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Activity-Based Costing and Management in a Hospital-Based GI Unit

2011; Elsevier BV; Volume: 9; Issue: 11 Linguagem: Inglês

10.1016/j.cgh.2011.08.010

1542-7714

Michael J. Goldberg, Lawrence R. Kosinski,

Medical Coding and Health Information

Over the last 2 decades, a number of attempts have been made to slow the rise in healthcare costs. Among them were Health Maintenance Organizations, which lowered costs through capitation. In most cases, this resulted in quality being sacrificed for cost and ultimately, many patients rejected the Health Maintenance Organization concept due to the lack of choice and access.1Feldstein P. Healthcare economics.6th ed. Thomas Delmoor Learning, Clifton Park, New York2005Google Scholar, 2Folland S. Goodman A. Stano M. et al.The economics of healthcare.5th ed. Prentice Hall, Upper Saddle River, NJ2007Google Scholar, 3Getzen T. Healthcare economics and financing. Wiley, Hoboken, NJ2007Google Scholar The economic downturn and the passage of the Affordable Care Act have again focused scrutiny on rising healthcare costs. In the next several years, the healthcare industry will be challenged to provide more care to more people with fewer resources.No matter which solutions are pursued, ie, bundled payments, episodes of care, accountable care organizations, or a return to capitation, it is important that quality not be sacrificed for cost. Most importantly, value must be provided to all stakeholders—patients, providers, and purchasers of care. In order to provide value, there must be a better understanding of costs. Importantly, decreases in costs must come from increases in efficiency and not decreases in quality.Activity-based costing (ABC) is a tool that was developed in the manufacturing sector in the 1970s and 1980s in an effort to improve efficiency and control cost.4Baker J. Activity-based costing and activity based management for healthcare. Aspen Publishers, Gaithersburg, MD1998Google Scholar, 5O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar This technique is based on the concept that the production of a product or the performance of a service consumes activities which then consume resources. ABC attempts to assign costs to each of these activities and/or resources so that total costs can be better understood and managed. It differs from traditional accounting in that it is based on the activities that drive costs. This allows one to manage processes by having a clearer understanding of what drives costs and how increases in efficiency affect costs. Many quality improvement techniques also break processes into discrete units. This is done to standardize processes, improve them, and eliminate unnecessary variability.Activity-based costing and process improvement techniques can be utilized together. This allows outcomes, ie, cost and quality, to then be simultaneously evaluated. Activity-based costing and management can be applied to the GI unit.4Baker J. Activity-based costing and activity based management for healthcare. Aspen Publishers, Gaithersburg, MD1998Google Scholar, 6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar, 7Canby J.V. Applying activity based costing to healthcare settings.Healthc Finan Manage. 1995; 49 (54–56): 50-52PubMed Google Scholar, 8Chan Y.L. Improving hospital accounting with activity-based costing.Health Care Manage Rev. 1993; 18 (77–77)PubMed Google Scholar, 9Ramsey R.H. Activity-based costing for hospitals.Hosp Health Serv Adm. 1994; 39: 385-396PubMed Google Scholar This report describes how this can be accomplished.The Activity MapThe ABC process starts by developing an activity map, which outlines the sequence of activities that are involved in the performance of a procedure.6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar, 7Canby J.V. Applying activity based costing to healthcare settings.Healthc Finan Manage. 1995; 49 (54–56): 50-52PubMed Google Scholar, 10Wendsheider W. Preiss P. Clinical pathways as a tool for process costing in cardiac surgery.Eur Surg. 2003; 35: 51-54Crossref Scopus (3) Google Scholar Figure 1 is an example of an activity map developed for an endoscopic procedure.Activity AnalysisNext, an activity analysis is performed to identify the resources used for each activity and then which cost pools are drawn from for each resource (Figure 2).6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar, 7Canby J.V. Applying activity based costing to healthcare settings.Healthc Finan Manage. 