Understanding how healthcare providers can deal with Coronavirus-induced cost crisis – ET HealthWorld

I have worked as a cost strategist in the healthcare industry for over three decades now, and I can say from experience that it is not for the first time that the industry is facing this sudden surge in cost. Changes in policy framework and insurance packages also affected affect the healthcare cost in many countries.

But I have seen hospitals employing scientific cost management methods to weather the crisis without comprising on the quality of care. But every time there is an escalation of cost for whatever reasons, a reanalysis and recalibration of cost help.

I feel that it is possible to recover from this severe blow and mitigate the financial and operational impacts of COVID-19. Healthcare providers need to understand that they have to live with Covid for a longer period than they had initially thought. So, it is necessary that they quantify the damage as soon as possible and come up with a strategy to remain profitable and cost-effective for their patients. Scientific cost management is the key to that.

As the first step, hospitals have to take a closer look at each and every cost element. Generally, supply chain, inventory management, manpower cost constitute over 50% of a hospital’s running expenditure. The rest include operations, marketing and finance cost, which, needs to be modified as per performance management structure.

All the costs and processes should go through four phases: Define, Evaluate, Analyze and Redefine. A perfect blend of suitable analytical skills and costing techniques are required to achieve that. Some of the costing methodologies hospitals can adopt include:

RVUs Costing: Relative value unit (RVU) cost accounting, which uses the resource-based relative value scale (RBRVS), considers fee schedules, the profitability of third-party payer reimbursement, a floor capitation rate, and capitation payments. The analysis of this information can help the hospital administration to manage the cost of providing services, set more realistic fees, and negotiate more profitable contracts. This is commonly used in medical reimbursement in the United States.

Kaizen Costing: Kaizen is a Japanese word, which means continuous improvement. Kaizen Costing does not hold any reference from the past cost data. It is a way to evaluate the cost of each activity as a new process such as the cost of the supply chain, administration, procurement, inventory and transportation, etc. It regulates all the costs incurred, including the cost of machinery, tools, manpower, and so on. This will give the operations managers a new perspective on the realignment of their resources and assigning the cost targets.

Standard Costing: In this method, we freeze the standards for certain processes and costs as per the industry standards/ expert opinions / past performance. The variation is quantified and analyzed with reason. A standard costing approach may be used based on two sets of standards: a standard cost profile and a standard treatment protocol.

Activity-Based Costing: My favourite method of cost accounting, this technique combines almost all the parameters, quantifying each and every activity/process/resource of the hospital towards the patient and helps identify the true cost of efforts put into treating a particular patient. Hospital management gets to know the comparison and deviation in cost of treating a patient, which may depend upon the nature of a procedure, the treating doctor, the concerned department, the location of the patient, and so on. This is a scientific method, which makes the strategic decisions for resource allocations are quite easy.

Well, a healthcare provider may choose any method of cost-reduction, but it is important that every strategy and decision is data-driven and most importantly, continuous. Second, under no circumstances should the strategy compromise with the quality of care provided to the patients.

Personally, I use a blend of these cost strategies. And I also feel that Artificial Intelligence (AI), which can be a critical engine behind analytics, insights, and the decision-making process, can be applied to understand treatment variability and cost modelling. AI has shown a lot of potential to create savings by eliminating waste in the system. Studies show that AI can lead to as much as 25 per cent reduction in cost.

So, I believe that that instead of being bogged down healthcare providers should treat the coronavirus crisis to reimagine their cost continuum.

Latesh Sen, Co-founder and Group CFO, Medi Q Healthcare Group

(DISCLAIMER: The views expressed are solely of the author and ETHealthworld.com does not necessarily subscribe to it. ETHealthworld.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.)