dramatically different. These can be explained in further detail by contrasting them to traditional tools used in healthcare today.

ABC/ABM Compared to Traditional Cost Systems

Traditional approaches used by hospitals and other healthcare organizations to determine service line or patient profitability often utilize standard cost allocations. These approaches use either single or multiple cost pools either allocated directly or by utilizing a departmental rate. However, there is a key problem with this approach—it fails to reflect the underlying diversity of work taking place within a department or hospital. Single step allocations fail to reflect the real work—the activities being performed.

ABC utilizes a multi-stage process that first traces resources (salaries, rent, equipment, etc) to the activities those resources perform. This activity analysis converts the traditional view of cost information (dollars by resource acquired) into an activity view (dollars by activity performed).

ABC then applies activity drivers to trace the activities to the cost objects. In answering the question, “What do things cost?” cost objects are the “things.” Cost objects within healthcare organizations may include patients, procedures such as a CT scan w/contrast, service lines, payors for services, physician groups, and geographic facilities.

Traditional hospital accounting systems typically capture only a portion of the costs involved in delivering care services. ABM recognizes that services are performed as a result of a combined effort from a number of functional departments. Furthermore, ABM theory assumes that a portion of all overhead should be attributed to each service provided. This complete cost picture becomes extremely important with the changes being proposed to funding, strategic decisions such as managed care contract pricing, margin analysis, etc.

According to a personal conversation in August 2006, Billie Gayle Lewis, Principal, GayleForce Consulting, who has over 17 years experience in teaching and implementing ABC/ABM in the manufacturing and governmental industries, said:

“Activity-based methods focus simultaneously on cost and performance. Cutting cost without taking into account the effect on performance factors such as quality, timeliness, and customer satisfaction is like cutting off your arm to lose weight. You may attain the short-term goal, but impair your ability to achieve long-term performance.

Manufacturing and service organizations use activity-based methods to better understand customer profitability, adjust pricing strategies, and negotiate service levels. Non-profit organizations use activity-based methods to maintain, or even improve, the level and quality of services they provide despite declining resources and budget reductions.

The following examples illustrate the effectiveness of activity-based methods:

• A Facilities Maintenance Department where 30% of the activities ($1.5 million of total labor cost of $4.9 million) were classified as non-value-added by the employees who performed the work.
• Twenty-five percent of the activities in a Purchasing Department, at a cost of $142,000 annually, were associated with expediting materials.
• Patient Registration at one hospital spent $242,000 annually gathering patient demographic information. Yet, the most common reason for inability to collect self-pay Accounts Receivable was because of an ‘incorrect mailing address.’
• In a Family Practice Department, clinical nurses spent 42% of their time performing activities that did not require nursing expertise and could be performed by clerical, rather than clinical, staff.

  All healthcare organizations (hospitals, outpatient facilities, and diagnostic imaging centers) can benefit from implementing activity-based methods to understand and improve internal operational performance.”

ABC will become your building block for ABM. ABM focuses on the cost drivers and performance measures. Performance measures are used to measure the output of activities. They include not only specific cost measures, but also non-financial measures such as clinical outcomes. A cost driver can be defined as any factor which influences the cost and there may be multiple cost drivers for any activity. A cost driver may be beyond your control, such as a Joint Commission on Accreditation of Healthcare Organization (JCAHO) or Nuclear Regulatory Commission(NCR) regulation. Understanding the significance of cost drivers, both individually and in combination with each other, is the key to understanding what causes cost to occur and reducing cost.

An Example: Using Activity-Based Methods to Evaluate the Start-Up Routine for a Nuclear Medicine Department The morning start-up routine consists of the following functions:

• Radiopharmaceutical preparation
• Evaluate for contamination
• Recipe of doses for outside pharmaceuticals
• Quality control/dose calibration

This routine usually takes approximately 21/2–3 hours. Radiopharmaceutical preparation includes the following 2 activities starting with extracting Tc-99m from the Mo-99 generator and performing the quality control on the extraction, which takes approximately 15 minutes. The next activity is preparing each radiopharmaceutical kit, which takes 5–15 minutes including all the necessary paperwork. An average of 5 kits per day is prepared for a total time of 1 hour and 15 minutes.