1995; 49 (54–56): 50-52PubMed Google ScholarFigure 2An activity analysis identifying resources that are necessary for an endoscopic procedure. This process assists in determining what cost pools will be used for each resource.View Large Image Figure ViewerDownload Hi-res image Download (PPT)Assigning Cost CategoriesOnce one has identified the resources utilized, we must then assign each resource to a cost category, ie, labor, materials, or general overhead. These categories will then be assigned further to either direct or indirect cost categories. The direct costs are those that are "directly" related to the performance of the service (nursing) as opposed to indirect costs (accounting) which have to be allocated to multiple services.These categories are shown in Table 1 (Cost Categories).Table 1Cost CategoriesComponent activityCategoryReferral and scheduling Scheduling podIndirect labor Office secretaryDirect labor Patient education—preprocedureDirect laborDay of procedure processing Patient registration—RNDirect labor IV insertionsDirect material IV tubingDirect material Nasal cannulaDirect material ECG leadsDirect materialProcedure NurseDirect labor TechnicianDirect labor Medication—demeralDirect material Medications—versedDirect material Medical malpracticeIndirect cost Equipment depreciationIndirect cost GI laboratory depreciationIndirect cost Laboratory supervisorDirect labor Hospital overheadIndirect cost Ancillary equipmentIndirect materialRecovery Food servicesIndirect labor NurseDirect laborScope cleaning TechnicianDirect labor MaterialsIndirect materialOverhead costs BillingIndirect laborECG, electrocardiogram; IV, intravenous; RN, registered nurse. Open table in a new tab Cost DriversNext the cost drivers for each resource and the number of resources utilized need to be determined. The annual quantity of the cost driver is estimated according to the nature of the cost driver. This may best be shown through some examples.Examples1Employee cost drivers: time2Material costs: number of items usedAfter this, the cost allocation rate which is the quotient of annual cost of a resource and the number of times the resource is used over the time period (annual quantity of cost driver) can be calculated. From the cost allocation rate, one can accurately determine the allocated activity cost by multiplying the cost allocation rate by the actual quantity of allocation base for that activity.10Wendsheider W. Preiss P. Clinical pathways as a tool for process costing in cardiac surgery.Eur Surg. 2003; 35: 51-54Crossref Scopus (3) Google Scholar, 11Ross M. Analyzing healthcare operations using ABC.J Health Care Finance. 2004; 30 (2004): 1-20PubMed Google Scholar This is shown in Supplementary Table 1.When utilizing activity-based costing it is important to identify the activities that generate significant costs. The triggers of these activities are the cost drivers. In designing this type of system one should try to keep things simple. The most important activities need to be picked up—but not each and every activity needs to be detailed, especially when those activities do not have a major impact on costs. Making the system too complex leads to ignoring the data generated by it. Too much detail leads to excessive expense in designing and maintaining the system.4Baker J. Activity-based costing and activity based management for healthcare. Aspen Publishers, Gaithersburg, MD1998Google Scholar, 6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar In using activity-based costing in the GI unit, cost drivers can be different depending on the unit. A unit that leases its equipment and does not own it, can use the per procedure endoscopy company charge as a cost driver. For a unit that purchases its equipment, depreciation of that equipment divided by the number of procedures done is the cost driver.Examples of how activity-based costing can help in managing a GI unit are easily found.1Poor preparations can lengthen procedures.12Lebwohl B. Kastrinos F. Glick M. et al.The impact of suboptimal bowel preparation on adenoma miss rates and the factors associated with early repeat colonoscopy.Gastrointest Endosc. 2011; 73: 1207-1214Abstract Full Text Full Text PDF PubMed Scopus (305) Google Scholar If a poor preparation lengthens a procedure by 30 minutes then the cost of the procedure goes up by $30.90. For a unit performing 10,000 procedures per year, this adds over $300,000 in cost. An education program for patients would be much less expensive to implement.2Inadequate recovery bays. If bottlenecks caused by inadequate recovery bays lead to a 15-minute delay per patient, procedure costs would rise by $12.90 per procedure. In a unit that performs 10,000 procedures a year, this would amount to $129,000 a year. Depending on what it costs to rent more space and build more recovery bays, eliminating this constraint could result in reduction of costs. In units where bays cannot be added due to physical constraints, the use of an anesthesiologist and propofol to decrease recovery times can be assessed. Does the extra cost of the drug and addition of a CRNA or anesthesiologist result in gains in quality, efficiency, and cost? Most likely not, however, ABC allows one to assess this.In the early 1900s, Frederick Taylor pioneered scientific management in an attempt to improve productivity.5O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar His work spawned several methodologies for productivity and quality improvement including lean, 6 sigma, DMIAC, etc. Activity-based costing can help facilitate these techniques. Process improvements that increase efficiency and quality