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Expert details healthcare cost accounting for value-based care

A McKesson Corporation population health expert explains advanced cost accounting techniques for value-based care, alternative payment models and revenue optimization.

In the first part of a two-part Q&A, John Shewell, vice president, healthcare analytics for RelayHealth, part of McKesson Corporation's McKesson Technology Solutions (MTS) unit, provides expert advice on healthcare cost accounting for the value-based care era. In part two, Shewell touches on the challenges value-based reimbursement poses for small physician practices.

How can providers best do healthcare cost accounting to calculate the true cost of care?

John Shewell: True cost of care is actually a good place to start. If you go back to the world of fee-for-service, everything was essentially associated with a specific encounter. So somebody shows up to a hospital or shows up to an imaging center or what have you. There's an activity. There's a payment associated with it. And then there's typically a cost that gets associated and allocated with it. 

That's the financial model that decision support and financial decision support systems for healthcare have worked with probably since the mid-1980s. Largely, that model has not changed. I think we've gotten better at it. And the contracts and the revenue side have gotten more sophisticated.

There have been some enhancements to the process of healthcare cost accounting. But largely, it's been either activity-based or procedure-based -- costing that really looks at that cost allocated to the individual service or activity, and then that gets aggregated up to the patient. Patients get aggregated up to DRG (diagnosis related group), service lines, hospitals, health systems, whatever. A similar thing happens on the revenue side. There's always been a very tight tie between costs and revenue at that granular level.

What we're starting to see now with the advent of value-based care is new alternative payment models. Bundled payments are an example. Global payments are probably the most extreme example where there is no longer a direct association with the payment at the encounter level. But cost can be bundled up to higher than just the encounter level as well. So in a simple example like a bundle, you would typically get one payment for that bundle, and the provider that's responsible would then be responsible for any of the payments that happened outside of that.

John ShewellJohn Shewell

From a cost perspective, there is certainly still the element of traditional cost accounting, knowing how much the hip replacement costs, the implantable, and all that kind of stuff. But then there are also levels of administration that go above the individual encounter level. And that becomes even more prevalent when you get to the population level and when you manage risk.

When you're managing a population, a lot more of that cost gets bundled up in overall management. And to allocate that down to individual patients doesn't make sense. Because, if you're successful, a patient doesn't incur costs. So we need to rethink allocation of costs when we start thinking at larger aggregations.

The other thing that we need to be thinking about is the inclusion of internal and external costs. So there are the cost of services that we do within an organization, and the cost of the stents and this, that and the other thing. The thing that we need to take into account as we get to these higher levels of payment is the external costs, so the patients that you have financial responsibility for but go outside of your network for care, and that typically is represented through paid claims. There's typically a lag or a delay.

How can organizations model for populations before they take on risk-based contracts, such as Medicare Advantage and other alternative payment programs?

Shewell: To model the costs, to have a full picture of the costs, you need to have some understanding of the out-of-network activity and claims. Then it's a matter of taking and essentially weeding out your internal costs, your internal activity and then substituting the external costs.

Going forward, you need to get to more sophisticated tools like risk stratification tools, which really help you identify who are the potentially high-cost patients that you're going have in the coming year. And that can help to actually build out your models as well.

The other thing to keep in mind is that a lot of organizations have not really been keeping up with all the ancillary costs. Most hospitals today, or health systems, have some form of cost accounting system. Whether they're keeping it up or not, that's to be seen. But many fewer have actually cost physician practices in the physician's organization, and even fewer have [accounted for costs] in the home care organizations and the other components of the health systems they own.

Editor's note: In June, McKesson and Change Healthcare announced the formation of a new company that combines most of MTS' healthIT systems, including RelayHealth Intelligence. The deal has not been finalized.

Next Steps

Improving home care IT

Value-based reimbursement has not quite arrived yet

Big data, analytics and population health

This was last published in October 2016

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