Figure 1 illustrates how activity-based methods can be used to evaluate and determine the cost of one of the functions necessary for morning start-up. The activity driver in this example is the number of radiopharmaceutical kits.

Assuming there are 20 working days a month and 12 months in a fiscal year, this activity will cost $56.25 a day ($1,125/month); resulting in a cost of $13,500 per year (provided the number of kits does not increase). With activity- based methods, the resources needed can easily be determined, as well as the cost of those resources for each of the activities performed on a daily basis. Using this methodology, there is the ability to determine all the resource costs (materials, supplies, labor, equipment, facilities, and other overhead services) of each activity required to complete the procedure. This will provide you with the “true cost” per procedure.

Internal policies and procedures or the physical layout (department location) of a facility may act as a cost driver. Once activities are defined and costs are assigned, you will be able to identify many of the cost drivers within radiology. It may be surprising to find that the cost of non-clinical activities such as scheduling, registration, preparation, clerical activities, and others may account for as much as 20–40% of the true cost of a radiographic procedure. This will also give a glimpse into a patient’s experience as he or she moves through your department from scheduling, registration, transportation, image acquisition, etc. After determining the cost of each activity, you can then link functions and activities together to evaluate, enhance, and monitor an entire process. This process could be performed from order entry to final report and beyond. It will clearly show what procedures your facility performs efficiently and effectively from a financial and operational point of view. You will also be able to identify the bottlenecks and handoffs from radiology to another area, which can provide a glimpse of what the patient actually experiences.

Where Do We Go from Here?

The rewards of implementing activity-based methods are many. First, it will give the insight necessary to improve operations and reduce costs by eliminating the unnecessary activities that may be currently performed. Next, activity-based methods will enhance the deployment of new technology throughout a department by examining the new activities and ensuring the efficient use of staff and equipment through the entire workflow process. Many of the top imaging and radiology information technology manufacturers are attempting to address workflow issues through different facets of their technology.

Activity-based methods will also provide detailed insight into the operation of your service line. Using activity-based methods, managers and supervisors will be able to assign a cost to each activity, determine the cost driver for that activity, and assess whether the activity adds value or if the activity should be eliminated to streamline a process. Using this process will reveal opportunities to increase throughput, reduce costs, and create potential capacity.

When asked about adoption of the activity-based methodology by the healthcare industry during a conversation in August 2006, Ruben King-Shaw Jr., Partner, Pan American Risk Management Associates, LLC and former Deputy Administrator & Chief Operating Officer of The Center for Medicare and Medicaid Services at the US Department of Health and Human Services, stated: “In today’s highly regulated, competitive, and cost-sensitive environment, every radiology administrator should be thinking about activity-based budgeting and management. It may be the best way to capture all related costs, minimize waste, improve performance and avoid ugly compliance issues.”

As radiology professionals, we have always been early adaptors for medical technology and on the leading edge of medicine. It is time, once again, for us to take the lead and show our organizations the benefits we can achieve by coupling new technologies with new operationally oriented management methodologies.

References

¹American Society of Radiologic Technologist, Update to enrollment, Enrollment Snapshot of Radiography, Radiation Therapy and Nuclear Medicine Programs, Fall 2005 Technologist added 2004–2014. Updated march 2006.

Paul H. Monge, CRA, BS, RT(R), RDMS, RDCS is currently the Vice President, Clinical Specialists at ExactCost, Inc., a provider of Activity- Based Costing, Activity-Based Management, and Performance Management Software Solutions for healthcare. Among Paul’s global responsibilities he is responsible for the ExactCost® Radiology Solution that focuses on performance improvement and cost reduction. He is a member of the Editorial Review Board and may be contacted at paulm@exactcost.com.