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How TDABC is the catalyst for reforming Health Care Organizations

How TDABC is the catalyst for reforming Health Care Organizations

Health care industry costs are quickly becoming too high for any one provider, payer, or especially, patient to maintain. It is suggested that more than $1 trillion is being squandered [within healthcare][1]. How did this problem come into play and how can we fix it?

As Michael Porter states in his book, Redefining Health Care, the core problem is the zero-sum competition design. This inefficient structure is failing because it is not based around value where value is defined as the ‘health outcome achieved per dollar expended. To reform this, we should implement a value-based competition model which will rely on and revolve around results. These results come through Time-Driven Activity Based Costing, or TDABC; a platform where healthcare processes and financial analysts come into play.

Why should our HCO shift how we are currently operating and take the time to implement TDABC?

The answer is because it is through this technique, and only through this technique, the healthcare personnel themselves estimate their resource demands. TDABC enables an organization to better utilize their resources & maximize efficiency while delivering value to the patient at the same time. This is done by measuring two parameters per resource, the cost per time unit of supplying and the unit times of capacity. Each resource may be imposed by the transaction, product, or customer.

The methodology of Time-Driven Activity Based Costing is derived from the traditional Activity Based Costing (ABC) model. The ABC model was updated to fit into the modern business world which led to the introduction of TDABC. Below is a visual representation of the main components and structure of TDABC, along with how the model differs from the ABC model.[2].

Activity Based Costing (ABC) Time-Driven Activity Based Costing (TDABC)
*Assumes 100% Theoretical Full Capacity (FC)* *Assumes 80-85% Practical Capacity (PC)*
Per Activity (& Quantity of each): Per Activity (& Quantity of each):
Percentage of Time Spent
• Collected through employee surveys and based on FC
Unit Times
• Collected through interviews w/ employees or direct observation
Assigned Cost
• Given, based on Percentage of Time Spent
Cost per Time Unit of Capacity
• [Total Time Unit (based on PC) / Cost of Supplying Capacity]
Cost-Driver Rate
• Based on each activity’s consumption of resource expense
Cost-Driver Rate
• Found by multiplying Cost per Unit Time of Capacity by the Unit Times

The next question that may be on a healthcare organization’s mind is, has this been proven to work?

Who has done this before, when was this, and what were the outcomes of that? Schön Klinik was one of the first private hospitals in Germany to conduct TDABC in 2011.[3]. They wanted to know the difference between their facility and United States hospitals, in terms of how they were both operating and delivering value. As was made apparent through the experiment: Schön Klinik facilities were shown to be highly efficient with long lengths of stay, while American hospitals were high in expenses with short lengths of stay. Their story will be continued further below.

Seven process steps must occur to implement TDABC [4].

These were developed through Harvard Business School, with the above mentioned author Michael Porter & Robert Kaplan. These seven steps compile the simple process to implement TDABC within a healthcare organization.seven-steps

Step Two is critical as one must define the Care Delivery Value Chain, which includes selecting a starting and stopping point for measurement purposes. Steps Three & Four are jointly what the clinicians and administrators provide, or also known as, the Quantity piece. Step Five is what the finance team provides, or, the Price piece. It encompasses all people, equipment, space, and consumables used during the Complete Care Cycle.

Lastly, Steps Six & Seven are merging the Q and P pieces to find overall costs, and later determining where current utilization is for both the time and cost of the inputs.[5].

Schön Klinik demonstrated these seven steps

Schön Klinik demonstrated these seven steps as they implemented TDABC. The facility itself is focused on mental health, neurological, and orthopedic conditions.

For the initial study they selected to focus on TKR (Total Knee Replacements). Orthopedics was the largest specialty there, with over 2,500 TKR and 3,250 THR (Hip Replacements) per year. They decided upon the CDVC (Care Delivery Value Chain) as being from (Point A) when a patient was admitted to (Point B) the time when the patient resumed a ‘baseline health status’ and level of functioning post-operation (3-12 months afterwards).

outcome-measeure

As they went through the third step of producing process maps it was important to know the current status, exactly as it was, and then they would be able to move forward from there. Therefore, doctors had no incentive to “subtract” time from steps in order to appear better than they were. It was also important to understand the deviations.

Why would someone with the same procedure require different resources and/or processes?

A few examples of this would be a patient who ended up needing a blood transfusion or a demographic difference (between an elderly and younger patient). Within this, they would state how long each step would take to conduct and eventually compiled all this process information into an Excel sheet. “Now the project team had direct data on preparation and turnover times of the room in addition to the surgical time.”

They received the time information by interviews with the doctors and other personnel involved within the process (not through a stopwatch as ABC promotes). While these interviews and mapping of processes were being conducted, the project team was also collecting the financial piece to complete Steps Five through Seven.

workflow

As a final result, Schön Klinik learned how they could better utilize their resources at a higher efficiency. “Deerberg realized immediately the important impact of these revised figures on Schön Klinik’s strategy and management of daily activities. The board had been reducing the capacity of some rehabilitation departments, in part, because they had appeared to be less profitable than acute care units.

The new calculations caused the board to recognize that rehabilitation facilities could be important profit contributors. There was also an opportunity to further improve by comparing their Total Knee Replacement structure to the U.S structure.

Overall, they both delivered comparable outcomes (in terms of value to the patient). However, Schön Klinik had a longer rehab time at a third of the cost. Some of the cost difference could be based on input price differences but most was based on the differences in the way care was structured and the personnel resources used to perform the same processes. The Schön team realized that, “such differences could never have been revealed with the traditional costing system (or ABC).[6].

In short, as Robert Kaplan states, TDABC offers a transparent, scalable methodology that is easy to implement and update. It provides owners and managers with meaningful cost and probability info, quickly and inexpensively.”[7]. This way we help the Department of Veterans Affairs (our test agent) manage their costs in the forms of process improvement and redesign & personnel and resource utilization.

References

[1]James, Brent C., MD, and Gregory P. Poulsen. “The Case for Capitation.”Harvard Business Review. Harvard Business School, 01 July 2016. Web. July 2016.
[2]Kaplan, Robert S., and Steven R. Anderson. “Time-Driven Activity-Based Costing.” Harvard Business Review. Harvard Business School, 01 Nov. 2004. Web. July 2016.
[3] Kaplan, Robert S., Mary L. Witkowski, and Jessica A. Hohman. “Schon Klinik: Measuring Cost and Value.” Schon Klinik: Measuring Cost and Value. Harvard Business Review, n.d. Web.
[4] HBS
[5] HBS
[6] Kaplan, Robert S., Mary L. Witkowski, and Jessica A. Hohman. “Schon Klinik: Measuring Cost and Value.” Schon Klinik: Measuring Cost and Value. Harvard Business Review, n.d. Web.
[7] Kaplan, Robert S., and Steven R. Anderson. “Time-Driven Activity-Based Costing.” Harvard Business Review. Harvard Business School, 01 Nov. 2004. Web. July 2016.
[8] Kaplan, Robert S., Mary L. Witkowski, and Jessica A. Hohman. “Schon Klinik: Measuring Cost and Value.” Schon Klinik: Measuring Cost and Value. Harvard Business Review, n.d. Web.
[9] Kaplan, Robert S., Mary L. Witkowski, and Jessica A. Hohman. “Schon Klinik: Measuring Cost and Value.” Schon Klinik: Measuring Cost and Value. Harvard Business Review, n.d. Web.

everis Health Consultant

Hi, I am Paige Hagstrom and I am a member of the everis Value Management team. I work as a Health consultant within that team and am currently located in Boston, MA. I am a graduate of the University of Notre Dame with a major in Economics.

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