patient level costing to performance management

© November 2014 Bellis-‐Jones Hill & Prodacapo Ltd.

From Patient Level Costing to Performance Management Performance management within the healthcare sector

Bellis-‐Jones Hill – Patient Level Costing to Performance Management

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Contents

An introduction 3

Transparent and graphical cost overview 5

Correct terminology and level of detail 7

Validate model together with managers 11

Update your costing frequently 13

Accessible results 15

Concluding comments 16


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An introduction

The implementation of Patient Level Information and Costing Systems (PLICS) in the NHS has been supported by the Department of Health since 2007. Most trusts now have some form of PLICS and the Clinical Costing Standards for its implementation have evolved significantly over recent years under the guidance of the HFMA.

Monitor now has responsibility for the further development of Patient Level Costing and has recently published a Costing Roadmap for the NHS: a strategy for the further development of Patient Level Costing.

It is clear from this document that Monitor believes that there is significant opportunity to improve the quality, consistency and usefulness of PLICS across the NHS. It highlights the fact that, to date, relatively little use is being made of costing information for cost management purposes, yet the belief is that this could offer significant performance improvement potential to trusts.

This paper seeks to learn what has been achieved in Sweden where they too have had a patient level costing (PLC) system for some years.

Healthcare is typically the responsibility of Local Authorities in Sweden and the Swedish Association of Local Authorities and Regions (SALAR -‐ a body that represents the governmental, professional and employer-‐related interests of Sweden’s 290 municipalities and 20 county councils) has defined guidelines for how patient costs should be calculated and reported to SALAR’s database. This data is used for national benchmarking and tariff setting purposes.

Most Swedish hospitals and county councils use PLC in accordance with the guidelines issued by SALAR. They all seem to be satisfied with the key performance indicators and the comparison options that PLC provides, even though this is sometimes at a somewhat crude level of detail.

While managers at Swedish hospitals and county councils are usually aware of their PLC results, they do not seem to use them for performance management purposes.

In summary, PLC seems to be a good tool for the finance function, but it is not being used to manage and improve the operations of their individual organisations. The main reasons seem to be that:

• Patient level costing is often too crude as the health care services provided have been defined with insufficient detail and therefore do not reflect how services are delivered in a way that is useful for performance management.

• Managers do not understand the costing model well enough to have confidence in the figures.

• Getting the PLC result for the previous calendar year in May/June of the next year is simply too late and the annual update is too infrequent to be useful.

These observations may seem eerily familiar to those in the NHS where the same problems seem to apply to Patient Level Information and Costing Systems. The purpose of this paper is therefore to explore


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some of the underlying reasons why this might be and to suggest some practical, proven solutions.

Objectives of this document

For over 20 years Prodacapo AB in Sweden has been developing and refining a costing methodology that can be used to both reduce costs and secure business performance improvements in the long-‐term, at the same time. For many this is the “holy grail”, as it directly challenges the notion that one can either reduce costs or improve quality, but not both together.

Since 2008 Prodacapo AB has focused particularly on the health sector. Working closely with their clients and business partners such as Bellis-‐Jones Hill, they have developed activity based costing solutions that can help hospitals to use the cost per patient information to both manage and improve operational performance by applying cost management principles and approaches that have already been proven in other sectors of the economy.

The intention of this document is to summarise what is important if PLC information is to be used by managers and clinicians to develop and improve the operational performance of a hospital, as well as inform how tariffs are set.

If operational managers are to be able to use PLC data for their performance management then the costs, and how they have been derived, must be easy to understand and be relevant to the needs of the hospital. These managers must also receive frequently updated figures if they are to see the effect of the changes they make.

In order to understand costs, find them relevant and to be able to apply them to operational activities that deliver care to patients, there are a number of criteria that need to be satisfied:

1. Managers must be provided with a transparent overview of the costing process where all cost allocations can be tracked back and forth between patient episodes, clinical treatments, and expense headings at cost centre level as recorded in the general ledger.

2. The costing model must reflect the work undertaken in the trust in terms of the correct terminology and in sufficient detail.

3. Rapid validation and adjustment of the cost model must be undertaken together with either line managers or staff whose role it is to validate the data in the costing model.

4. The costing information must be regularly updated with a frequency of 4-‐12 times a year in order to monitor trends, see the effect of changes already made and actively respond in a timely manner.

5. The result must be easily accessible by all managers and clinicians.

This may all sound straightforward but let’s take a deeper look at these criteria and at what they actually mean in practice.