can be linked to cost and in this way provide managers (or physicians) a powerful tool.Why then is ABC not being used more commonly? A study in 20055O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar reflected a decrease in the percentage of health care organizations using activity-based costing. This is actually not surprising as the demise of managed care removed the push for accurate costing and a return to the status quo is therefore not unexpected. ABC does require some changes to be made and also requires accurate information which must be updated and maintained. However, in the current milieu for cost containment and potential declines in reimbursement, the need for much tighter cost controls will intensify the need for techniques like ABC that allow for accurate determination of costs as well as how those costs are affected by process control. It can help control costs in the GI unit. One can also link changes in process to costs and quality, giving an ideal mechanism of assessing value. This will be essential for the continued success of gastroenterology and ambulatory endoscopy in the future. Over the last 2 decades, a number of attempts have been made to slow the rise in healthcare costs. Among them were Health Maintenance Organizations, which lowered costs through capitation. In most cases, this resulted in quality being sacrificed for cost and ultimately, many patients rejected the Health Maintenance Organization concept due to the lack of choice and access.1Feldstein P. Healthcare economics.6th ed. Thomas Delmoor Learning, Clifton Park, New York2005Google Scholar, 2Folland S. Goodman A. Stano M. et al.The economics of healthcare.5th ed. Prentice Hall, Upper Saddle River, NJ2007Google Scholar, 3Getzen T. Healthcare economics and financing. Wiley, Hoboken, NJ2007Google Scholar The economic downturn and the passage of the Affordable Care Act have again focused scrutiny on rising healthcare costs. In the next several years, the healthcare industry will be challenged to provide more care to more people with fewer resources. No matter which solutions are pursued, ie, bundled payments, episodes of care, accountable care organizations, or a return to capitation, it is important that quality not be sacrificed for cost. Most importantly, value must be provided to all stakeholders—patients, providers, and purchasers of care. In order to provide value, there must be a better understanding of costs. Importantly, decreases in costs must come from increases in efficiency and not decreases in quality. Activity-based costing (ABC) is a tool that was developed in the manufacturing sector in the 1970s and 1980s in an effort to improve efficiency and control cost.4Baker J. Activity-based costing and activity based management for healthcare. Aspen Publishers, Gaithersburg, MD1998Google Scholar, 5O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar This technique is based on the concept that the production of a product or the performance of a service consumes activities which then consume resources. ABC attempts to assign costs to each of these activities and/or resources so that total costs can be better understood and managed. It differs from traditional accounting in that it is based on the activities that drive costs. This allows one to manage processes by having a clearer understanding of what drives costs and how increases in efficiency affect costs. Many quality improvement techniques also break processes into discrete units. This is done to standardize processes, improve them, and eliminate unnecessary variability. Activity-based costing and process improvement techniques can be utilized together. This allows outcomes, ie, cost and quality, to then be simultaneously evaluated. Activity-based costing and management can be applied to the GI unit.4Baker J. Activity-based costing and activity based management for healthcare. Aspen Publishers, Gaithersburg, MD1998Google Scholar, 6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar, 7Canby J.V. Applying activity based costing to healthcare settings.Healthc Finan Manage. 1995; 49 (54–56): 50-52PubMed Google Scholar, 8Chan Y.L. Improving hospital accounting with activity-based costing.Health Care Manage Rev. 1993; 18 (77–77)PubMed Google Scholar, 9Ramsey R.H. Activity-based costing for hospitals.Hosp Health Serv Adm. 1994; 39: 385-396PubMed Google Scholar This report describes how this can be accomplished. The Activity MapThe ABC process starts by developing an activity map, which outlines the sequence of activities that are involved in the performance of a procedure.6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar, 7Canby J.V. Applying activity based costing to healthcare settings.Healthc Finan Manage. 1995; 49 (54–56): 50-52PubMed Google Scholar, 10Wendsheider W. Preiss P. Clinical pathways as a tool for process costing in cardiac surgery.Eur Surg. 2003; 35: 51-54Crossref Scopus (3) Google Scholar Figure 1 is an example of an activity map developed for an endoscopic procedure. The ABC process starts by developing an activity map, which outlines the sequence of activities that are involved in the performance of a procedure.6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar, 7Canby J.V. Applying activity based costing to healthcare settings.Healthc Finan Manage. 