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Editorial Commentary: The Value of Time-Driven, Activity-Based Costing in Health Care Delivery

      Abstract

      Time-driven activity-based costing (TDABC) provides a powerful approach to more targeted cost accounting based on resources actually used by patients during a cycle of care. Since its introduction in 2004 by Kaplan and Anderson, TDABC has gained increasing popularity in defining the actual costs of care for various orthopaedic processes and pathways. TDABC may demonstrate lower costs of care compared with traditional cost accounting methods, including ratio of costs to charges and relative value units. Weaknesses of traditional methods include approaching costs through the lens of charges, revenue, processes and procedures, adopting a “top-down” approach, and potentially overestimating costs. In contrast, TDABC builds costs from the individual level, taking a front-line, condition-focused, and patient-centered view. Existing organizational decision-making is oriented around revenue metrics (relative value units and ratio of costs to charges) rather than cost metrics, yet alternative payment models are shifting toward fixed revenues for certain conditions or procedures. The variability, including both financial upside and loss, will primarily be a function of the cost of care—a number that is profoundly opaque in most health care settings. We view TDABC as an approach that sheds light on variation, offers a more granular differentiation of costs compared with traditional approaches, mitigates risk, and sparks opportunities for increasing operational efficiency and waste reduction. The goal is to identify and provide the greatest-value orthopaedic care.
      Time-driven activity based costing (TDABC)—designed by Kaplan and Anderson in 2004—aims to provide a more precise estimate of the true cost of care by focusing on resources actually experienced by patients over a cycle of care.
      • Kaplan R.S.
      • Anderson S.R.
      Time-driven activity-based costing.
      We reflect on a systematic review, “Time-Driven Activity-Based Costing Provides a Lower and More Accurate Assessment of Costs in the Field of Orthopaedic Surgery as Compared to Traditional Accounting Methods,” by Koolmees, Bernstein, and Makhni, that examines the implementation of TDABC in orthopaedic surgery and compares this method with traditional cost accounting while considering how this approach challenges the status quo, enables innovation related to costs fit for value, and promises to accelerate the transition toward value-based orthopaedic care.
      • Koolmees D.
      • Bernstein D.N.
      • Makhni E.C.
      Time-driven activity-based costing provides a lower and more accurate assessment of costs in the field of orthopaedic surgery as compared to traditional accounting methods.

      Challenging the Status Quo

      This review highlights the benefits of TDABC and the use of costs for supplied resources (generating a cost per minute of all aspects of a health care professional’s time) and practical capacity (actual productive time spent on each capacity-supplying resource) in providing more granular, targeted, and accurate costs in various real-world orthopaedic settings.
      • Koolmees D.
      • Bernstein D.N.
      • Makhni E.C.
      Time-driven activity-based costing provides a lower and more accurate assessment of costs in the field of orthopaedic surgery as compared to traditional accounting methods.
      ,
      • Etges APB da S.
      • Ruschel K.B.
      • Polanczyk C.A.
      • Urman R.D.
      Advances in value-based healthcare by the application of time-driven activity-based costing for inpatient management: A systematic review.
      Unsurprisingly, some studies selected in this review demonstrate lower costs of care using TDABC compared with traditional cost accounting methods, including ratio of costs to charges (RCC) and relative value units (RVU). The review underlines the weaknesses of these methods, which approach costs, to varying extents, through the lens of charges, revenue, processes, and procedures, adopting a “top-down” approach, and in doing so potentially overestimating total costs. In contrast, TDABC builds costs around the level of the individual level, taking a more front-line, and patient-centered view. Most organizations still continue to play it safe when it comes to cost accounting, sticking to legacy approaches (particularly RCC and RVUs) that are familiar—but there is scope for improvement. Notably, there is substantial variability in the cost of care for common orthopaedic conditions such as osteoarthritis, yet these differences are poorly understood both at an individual physician level as well as an organizational level. Existing organizational decision-making is oriented around revenue metrics (RVUs and RCC) rather than cost metrics, yet alternative payment models are shifting toward fixed revenues for certain conditions or procedures. The variability, including both financial upside and loss, will primarily be a function of the cost of care—a number that is profoundly opaque in most health care settings. We view TDABC as an approach that sheds light on variation, offers a more granular differentiation of costs compared with traditional approaches, mitigates risk, sparks opportunities for increasing operational efficiency and waste reduction, and through challenging the status quo provides the basic premise of value-based bundling, episode, and reference pricing.