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Transparent and graphical cost overview

The first criterion is to provide managers with a clear and transparent picture of the Patient Level Costs and how they were derived.

Managers must be able to follow the cost flow to patient episodes, and see details of treatments provided, resources used and costs incurred in each cost centre in the general ledger in which they are managed.

For example:

A manager is informed that the cost of a particular treatment this period is £2,800. The first reaction is probably to check the accuracy of this statement and they may well ask questions such as:

-‐ How did you come up with £2,800?

-‐ What kind of resources and costs are included in this sum and how did you work that out?

-‐ The costing says the sum of £2,800 includes 2.1 care days, at £550 per day. How do you know that one day of patient care costs £550 at this particular ward?

If you cannot easily answer these initial questions then the costing is simply not good enough to be used for your decision making. Even though the costing might be sophisticated with many factors involved, it is essential that it is easy to understand how the cost model is constructed and how different costs and volumes make up a particular cost.

To meet this need for transparency Prodacapo has developed a graphical presentation of the cost flows in a costing model that makes it easy to follow and understand complex cost tracings. This transparent picture of the cost flow leads to a much greater understanding of the calculated costs and to insights into how they can be influenced through understanding what drives the need for, and extent of, these costs.

By clicking backwards and forwards in the cost flow you can explore such cost tracings in detail. You can follow each cost assignment from GL-‐costs to cost per patient episode and back again as is illustrated in the following screenshot.


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It is simply not good enough to say, for example, that the sum of “£550 per day” is a predetermined or “standard cost” that may have been calculated in a separate MS Excel sheet outside the costing model, and possibly calculated using inconsistent assumptions.

To achieve the needed transparency all costing, from GL-‐cost through to the Patient Level Costs, must be done within the same cost model so that the whole flow and underlying logic can be graphically displayed for the user.

If managers and clinicians are to understand what causes costs to be incurred then you must present each step the whole cost chain, as below, in a graphical, easy to use format in the same cost model.

This means that the data needed for the calculation of the cost per treatment provided and the cost per patient episode must be available in detail from the same costing system.

Prodacapo delivers this, allowing users to analyse treatment costs and profitability right down to the level of the individual patient episode.


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Correct terminology and level of detail

In order to understand Patient Level Costs and what drives the need for them, a cost model must reflect the business in sufficient detail and in a language that users, i.e. managers and clinicians, will recognize.

A prerequisite for this is that resources, such as staff by grade or role, facilities, or expensive equipment are included in the cost model as discrete and recognisable items.

This is important as managers are responsible for their staff and equipment and how they are used productively and will find it much easier to relate to resources shown in the PLICS model rather than to simply expense headings in a cost centre.

For example:

Let’s say there are three nurses in a ward whose specific cost is booked to salary-‐related expenses heading in a cost centre in the General Ledger for that ward. However, managers are first and foremost focused on the individual resources at their disposal and how they are deployed. The overall salary cost is more or less a consequence of the individual resources and their different costs.

However, the focus should be on the business (the resources and their use in delivering healthcare) and the financial result is merely a consequence. This means that if a cost calculation is to fulfil the managers’ needs you have to reflect the different categories of staff employed in your costing model and how they are deployed in delivering healthcare. Ideally, you would also include the capacity

available for each resource such as the number of hours or the number of whole time employees (WTEs) and then trace costs on the basis of the capacity used in treating patients.

For simple cost estimation it is not necessary to be too detailed in the description of the activities and the treatments provided. However, if you do want to use your costing information to achieve real business benefits then you have to describe your business in as much detail as is necessary to reflect at least 80-‐90% of the activities that are actually performed. A few examples illustrate the importance of this point:

In the case of out-‐patient clinics, it is too crude to divide out-‐patient visits simply into new appointments and follow-‐up visits, as this will generate two average costs for completely different things and will not provide information that is good enough to see how to improve the business.

We believe that there are three aspects that need to be taken into account; the resources involved, the time spent by those resources and the treatments they provide. Let’s explain further using this example of outpatient appointments:

1. What resources are involved in different types of out-‐patient appointments?

To provide the information necessary for performance management purposes you need to differentiate appointments between the following:


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• Where “only nurses meet patients” during an appointment.

• Where “only doctors meet patients” during an appointment.

• Those appointments where “both doctors and nurses meet patients”.

The cost of these different types of appointments can vary a dramatically even though they all take, say, 30 minutes each. In this case, the cost is likely to vary greatly between different types of appointment according to the mix of the resources involved rather than simply on the time the patient spent in the appointment.