1995; 49 (54–56): 50-52PubMed Google Scholar, 10Wendsheider W. Preiss P. Clinical pathways as a tool for process costing in cardiac surgery.Eur Surg. 2003; 35: 51-54Crossref Scopus (3) Google Scholar Figure 1 is an example of an activity map developed for an endoscopic procedure. Activity AnalysisNext, an activity analysis is performed to identify the resources used for each activity and then which cost pools are drawn from for each resource (Figure 2).6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar, 7Canby J.V. Applying activity based costing to healthcare settings.Healthc Finan Manage. 1995; 49 (54–56): 50-52PubMed Google Scholar Next, an activity analysis is performed to identify the resources used for each activity and then which cost pools are drawn from for each resource (Figure 2).6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar, 7Canby J.V. Applying activity based costing to healthcare settings.Healthc Finan Manage. 1995; 49 (54–56): 50-52PubMed Google Scholar Assigning Cost CategoriesOnce one has identified the resources utilized, we must then assign each resource to a cost category, ie, labor, materials, or general overhead. These categories will then be assigned further to either direct or indirect cost categories. The direct costs are those that are "directly" related to the performance of the service (nursing) as opposed to indirect costs (accounting) which have to be allocated to multiple services.These categories are shown in Table 1 (Cost Categories).Table 1Cost CategoriesComponent activityCategoryReferral and scheduling Scheduling podIndirect labor Office secretaryDirect labor Patient education—preprocedureDirect laborDay of procedure processing Patient registration—RNDirect labor IV insertionsDirect material IV tubingDirect material Nasal cannulaDirect material ECG leadsDirect materialProcedure NurseDirect labor TechnicianDirect labor Medication—demeralDirect material Medications—versedDirect material Medical malpracticeIndirect cost Equipment depreciationIndirect cost GI laboratory depreciationIndirect cost Laboratory supervisorDirect labor Hospital overheadIndirect cost Ancillary equipmentIndirect materialRecovery Food servicesIndirect labor NurseDirect laborScope cleaning TechnicianDirect labor MaterialsIndirect materialOverhead costs BillingIndirect laborECG, electrocardiogram; IV, intravenous; RN, registered nurse. Open table in a new tab Once one has identified the resources utilized, we must then assign each resource to a cost category, ie, labor, materials, or general overhead. These categories will then be assigned further to either direct or indirect cost categories. The direct costs are those that are "directly" related to the performance of the service (nursing) as opposed to indirect costs (accounting) which have to be allocated to multiple services. These categories are shown in Table 1 (Cost Categories). ECG, electrocardiogram; IV, intravenous; RN, registered nurse. Cost DriversNext the cost drivers for each resource and the number of resources utilized need to be determined. The annual quantity of the cost driver is estimated according to the nature of the cost driver. This may best be shown through some examples.Examples1Employee cost drivers: time2Material costs: number of items usedAfter this, the cost allocation rate which is the quotient of annual cost of a resource and the number of times the resource is used over the time period (annual quantity of cost driver) can be calculated. From the cost allocation rate, one can accurately determine the allocated activity cost by multiplying the cost allocation rate by the actual quantity of allocation base for that activity.10Wendsheider W. Preiss P. Clinical pathways as a tool for process costing in cardiac surgery.Eur Surg. 2003; 35: 51-54Crossref Scopus (3) Google Scholar, 11Ross M. Analyzing healthcare operations using ABC.J Health Care Finance. 2004; 30 (2004): 1-20PubMed Google Scholar This is shown in Supplementary Table 1.When utilizing activity-based costing it is important to identify the activities that generate significant costs. The triggers of these activities are the cost drivers. In designing this type of system one should try to keep things simple. The most important activities need to be picked up—but not each and every activity needs to be detailed, especially when those activities do not have a major impact on costs. Making the system too complex leads to ignoring the data generated by it. Too much detail leads to excessive expense in designing and maintaining the system.4Baker J. Activity-based costing and activity based management for healthcare. Aspen Publishers, Gaithersburg, MD1998Google Scholar, 6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar In using activity-based costing in the GI unit, cost drivers can be different depending on the unit. A unit that leases its equipment and does not own it, can use the per procedure endoscopy company charge as a cost driver. For a unit that purchases its equipment, depreciation of that equipment divided by the number of procedures done is the cost driver.Examples of how activity-based costing can help in managing a GI unit are easily found.1Poor preparations can lengthen procedures.12Lebwohl B. Kastrinos F. Glick M. et al.The impact of suboptimal bowel preparation on adenoma miss rates and the factors associated with early repeat colonoscopy.Gastrointest Endosc. 