Management of a rural hospital was approached by an HMO asking the hospital for a negotiated, lower cost per maternity patient in return for becoming the hospital of choice for all of its maternity cases. After considering the offer, the hospital management team found itself in a predicament. They could not determine if it would benefit, or if it would lose money on this group of patients at the negotiated rate.

So how does management respond not only to the HMO, but make all such decisions with a strategic eye on profitability and performance? The hospital had a large amount of data, but not the right information to guide its strategic direction and operational issues. Management could not determine the profitability mix of its inpatient and outpatient business lines, service lines, or its six rural health clinics.

Using the CostPerform™ methodology and software, the consulting team supported Hospital management in analyzing and producing direct costs for specific procedures and for the services shared by all procedures. The shared service costs had been particularly difficult for management to allocate meaningfully by patient for each Diagnostic Related Group (DRG), or procedure. The CostPerform™ project cut through the hundreds of thousands of line items in the general ledger, revenue, and billing files to provide an integrated view of discounts, costs and profitability around patients, procedures, and service lines. 

Business Process modeling begins with an understanding of the volume of products and/or service that flows through the organization.  An adequate understanding of these quantities allows the modeler to design the correct model structure and accurately model the business.  After understanding volume, the next important step is to understand the resource structure of the organization, and specifically how the financial general ledger translates into discrete resource pools or categories that perform functions and processes that in turn product the volume of products and services.  The final part of the modeling project is integrating the output volumes and resources data with additional layers in between the model to include sub-processes and processes, as well as specific views of the data that the client wants to see.  In this respect, process-based modeling can be regarded as an art and a science – focusing on the ends is primarily a science and varies only with the anomalies of the client data.  The art is the middle layers of the model which takes into account specific ways that particular business is structured and/or operates.  The following diagram explains how modeling occurs:

This approach varies slightly with regards to hospitals as follows:

In the illustration above, each incidence of care (DRG or ICD) is made up of one or more procedures  or CPT's.  Other internal support functions such as housekeeping provide internal services and outputs to support the functional areas that produce a procedure (CPT) needed by each DRG/ICD.  Each procedure or internal service consumes varying levels of resources (i.e. nurses, materials, rooms).  Finally, the General Ledger is the translation of expenses into resource costs. 

The result is that the CostPerform™ tool and the supporting methodology allows healthcare organizations to link the disparate systems and patient level data in order to get a strategic view of manageable information.  The client can see costs, charges, net revenue and profitability around DRG/ICD, Service Line and Payer or any combination of the these attributes.  Additionally, The methodology also provides visibility to costs around procedures and to the utilization of resource capacity.

As the illustration below conveys, integrated financial and capacity data around diagnostic related groups (DRG’s)  and incidence of care (ICD’s) provides an understanding of the complete delivery of care which allows for strategic changes to processes that improve both quality of care and overall business operations.

What does this do for you?

CostPerform™ gives you the ability to see where your resources are being used and what the hospital is getting in return. This allows you to:

Cost Perform Software and Methodology Advantages

Using the same sample recruitment model, the following graphical features which can be viewed in the software as a saved view or in a report as a printed or web-based file, shows various cost and non-financial metrics.  For instance, the client organization was able to understand cost per recruit across various regions, as well as productivity per recruiters across various regions.

The following graphic from the sample recruitment model illustrates how a client organization can design a model that communicates cost and product/service flow simultaneously, and at each stage of a product/service lifecycle, from resources, processes, direct costs (without overhead), and with overhead and shared services layered on to the point of customer delivery.

Actual and Unit Cost Visibility at Each Stage of Product/Service (Output) Flow 

The following graphic from the sample recruitment model illustrates how multiple cost drivers and calculation rules can be used within the same model for various components of a process. 

Using the same model, the following illustration shows how total and unit costs are visible at each stage of a product/ service flow.

Dashboards That Monitor Key Metrics, and Project/Forecast Impacts on Organizational Resources, Processes, and Outputs

The following graphic from the sample recruitment model illustrates how multiple cost drivers and calculation rules can be used within the same model for various components of a process.