The services provided should therefore be separated according to the resources consumed so that the related costs can reflect the reality of what is really happening and so that clinicians and managers can use it to determine clinical effectiveness and value for money.

2. How much time is spent on the appointments?

For an accurate costing you need to find out how much time both the nurse and the doctor, or other resources such as a specialist technician, spends on any particular patient appointment, not simply the total time of the patient visit. The need for this level of detail depends on its financial materiality, the effect it has on the quality of care provided and the degree to which this varies.

3. Is it “appointment only” or is it “appointment and treatment”?

In some cases, an appointment can include a minor surgical procedure (appointment plus treatment). If so, the minor surgery is usually recorded in the Patient Administrative System (PAS)/ Electronic Patient Record (EPR) (e.g. treatment code and location).

If this minor surgery had been performed in the Theatre this action would have been recorded in the theatre (operational) system. But when minor surgery is performed during an outpatient appointment it is important to ensure that this has been recorded in the PAS/EPR system.

To get this right you need to record two things; an appointment and a minor surgical procedure.

To accomplish this, your costing system must either allow you to assign different resource consumptions according to the different treatments provided, or to use recorded actual resource consumption from operational systems. The costing system must therefore also enable you to easily sort the base data from the patient administrative system and from other systems into the way treatments are provided to each patient episode/appointment, so that you can take the volume of treatments per patient episode into account.

But, what happens if you do not have any information recorded about the resource consumption that would be required for such a detailed costing?

Well, to simply find out the cost per patient you do not need all this detail. But if you do want to use your costing data to improve your performance, you will need to describe your care services in some detail so that the resource consumption is reflected correctly.

To do this you will need assistance from colleagues in your organization to:

• Describe the different types of appointment or treatment provided in sufficient detail.


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• Understand actual or the typical resource consumption for each different type of appointment/treatment.

• Find out how you can identify the data from the operational and patient administrative systems for each of these different appointments/treatments.

Our experience indicates that if the costing describes how activities are undertaken in sufficient detail then managers and clinicians will be able to:

• Better understand the variability in how care is being delivered.

• Investigate any differences and their root-‐causes.

• Use it to improve the robustness of their planning, utilisation and optimization of use of resources.

• Simulate the consequences of changes to the volume and mix of treatments.

Example from a Theatre:

Many patient level costing solutions only use knife-‐time to allocate a wide range of costs to patient episodes.

Doing so implies that you assume all types of surgical procedures consume the same mix and number of resources each time any procedure is performed and that these costs are incurred equally per knife-‐time minute when treating any patient.

This might be good enough to develop a crude patient level cost, but it will be of little use in your management of performance. This is

because in reality different resources are used for different surgical procedures and, for example, might include operating theatre time, consumables, implants and devices, surgeon, scrub nurse, anaesthetist, radiologist, recovery nurse, porter etc. So, for information that is useful in improving efficiency and effectiveness you need sufficient detail of the resources available and how they are consumed.

In this case, you would have to breakdown the provision of surgery into its subsidiary components that reflect either different types of surgical procedure (per procedure data) or into different categories of surgery. In essence, you need to find out what different resources are used for each of the different types of surgery and how much time is taken (or other measure of consumption) by each resource in each type of surgery.

These consumption metrics can be the actual recorded consumption of resources from the operational systems. They may be standard consumption figures – determined in consultation with those clinicians and technicians involved – which reflect the impact of patient characteristics such as age or particular medical conditions, such as dementia, on the individual elements of treatment. For example, an X-‐ray of an arm might take 10 minutes longer than usual where the patient is under three years of age.

This example describes the two aspects of cost that need to be considered if the resulting costing is to be valuable, which are:

• What resources are involved in the different types of surgeries or procedure?


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• How much time does each of these resources typically spend on each type of surgery?

These times can usually be found in hospital-‐systems. If not, you could ask someone involved to estimate the typical time per resource and per procedure; in our experience this is not difficult.

Creating a costing model using carefully-‐estimated resource consumption driven by patient and procedure characteristics is often referred to as a “time-‐driven methodology” and it has some clear advantages:

• Ease of update -‐ Resource and time data can easily be updated when changes occur in case-‐mix each period, work practices or the way activities are performed. Based on this approach, the cost model allocates resource costs based on the volume of activity undertaken for different care services provided and the time per occurrence, rather than static percentage estimate such as 20% to one activity and 30% for another, which is common when not using a time-‐driven methodology. When time is allocated on a percentage basis it is almost impossible to update easily and often the results often lack credibility with the end user, especially clinicians.