2011; 73: 1207-1214Abstract Full Text Full Text PDF PubMed Scopus (305) Google Scholar If a poor preparation lengthens a procedure by 30 minutes then the cost of the procedure goes up by $30.90. For a unit performing 10,000 procedures per year, this adds over $300,000 in cost. An education program for patients would be much less expensive to implement.2Inadequate recovery bays. If bottlenecks caused by inadequate recovery bays lead to a 15-minute delay per patient, procedure costs would rise by $12.90 per procedure. In a unit that performs 10,000 procedures a year, this would amount to $129,000 a year. Depending on what it costs to rent more space and build more recovery bays, eliminating this constraint could result in reduction of costs. In units where bays cannot be added due to physical constraints, the use of an anesthesiologist and propofol to decrease recovery times can be assessed. Does the extra cost of the drug and addition of a CRNA or anesthesiologist result in gains in quality, efficiency, and cost? Most likely not, however, ABC allows one to assess this.In the early 1900s, Frederick Taylor pioneered scientific management in an attempt to improve productivity.5O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar His work spawned several methodologies for productivity and quality improvement including lean, 6 sigma, DMIAC, etc. Activity-based costing can help facilitate these techniques. Process improvements that increase efficiency and quality can be linked to cost and in this way provide managers (or physicians) a powerful tool.Why then is ABC not being used more commonly? A study in 20055O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar reflected a decrease in the percentage of health care organizations using activity-based costing. This is actually not surprising as the demise of managed care removed the push for accurate costing and a return to the status quo is therefore not unexpected. ABC does require some changes to be made and also requires accurate information which must be updated and maintained. However, in the current milieu for cost containment and potential declines in reimbursement, the need for much tighter cost controls will intensify the need for techniques like ABC that allow for accurate determination of costs as well as how those costs are affected by process control. It can help control costs in the GI unit. One can also link changes in process to costs and quality, giving an ideal mechanism of assessing value. This will be essential for the continued success of gastroenterology and ambulatory endoscopy in the future. Next the cost drivers for each resource and the number of resources utilized need to be determined. The annual quantity of the cost driver is estimated according to the nature of the cost driver. This may best be shown through some examples. Examples1Employee cost drivers: time2Material costs: number of items usedAfter this, the cost allocation rate which is the quotient of annual cost of a resource and the number of times the resource is used over the time period (annual quantity of cost driver) can be calculated. From the cost allocation rate, one can accurately determine the allocated activity cost by multiplying the cost allocation rate by the actual quantity of allocation base for that activity.10Wendsheider W. Preiss P. Clinical pathways as a tool for process costing in cardiac surgery.Eur Surg. 2003; 35: 51-54Crossref Scopus (3) Google Scholar, 11Ross M. Analyzing healthcare operations using ABC.J Health Care Finance. 2004; 30 (2004): 1-20PubMed Google Scholar This is shown in Supplementary Table 1.When utilizing activity-based costing it is important to identify the activities that generate significant costs. The triggers of these activities are the cost drivers. In designing this type of system one should try to keep things simple. The most important activities need to be picked up—but not each and every activity needs to be detailed, especially when those activities do not have a major impact on costs. Making the system too complex leads to ignoring the data generated by it. Too much detail leads to excessive expense in designing and maintaining the system.4Baker J. Activity-based costing and activity based management for healthcare. Aspen Publishers, Gaithersburg, MD1998Google Scholar, 6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar In using activity-based costing in the GI unit, cost drivers can be different depending on the unit. A unit that leases its equipment and does not own it, can use the per procedure endoscopy company charge as a cost driver. For a unit that purchases its equipment, depreciation of that equipment divided by the number of procedures done is the cost driver.Examples of how activity-based costing can help in managing a GI unit are easily found.1Poor preparations can lengthen procedures.12Lebwohl B. Kastrinos F. Glick M. et al.The impact of suboptimal bowel preparation on adenoma miss rates and the factors associated with early repeat colonoscopy.Gastrointest Endosc. 