      Unlocking Value Through Agile Innovation

      As health care systems increasingly shift the spotlight toward value and transitioning from fee-for-service infrastructures, they also depend on tools to reach this goal.
      • Etges APB da S.
      • Polanczyk C.A.
      • Urman R.D.
      A standardized framework to evaluate the quality of studies using TDABC in healthcare: The TDABC in Healthcare Consortium Consensus Statement.
      In our experience, TDABC serves as an enabler for the cost component of the value equation (the denominator), just as patient-reported outcome measures have revolutionized the assessment of outcomes that benefit patients (the numerator).
      • Porter M.E.
      • Teisberg E.O.
      Redefining health care: creating value-based competition on results.
      We consider TDABC a type of “agile innovation”—“an iterative, incremental method of designing and building activities that aim to provide new product or service development in a highly flexible and interactive manner.”
      The Secret History of Agile Innovation [Internet].
      This approach aligns with the core values of “agile innovation,” including the need to focus on individuals and complex interactions over processes and tools, the versatility to build in modularity through iterative development of constituent components, the preference for working methods over comprehensive documentation, the responsiveness to change, and the need for multidisciplinary collaboration with close customer (patient and team) involvement.
      Embracing Agile [Internet].
      TDABC provides a more accurate definition of cost based on human resources as well as various structural and functional drivers through a standardized, repeatable process. Numerous TDABC studies in orthopaedics focus on lower-extremity arthroplasty, highlighting implants as the major cost driver, or the cost effectiveness of one procedure over another.
      • Koolmees D.
      • Bernstein D.N.
      • Makhni E.C.
      Time-driven activity-based costing provides a lower and more accurate assessment of costs in the field of orthopaedic surgery as compared to traditional accounting methods.
      Aside from procedural-level insights, which are well discussed in the review, TDABC is versatile enough to provide clinical insights, involving the evaluation of pathways, teams, and patients of different medical complexities across different subspecialties and conditions.
      • Blaschke B.L.
      • Parikh H.R.
      • Vang S.X.
      • Cunningham B.P.
      Time-driven activity-based costing: A better way to understand the cost of caring for hip fractures.
      Furthermore, it can provide transparency around cost implications of process variations, including the addition of digital health tools and use of external services.
      • Koolmees D.
      • Bernstein D.N.
      • Makhni E.C.
      Time-driven activity-based costing provides a lower and more accurate assessment of costs in the field of orthopaedic surgery as compared to traditional accounting methods.
      The review by Koolmees et al., along with several others, highlights variation in costs and thus the potential to inform clinicians and administrators ways to more effectively optimize resource allocation and waste reduction.
      • Etges APB da S.
      • Polanczyk C.A.
      • Urman R.D.
      A standardized framework to evaluate the quality of studies using TDABC in healthcare: The TDABC in Healthcare Consortium Consensus Statement.
      ,
      • Pathak S.
      • Snyder D.
      • Kroshus T.
      • et al.
      What are the uses and limitations of time-driven activity-based costing in total joint replacement?.
      TDABC can indicate whether variability comes from the cost level, e.g., labor cost or variably priced and billed inputs such as implants, or instead lie at the charge level. Further, in relation to value-based bundled payment models, TDABC may indicate whether professional fees of clinicians entitled to separate payments can or cannot be carved out and billed separately while preserving the core savings of the payment model. The data intelligence provided by TDABC presents valuable metrics for configuring alternative payment models, including risk stratification and steerage around gainsharing.
      • Pathak S.
      • Snyder D.
      • Kroshus T.
      • et al.
      What are the uses and limitations of time-driven activity-based costing in total joint replacement?.
      ,
      • Keswani A.H.
      • Snyder D.J.
      • Ahn A.
      • Austin D.C.
      • Jayakumar P.
      • Grauer J.N.
      • et al.
      Metric selection, metric targets, and risk adjustment should be considered in the design of gainsharing models for bundled payment programs in total joint arthroplasty.
      In Pathak et al.,
      • Pathak S.
      • Snyder D.
      • Kroshus T.
      • et al.
      What are the uses and limitations of time-driven activity-based costing in total joint replacement?.
      we underline the substantial variation in TDABC methodology itself, adherence to the 7 steps of TDABC, data collection, and the incorporation of indirect costs into the TDABC calculation alongside notable differences in which direct and indirect expenses were included. Not surprisingly a wide range of cost estimates unfolded for total joint arthroplasty, from USD 7081 to USD 29,557, with variation driven by the time frame of the joint replacement and whether implant costs were included in the cost calculation.
      TDABC also has the capability of tracking change—a valuable feature when evaluating costs within a changing health care environment. This is highlighted in the review in a study tracking change in costs following implementation of a new electronic health record system.
      • Koolmees D.
      • Bernstein D.N.
      • Makhni E.C.
      Time-driven activity-based costing provides a lower and more accurate assessment of costs in the field of orthopaedic surgery as compared to traditional accounting methods.
      As technologies and third-party solutions increasingly become embedded into orthopaedic care pathways, dynamic accounting for change in activity and associated costs becomes crucial. This is also highly relevant when it comes to evolving team configurations in integrated care.
      • Jayakumar P.
      • Moore M.L.G.
      • Bozic K.J.
      Team approach: A multidisciplinary approach to the management of hip and knee osteoarthritis.
      Without a robust understanding of underlying costs, organizations are ill-equipped to operate under any risk-sharing reimbursement model. Organizations without this information may find themselves on the back foot when it comes to playing a role in payment reforms. We believe that organizations without the cost knowledge derived from patient-focused cost accounting methods, such as TDABC, may be at a competitive disadvantage in the marketplace, unable to price services accurately, or strategically allocate resources toward high return-on-investment priorities. The business intelligence provided by TDABC can help level the playing field for payers and providers and re-establish the balance in cases of information asymmetry when it comes to different stakeholders considering the drivers of costs and cost-reimbursement margins.