• Capacity utilisation – This approach allows you to compare the amount of time that should have been consumed by the volume of a given activity with the actual time available. This means your costing tool can facilitate much better resource planning and easier validation of the cost model. If, for example, only 20% of a nurse’s available time has been consumed (according to production volume x unit time) it

probably means that the model does not properly describe how the nurse is working and further investigation will be required to understand why this might be and to correct any errors.

• Clinical engagement – in our experience staff find it easier to validate the typical activity times that they or colleagues may have provided and this delivers a much stronger degree of engagement in the costing results, and how they might evolve over time.

A prerequisite for working with a time-‐driven methodology is that the costing model covers the entire cost flow from cost centres and accounts to the patient episodes, as described above.


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Validate model together with managers

A cost model must be easy to validate and adjust if both clinicians and managers are to:

• Understand it.

• Find it relevant to their decision-‐making.

• See it as helpful in their drive for their performance improvement.

The Prodacapo Patient Level Costing system provides templates used to describe different hospital activities which can be used to help setup the first version of a cost model quickly and efficiently. Having produced the initial cost model it will then need to be validated in conjunction with the people in your hospital who know best how it operates. Then you need to adjust the cost model quickly so that it better reflects the activities of the hospital.

A first step in the process of validation may well be to verify the new costing results against prior expectations or compare the costs of different care services. At this stage, you might even find some deficiencies in the costing model that may need to be addressed in order to better reflect the reality of how the trust operates in each area of activity and define the fair consumption of resources.

An example within radiology:

A project group considered a lot of factors when setting up the first version of their costing model. When people outside the project group were asked to verify the costing it turned out that some of the

radiology services, which used contrast fluids, had a much lower cost than expected.

When the project group verified this in Prodacapo they discovered that the expensive contrast fluid was correctly traced to the care services, but the project group had not taken into account that the radiologist often stays the whole time to continuously monitor the amount of contrast fluid required. In this instance, the project group had forgotten to include the cost of the radiologist’s time.

The following screenshots show an example of an analysis of a specific radiology treatment, the first of which shows the total cost of a particular care service performed 89 times with an average cost of £13,606:


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To verify and understand this total cost you need to break it down into its underlying costs, which are shown in the second screenshot.

The third screenshot shows why these cost items have been traced to this medical examination.

It is not reasonable to expect a costing model to perfectly reflect the reality of all activities undertaken in the delivery of patient care; human activity is simply too nuanced to allow this.

However, if you do want to create clinical engagement and improve your operational performance then you must make sure the costing model is reflecting how people really work as accurately as is practicably and financially possible.

What also helps is to be able to quickly and effectively amend the costing model in response to improvement suggestions from clinicians, recalculate the costs and validate the revised result. How

fast can this be? In our experience this might take only 15–30 minutes for a typical DGH.

Changes needed that affect how the master data is imported into the model, such as adding new service treatments and recalculating millions of data records, might take a little longer, but they will still be seen as fast.

It’s very important that your costing system allows you to easily improve your model, import large amounts of data and calculate quickly.

The costing system is there to provide information to very busy people whose time is valuable. It is therefore essential that the costing model is quick to update and recalculate, and the team and the system are highly responsive to suggestions for its improvement


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Update your costing frequently

To engage the interest of clinicians and managers in cost information it must be seen as current and should therefore be updated either quarterly or monthly. This allows cost-‐improvement trends to be seen as well as the cost effects of actions taken. A monthly regime would also integrate better with the established monthly reporting and control cycle of a hospital and support a quick response to the information presented.

However, there are some challenges that must be addressed when updating cost calculations with such frequency:

• The data flows must work.

• The costing model must be built with as many “dynamic cost drivers” as possible.

• Procedures need to be established to close the periodic reporting of production data in a timely manner.

Challenge 1: The data flows must work.

The data must be:

• Extracted from the feeder systems.

• Matched so that all care events, such as radiology services, are matched to the related patient episodes.

• Handled via rules that relate care services to patient episodes/appointments in the cost model.

• Loaded into the cost model and calculated.

• Extracted to a reporting database such as our Patient Level Costing app in QlikView. Reloads of any new analysis/reports should be easily and quickly undertaken.

These data flows must be automated if the calculation is to be updated frequently; otherwise the task becomes unnecessarily burdensome.

In some of our NHS clients this takes less than a day in total, once the necessary data is available.

