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Hospital Cost Accounting Tool to Cut Costs, Boost Value-Based Care

HFMA and Strata are making a hospital cost accounting roadmap available to all providers to help organizations reduce spending and transition to value-based care.

Hospital cost accounting and value-based care

Source: Getty Images

By Jacqueline LaPointe

- The Healthcare Financial Management Association (HFMA) is making a hospital cost accounting roadmap available to all providers looking to reduce variation, waste, and inefficiency.

The leading healthcare finance group recently partnered with Strata Decision Technology to launch the HFMA-Strata L7 Cost Accounting Adoption Model (L7 Model). In a joint announcement, the organizations called the L7 Model, “healthcare’s first roadmap to help healthcare providers access accurate cost data via the use of advanced cost accounting.”

HFMA and Strata first designed the hospital cost accounting model for 200 major healthcare delivery systems. However, the model is now being open-sourced, making it available to all healthcare providers at no charge.

“As hospitals and healthcare delivery systems move toward value-based payment structures, they will need to leverage cost accounting in a much more strategic fashion,” HFMA President and CEO Joseph J. Fifer, FHFMA, CPA, stated in the announcement. “To effectively improve their cost accounting capabilities in a rapidly changing and complex setting, health systems need a roadmap to ensure their approach meets their strategic needs.” 

Providers increasingly need to understand costs of care as the rate of healthcare spending continues to grow. HFMA and Strata pointed out that the US spends an estimated $3.6 trillion, or $10,000 per individual, on healthcare every year. The level of spending is twice the average of similar countries.

However, recent research shows providers do not understand costs of care. A recent Strata survey showed 90 percent of care delivery providers did not know the cost of care they provided.

Furthermore, less than ten percent of hospitals and health systems reported having advanced cost accounting systems that could deliver accurate cost data from across the care continuum.

The need to understand healthcare costs is increasing, especially as healthcare stakeholders look to dramatically reduce spending through value-based payment.

“Traditional healthcare cost accounting methods were not designed for value-based payment,” the organizations explained in the announcement. “The lack of trusted cost information is driving the rapid adoption of more advanced cost accounting applications that make cost data more accurate, accessible, and actionable. The ability to drill down into the costs associated with bundled services, specific patient groups, or practice patterns can help decision makers better understand variation and costs related to variation—and make changes that will improve value.”

To meet the demand for more advanced hospital cost accounting tools, HFMA and Strata developed the L7 model.

The organizations intend for the model to provide a new industry standard for hospitals and health systems much like the HIMSS Electronic Medical Record Adoption Model (EMRAM) acted as a roadmap for better clinical data access.

The L7 Model will allow hospitals to evaluate their current cost accounting methodology, assess their cost data accuracy, and benchmark their capabilities against their peers. The model will also offer a roadmap for the actions that hospitals need to take to ensure their cost accounting strategy meets their strategic needs.

The model has seven stages, with the base of the model representing healthcare organizations with basic cost accounting tools that use ratio of cost-to-charge-based methods and Level 7 representing the most sophisticated cost accounting strategy. Hospitals at Level 7 use time-driven costing for all clinical areas and engage clinicians with cost data to drive performance improvement.

“Each level of the cost accounting model builds upon the prior level, deploying more extensive data sets and dynamic methodologies to help an organization increase the extensibility and accuracy of their cost data,” HFMA and Strata explained. “As an organization moves up to the next level, more sophisticated costing processes and workflows are deployed, generating more meaningful and accurate output. The model also assesses current gaps in source system data to help standardize and automate data capture.”

Providers can download the L7 Model here to assess their current cost accounting position. They can also attend a webinar on Tuesday, Feb. 26 at 1:30 PM CST to review the model and explore best practices.

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