      Shifting from ‘0 to 1 to n’

      Peter Thiel and Blake Masters wrote in their New York Times Bestseller Zero to One: Notes on Startups, or How to Build the Future that when you do something new and introduce an innovation, you go from ‘0 to 1’—but adding more of something familiar and doing what someone else already knows how to do takes the world from 1 to n. While some institutions may find themselves shifting from ‘0 to 1’ in applying TDABC in novel contexts and settings, others may be setting their sights on transitioning from ‘1 to n’ in scaling this methodology across their enterprise or network. Either way, TDABC for now remains firmly housed in the academic setting. We recognize some critical considerations and bridges to cross in shifting this method from research bench to real-world policy and practice change.
      First, we believe there is a fundamental requirement to understand institutional needs and establish a vision and mission around the cost accounting paradigm. While the review highlights institution-specific initiatives, the selected studies also signal the interests and aspirations of systems with clinical, administrative, and academic champions driving the need for more accurate cost accounting. Perhaps this requires further (ideally multicenter) work in consolidating the differential costs comparing TDABC to traditional cost accounting, to prove a point to those resistant to change. Based on our interactions with multiple stakeholders at the national level, there is a willingness to seek better methods when it comes to establishing costs fit for value-based care.
      Critical Considerations for Condition-Based Alternative Payment Models: A Multi-stakeholder Perspective | Health Affairs [Internet].
      Second, standardization of TDABC and TDABC in orthopaedics is critical. Etges et al.
      • Etges APB da S.
      • Polanczyk C.A.
      • Urman R.D.
      A standardized framework to evaluate the quality of studies using TDABC in healthcare: The TDABC in Healthcare Consortium Consensus Statement.
      have recently released a “TDABC in Health Care” consortium consensus statement that introduces a standardized framework upon which to evaluate the quality of studies and aide future development and reporting of TDABC projects to encourage reproducibility. Perhaps this networking of TDABC researchers marks a movement toward more widespread adoption and scaling of cost-reduction strategies.
      Third, we believe there is a case of misperception around precision when it comes to TDABC in the field of orthopaedics. Kaplan and Anderson
      • Kaplan R.S.
      • Anderson S.R.
      Time-driven activity-based costing.
      in their original 2004 work stated “…precision is not critical; rough accuracy is sufficient.” In other words, perfect is often the enemy of good when it comes to TDABC. While it may be a case of art rather than science in striking the right balance when it comes to the depth and detail of cost components, we reflect back on our first and second points in defining needs and following standardized recommendations.
      Fourth, another common misperception in our view relates to resource burden for performing TDABC. While some consider TDABC to be time- and resource-intensive, in our institutional experience, we conducted TDABC using a lean approach involving a small team (using observations, interviews, pre-existing datasets), a rapid but robust iterative and collaborative process, and freely available resources (online process mapping tools, etc.). Pathway mapping and data gathering are seen as complex and labor-intensive—they don’t have to be. Clearly, further education and training around user-friendly approaches to TDABC are needed without compromising methodologic integrity. The authors of the review allude to a lack of general appreciation for the potential impact of TDABC among the orthopaedic community and we would tend to agree.
      Fifth, indirect costs appear to be the Achilles heel of many TDABC studies, and achieving the goal of comprehensive and accurate total cost accounting requires consideration and critical appraisal of such structural (facility) and administrative components in the equation. Whether indirect costs are crucial for specific needs, it is important to assign the right level of value to this component and remain transparent in understanding and displaying what lies under the bonnet. As per the review, there is clearly a high level of variability around inclusion of indirect costs with a trend toward these elements being undervalued. Perhaps an optimal approach is a hybrid that involves a combination of “top-down” accounting, better geared toward encompassing indirect costs, with a “bottom-up” build, configured to more comprehensively account for direct costs.
      Finally, practical application of TDABC on-demand, in a coordinated and continuous fashion, will likely be dependent on the incorporation of various initiatives to facilitate this method: Simple rolling databases of salaries, benefits, time on/off for all clinicians; pathway and activity mapping as part of an institutional quality improvement strategy; financial modeling using TDABC methods; and even technology-enabled automated tracking of movement and activity of patients and professionals using Real-Time Locations Systems for a more automated way of defining costs at the individual pathways level on-demand.

      Conclusions

      Almost 17 years since its introduction, TDABC continues to garner interest among the orthopaedic community and beyond. While there have been early adopters of this method, TDABC still appears ahead of the innovation curve. In a climate of unprecedented economic burden placed on the health care system and growing interest in value-based health care, we believe the time is now for translating this powerful tool from the academic space toward the policy and practice arena. Health care systems should be seeking optimal models of cost accounting, as they are for advancing the measurement of outcomes benefiting patients, that are fit for value-based care in orthopaedics and beyond.

      Supplementary Data

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