2011; 73: 1207-1214Abstract Full Text Full Text PDF PubMed Scopus (305) Google Scholar If a poor preparation lengthens a procedure by 30 minutes then the cost of the procedure goes up by $30.90. For a unit performing 10,000 procedures per year, this adds over $300,000 in cost. An education program for patients would be much less expensive to implement.2Inadequate recovery bays. If bottlenecks caused by inadequate recovery bays lead to a 15-minute delay per patient, procedure costs would rise by $12.90 per procedure. In a unit that performs 10,000 procedures a year, this would amount to $129,000 a year. Depending on what it costs to rent more space and build more recovery bays, eliminating this constraint could result in reduction of costs. In units where bays cannot be added due to physical constraints, the use of an anesthesiologist and propofol to decrease recovery times can be assessed. Does the extra cost of the drug and addition of a CRNA or anesthesiologist result in gains in quality, efficiency, and cost? Most likely not, however, ABC allows one to assess this.In the early 1900s, Frederick Taylor pioneered scientific management in an attempt to improve productivity.5O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar His work spawned several methodologies for productivity and quality improvement including lean, 6 sigma, DMIAC, etc. Activity-based costing can help facilitate these techniques. Process improvements that increase efficiency and quality can be linked to cost and in this way provide managers (or physicians) a powerful tool.Why then is ABC not being used more commonly? A study in 20055O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar reflected a decrease in the percentage of health care organizations using activity-based costing. This is actually not surprising as the demise of managed care removed the push for accurate costing and a return to the status quo is therefore not unexpected. ABC does require some changes to be made and also requires accurate information which must be updated and maintained. However, in the current milieu for cost containment and potential declines in reimbursement, the need for much tighter cost controls will intensify the need for techniques like ABC that allow for accurate determination of costs as well as how those costs are affected by process control. It can help control costs in the GI unit. One can also link changes in process to costs and quality, giving an ideal mechanism of assessing value. This will be essential for the continued success of gastroenterology and ambulatory endoscopy in the future. 1Employee cost drivers: time2Material costs: number of items usedAfter this, the cost allocation rate which is the quotient of annual cost of a resource and the number of times the resource is used over the time period (annual quantity of cost driver) can be calculated. From the cost allocation rate, one can accurately determine the allocated activity cost by multiplying the cost allocation rate by the actual quantity of allocation base for that activity.10Wendsheider W. Preiss P. Clinical pathways as a tool for process costing in cardiac surgery.Eur Surg. 2003; 35: 51-54Crossref Scopus (3) Google Scholar, 11Ross M. Analyzing healthcare operations using ABC.J Health Care Finance. 2004; 30 (2004): 1-20PubMed Google Scholar This is shown in Supplementary Table 1. When utilizing activity-based costing it is important to identify the activities that generate significant costs. The triggers of these activities are the cost drivers. In designing this type of system one should try to keep things simple. The most important activities need to be picked up—but not each and every activity needs to be detailed, especially when those activities do not have a major impact on costs. Making the system too complex leads to ignoring the data generated by it. Too much detail leads to excessive expense in designing and maintaining the system.4Baker J. Activity-based costing and activity based management for healthcare. Aspen Publishers, Gaithersburg, MD1998Google Scholar, 6Lawson R.A. The use of activity based costing in the healthcare industry: 1994 vs 2004.Res Healthc Finan Manag. 2005; 10: 77-94Google Scholar In using activity-based costing in the GI unit, cost drivers can be different depending on the unit. A unit that leases its equipment and does not own it, can use the per procedure endoscopy company charge as a cost driver. For a unit that purchases its equipment, depreciation of that equipment divided by the number of procedures done is the cost driver. Examples of how activity-based costing can help in managing a GI unit are easily found.1Poor preparations can lengthen procedures.12Lebwohl B. Kastrinos F. Glick M. et al.The impact of suboptimal bowel preparation on adenoma miss rates and the factors associated with early repeat colonoscopy.Gastrointest Endosc. 