Hospice trends: Controlling costs without violating hospice tenets

Here’s how to get a handle on your costs

By Eric Resultan
Editor, Hospice Management Advisor

Our households are prime examples of nonprofit organizations. Right? Bear with me here for a minute. We raise money through revenue from work in hopes of earning enough to cover our costs. Surplus — if there is any — is reinvested in family programs, such as savings, clothing, cars, etc. Operating this venture without some knowledge of how money is being spent is foolhardy and will likely lead to financial heartburn, or worse.

If you wouldn’t run your family finances in a cavalier manner, then why would you run a hospice that way?

The point is this: Hospices must take as much care in managing their costs as they do in caring for their patients. Cost and quality are not mutually exclusive.

"We have to be good stewards of our resources," says David English, chief executive officer of The Hospices of the National Capital Region in Washington, DC.

From a strategic standpoint, health care businesses generally have three ways to improve their bottom line: raise prices, increase patient volume, or lower costs. For hospices, raising price is not an option, but patient volume and cost management are amenable to change. Cost is the area over which providers have the most control. The best way to manage costs is to identify processes and to improve on them rather than simply cutting positions or programs to reduce costs.

Here are some steps to follow as you try to improve your organization’s cost management and cost accounting:

Management must commit to better cost control.

Before activities-based cost (ABC) accounting can be implemented, there must be management commitment to the process. This must occur at the highest level of the organization. Without leadership buy-in, it will be difficult to justify the time spent scrutinizing activities. Further, it will be difficult to make the changes that ABC will reveal to be necessary.

Identify activities and resources.

Determine what is involved in a process. For example, a home visit encompasses a number of activities and resources, such as nursing, travel, and medical equipment. In general, you’ll need to identify resources—the pool of costs that make up activities. This requires going back to staff or department heads and conducting interviews to find out how employees fill their days.

Follow these guidelines when identifying resources:

  • Focus on the most expensive products. Trace these expensive products and service lines to diagnoses or episodes of care.
  • Focus on resources that have significantly varied rates of consumption by product and product type. For example, therapy is a resource that varies from one diagnosis to the next or from one episode of care to the next.
  • Focus on resources that have demand patterns that don’t correlate to traditional allocation measures, such as direct labor, documentation, and billing. In other words, examine resources needed to treat a diagnosis or episode of care that are not traditionally measured by current cost-accounting methods.

There are lots of ways to get this information. The most effective, you may find, is simply to ask your staff. Identifying costs enables you to compile an activity dictionary, an organization-wide document that defines each activity. People in different positions often perform similar activities and refer to them by different names. The dictionary ensures that when you assign costs to these activities, everyone in the organization will have a clear understanding of what these costs represent.

Assign costs.

This is a simple concept with complex hurdles. Much of the cost information you’ll need can be found in employees’ salaries and benefits. Beyond that, you’ll need to determine other cost items, such as medical equipment, drugs, office space, and whatever other costs your organization incurs. Each of these costs will play a role in one or all of the various processes a provider performs. The complexity of the exercise lies in segmenting these costs, such as determining how much of a nurse’s salary and benefits should be assigned to a visit or documentation.

In assigning costs under ABC, providers will have to abandon the notions of direct costs and indirect costs. ABC holds that all costs are indirect. For instance, nursing costs are traditionally seen as direct costs. ABC, however, says nursing costs can be divided among several activities — patient care, documentation, and travel, to name a few. When assigning costs, providers will find additional costs that they had not associated with patient care in the past, such as administration and billing. While ABC is a complex exercise in costing, providers should not get hung up on getting costs down to the last penny. Attempting to be too precise will only bog the process down and require more resources to complete.

Accept outcomes measurement.

Nurses tend to balk at the idea of treating patients with specific outcome goals in mind. They often have difficulty looking at outcomes measurement in general terms. Pain management is a good example. With the variety of pain drugs available, finding the most cost-effective drug can be difficult. By measuring outcomes, a hospice can make sound clinical decisions that are financially valid, as well.

Change your mindset.

In the past, hospices paid little attention to cost. Services like nursing visits were ordered without consideration of their financial impact. To link the two data sets, an organization must be willing look at patients from a cost perspective as well.

Follow these 12 steps to change mindsets

Changing the hearts and minds of those dedicated solely to patient and family care is not easy. Hospices should employ the following 12 strategies to handle acceptance and mindset issues:

  1. Merge data with other key utilization and financial statistics for a balanced picture of the organization’s performance.
  2. Create or purchase tools to facilitate easy reporting of many different slices of data.
  3. When using outcome data for performance improvement, focus first on areas with significant variance from the norm and examine the process of care associated with these areas.
  4. Use data derived from outcome measurement for both marketing and performance improvement.
  5. You can manage what you measure. Hospice management should understand the different types of available outcome data and decide which outcomes they should track.
  6. Benchmark your data and other utilization and outcome information against other organizations to identify your agency’s strengths and opportunities for improvements.
  7. Systematically use information derived from benchmarking to identify best practices and devise strategies to improve overall organizational performance.
  8. Use outcomes and benchmarks to determine the optimal mix of resources necessary to achieve the desired outcome.
  9. The key to changing behavior is ongoing feedback. Regularly provide agency staff with outcome reports illustrating their performance.
  10. Involve staff in identifying opportunities for improvement by providing training on the use and interpretation of data.
  11. Welcome opportunities for staff to question the validity of information. Such behavior means they are engaged and paying attention.
  12. Agency leadership must view OASIS and other outcome information as more than just complying with a government mandate. View outcome information as a key strategic advantage.

Hospices that take outcomes measurement — both clinical and financial — beyond their government obligations will be more competitive. The organization that masters data collection and reporting will have a significant competitive advantage over those that simply collect hospice cost report data to fulfill Centers for Medicare & Medicaid Services requirements. More important, hospices with strong data collection and outcomes measurement will be the most efficient organizations in the industry.