This screenshot illustrates a series of data processing routines – under the direct control of the PLICS team – which automate the update of a costing model and is based on Prodacapo’s ETL tool, Prodacapo Connect, which is used to import data into the costing model and match operational data to patients.


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Challenge 2: The model must use dynamic drivers.

The costing model should include as many “dynamic cost drivers” as possible. A dynamic cost driver is one where the cost allocation is based on a dynamic measure of operational performance rather than a static cost allocation. These allocations are typically related to cost drivers such as:

• # of pathology tests of a particular type.

• # of patients admitted to a particular ward.

• # of radiology scans of a particular type.

• # of minutes of preparation, knife-‐time and recovery time in a particular theatre.

The use of such dynamic cost drivers means that the greater the volume of a cost driver, the greater the cost traced to that patient and vice versa. Their use also means that it is much easier in a Patient Level Costing model to update the allocation of costs based on such cost drivers compared to a static allocation of costs.

For this reason, it is important to avoid the static allocation of any resource cost, such as a fixed allocation of resources between two activities on a 20/80% basis according to data sampled last year.

A Time-‐Driven costing approach is much better, as the operational data of the hospital is treated as the “dynamic driver” so that the allocation of all personnel costs is updated correctly when the unit activity time and production volumes are updated.

If cost allocations are based on fixed percentages it is difficult to update these more frequently than annually, at best, and this usually ends in the costing results being seen as just an average, out-‐dated and increasingly irrelevant to clinicians and managers.

We recognize it is possible to create an automated update of such data via a time recording system that provides accurate times for each treatment. However, this can be seen as a burdensome and perhaps expensive approach that often delivers spurious accuracy and is of questionable value.

We therefore recommend that priority be given to ensuring that all operational and transactional data (e.g. unit times and volumes) is fully up to date and that this be used as a basis for as many cost allocations in the costing model as possible.

Challenge 3: Procedures need to be developed to rapidly close the reporting of production data each period.

This can be a challenge particularly where it takes many weeks to establish final clinical codes for the work done in the period. For financial results there are usually well-‐established rules and procedures that govern every month-‐end close. However, activity data is often fully closed only once a year in order to establish a correct “work-‐in-‐progress” valuation, and, where needed, corrections are made but these are often not seen as time sensitive and are often undertaken well after the year-‐end.

However, for costs to be correct it is essential to match the costs of the period with the operational activity of the same period. This means you will need to ensure that the data in operational systems are closed with the same frequency as your financial accounts.

This allows the costs of treatment incurred over a number of accounting/reporting periods to be correctly costed and allocated to patient episodes, particularly where they span multiple periods.


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Accessible results

To understand your Patient Level Costs, see their relevance and use them to inform your decision-‐making and drive performance improvement, the result must be readily available and easy to access.

Clinicians and divisional managers often have different management information needs from those of divisional accountants. While the latter need to be able to twist and turn all the figures at will, our experience is that the former prefer to have the most relevant information handy in a standardised format that they can readily relate to and that is specifically focused on their areas of responsibility. If operations managers do need more information and deeper analyses, they can always turn to their divisional accountant colleagues.

To this end we have developed an advanced Patient Level Costing application in QlikView (see screenshots) that is very intuitive and flexible and is intended for use primarily by the finance community.

However, this can readily be tailored to meet the more specific needs of divisional managers and clinicians as is illustrated below where patient outcome and efficiency data have been integrated with Patient Level Cost information.

That such information is useful to clinicians and operational managers alike is reflected in the following comment:

“It is a very versatile system and the clinicians will like it” – Elaine Griffiths, Consultant Cardiothoracic Surgeon, Liverpool Heart and Chest Hospital NHS Foundation Trust


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Concluding comments

For as long as costing is seen as merely a means of spreading costs to inform tariff setting, it will have little value to clinicians and divisional managers.

However, if a Patient Level Costing system can reflect the reality of day-‐to-‐day activities in the delivery of patient care, as is described in this white paper, then it has the potential to bring real meaning to the world of cost management and benchmarking, whilst engaging clinicians and operational managers in a way that will surprise and excite many and help them to improve performance and reduce clinical variability.

To find out more about our work with Patient Level Costing, please call Sharon Clark on 0207 323 5033, or email [email protected]

Bellis-‐Jones Hill & Prodacapo Ltd 25 Watling Street London EC4M 9BR T +44(0)207 3235 033 F +44(0)8700 516 901 E [email protected] www.bellisjoneshill.com

patient level costing to performance management

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