2011; 73: 1207-1214Abstract Full Text Full Text PDF PubMed Scopus (305) Google Scholar If a poor preparation lengthens a procedure by 30 minutes then the cost of the procedure goes up by $30.90. For a unit performing 10,000 procedures per year, this adds over $300,000 in cost. An education program for patients would be much less expensive to implement.2Inadequate recovery bays. If bottlenecks caused by inadequate recovery bays lead to a 15-minute delay per patient, procedure costs would rise by $12.90 per procedure. In a unit that performs 10,000 procedures a year, this would amount to $129,000 a year. Depending on what it costs to rent more space and build more recovery bays, eliminating this constraint could result in reduction of costs. In units where bays cannot be added due to physical constraints, the use of an anesthesiologist and propofol to decrease recovery times can be assessed. Does the extra cost of the drug and addition of a CRNA or anesthesiologist result in gains in quality, efficiency, and cost? Most likely not, however, ABC allows one to assess this. In the early 1900s, Frederick Taylor pioneered scientific management in an attempt to improve productivity.5O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar His work spawned several methodologies for productivity and quality improvement including lean, 6 sigma, DMIAC, etc. Activity-based costing can help facilitate these techniques. Process improvements that increase efficiency and quality can be linked to cost and in this way provide managers (or physicians) a powerful tool. Why then is ABC not being used more commonly? A study in 20055O'Guin M. The complete guide to activity based costing. Prentice Hall, Englewood Cliffs, NJ1991Google Scholar reflected a decrease in the percentage of health care organizations using activity-based costing. This is actually not surprising as the demise of managed care removed the push for accurate costing and a return to the status quo is therefore not unexpected. ABC does require some changes to be made and also requires accurate information which must be updated and maintained. However, in the current milieu for cost containment and potential declines in reimbursement, the need for much tighter cost controls will intensify the need for techniques like ABC that allow for accurate determination of costs as well as how those costs are affected by process control. It can help control costs in the GI unit. One can also link changes in process to costs and quality, giving an ideal mechanism of assessing value. This will be essential for the continued success of gastroenterology and ambulatory endoscopy in the future. AppendixSupplementary Table 1Cost DriversComponent activityCategoryAnnual costCost driverAnnual quantity of cost driverCost allocation rateActual quantity of allocation baseAllocated activity costReferral and scheduling Scheduling podIndirect labor$84,588Number of patients11,000$7.691$7.69 Office secretaryDirect labor$40,000Minutes used120,000$0.3330$10.00 Patient education—preprocedureDirect labor$52,500Minutes used90,000$0.5820$11.67Day of procedure processing Patient registration—RNDirect labor$70,000Minutes used120,000$0.5830$18.00 IV insertionsDirect material$4730Number of patients11,000$0.431$0.43 IV tubingDirect material$55,000Number of patients11,000$5.001$5.00 Nasal cannulaDirect material$3520Number of patients11,000$0.321$0.32 ECG leadsDirect material$440,000Number of patients11,000$40.001$40.00Procedure NurseDirect labor$70,000Minutes used120,000$0.5845$26.25 TechnicianDirect labor$33,000Minutes used120,000$0.2830$8.25 Medication—demeralDirect material$9350Number of patients11,000$0.851$0.85 Medications—versedDirect material$20,350Number of patients11,000$1.851$1.85 Medical malpracticeIndirect cost$259,816Number of patients11,000$23.621$23.62 Equipment depreciationIndirect cost$323,820Number of patients11,000$29.441$29.44 GI laboratory depreciationIndirect cost$323,820Number of patients11,000$29.441$29.44 Laboratory supervisorDirect labor$100,000Number of patients11,000$9.091$9.09 Hospital overheadIndirect cost$650,524Number of patients11,000$59.141$59.14 Ancillary equipmentIndirect material$382,280Number of patients11,000$34.751$34.75Recovery Food servicesIndirect labor$130,808Number of patients11,000$11.891$11.89 NurseDirect labor$70,000Minutes used120,000$0.5810$5.83Scope cleaning TechnicianDirect labor$33,000Minutes used120,000$0.2820$5.50 MaterialsIndirect material$13,146Number of patients11,000$1.201$1.20Overhead costs BillingIndirect labor$200,504Number of patients11,000$18.231$18.23ECG, electrocardiogram; IV, intravenous; RN, registered nurse. Open table in a new tab ECG, electrocardiogram; IV, intravenous; RN, registered nurse.