Many healthcare organizations use the ratio of costs to charges to calculate cost and profitability when making decisions. This methodology of determining costs, called RCC costing, is inarguably a quick and easy method to determine costs. Proponents of this approach stress RCC costing provides reasonable results with very little effort.
But Are the Costs Acceptably Accurate?
KREG set out to address this question. What we did is take several instances where KREG had assisted in the development of unit costs for clients using our RVU based approach. We then compared the per unit results from KREG’s methodology to the results obtained from a strict application of RCC costs.
The Results of Our Analysis Are Stunning.
There are huge variations between RCC costs and RVU costs everywhere except one small hospital and a stand alone ASC unit. Six out of 10 charge items have RCC costs that are within a range of 60% (plus/minus 30%) of the RVU based costs. If your contractuals are plus/minus 30% is that acceptable? In fact, in the study we found many items were over 1,000% off. Unfortunately since there is simply no consistent underlying relationship between costs and charges, you can’t reliably use RCCs to determine charge item costs.
What’s a Healthcare Organization to Do?
As mentioned in a recent HFM article “as hospitals move toward pay-for-performance and other quality-based payments systems, it is essential they have access to accurate, reliable and actionable cost accounting information”. We know this should be the goal of every healthcare organization in the country, but how you actually achieve it is the problem. Each organization has different priorities, IT infrastructure, staffing and internal accounting limitations that impact the development of accurate and defensible costs for 100% of the items in their charge masters.
KREG’s “Reality Based Cost Accounting Approach”.
Our clients develop organizational specific RVUs and update their costs quarterly, semi-annually or annually. We have clients ranging in size from multi-hospital systems to critical access hospitals. We have clients that feed the cost accounting data into our Decision Support Reporting system to then analyze the profitability of product lines, physicians and contracts and others feeding the costs into their data repositories. The bottom line is KREG will help you customize the system and the process based on the realities your organization faces. We can even outsource the entire process for you.
You Can’t Manage What You Don’t Measure.
The reality is you can't manage what you don't measure. It is an old management adage that is just as applicable today. You can't manage for improvement if you don't measure to see what’s getting better and what isn't. Click here for a PDF copy of our RCC analysis.