Whatever direction reform takes over the next several years, healthcare organizations will remain under intense pressure to reduce costs and overhaul inefficiencies. Financial
pressures are coming from every area of healthcare: payers, the government and healthcare organizations competing for market share and doctors. The only way to sustain an organization in this financially charged environment is to tightly manage profitability, which cannot occur without understanding true costs and profit sources. Organizations that fail to recognize and meet this imperative will find it increasingly difficult to compete and may eventually have to close their doors.
The Root Problem: Understanding Costs
Although healthcare organizations have streamlined their processes in recent years, many hospitals and provider groups have yet to rigorously deploy methodologies like Six
Sigma and Lean. Nor have they adopted tools like process analysis and activity-based costing. With the demand for financial results increasing, it is time for cost and
performance measurement to move to the very top of management’s agenda.
To obrtain a clearer picture of costs, you must be able to answer key questions:
• What drives profitability—by case, service line, etc.?
• How do contractual payer prices compare to costs?
• How much capacity is being used?
• Are equipment investments justified?
• What areas should be kept in-house?
• What improvement initiatives would improve results?
Evaluating process and resources
To stay competitive in today’s environment, healthcare organizations need to streamline inefficient processes and understand the types and amounts of resources required. This can only be achieved through cost transparency.
Amazingly, most healthcare entities still use primitive standard costing tools that date back to an assembly line model - tools long abandoned by the manufacturing industry that created them. The result is rudimentary cost allocation that fails to match resources and related costs to their services. This makes it impossible to arrive at informed decisions that will improve financial results.
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