(a) Current fee-for-service structure presents multiple bills and is thus highly inefficient for the patient and the insurer. In the long run, all costs are variable. Payments will flow to a central finance department, which will allocate the revenue to the providers of care within the bundle in lieu of the independent revenue streams associated with fee-for-service. Unlike the top-down methods, product-level costing requires engagement of a broad constituency of care providers, midlevel managers, and finance personnel and is enabled by activity-based costing (ABC). Professional (oval) and facility (rectangular) providers have a direct relationship with the patient and payer when collecting revenue. To define the value of radiology, radiologists must lead in the measurement and management of health care costs. For for-profit entities, margin also enhances shareholder equity. Resource costs in step six will be available from the finance department and correspond to annual salary and benefits for personnel, purchase prices for supplies, and depreciation for capital equipment. The panoply of unique cost objects within a department of radiology becomes even more mind boggling from the perspective of a health system and the diversity of services or cost objects that represent each patient’s care. The expense of the resource remains, while capacity is created (49). For years, the radiology service line has been the primary profit engine for hospitals but that will change as the federal government, following on the heels of private insurers, accelerates efforts to curb one of the fastest-growing expenses for Medicare: diagnostic imaging costs. When allocation is based on bill count versus revenue, the allocation to surgery is $200 000 less, while the department of radiology experiences a $1.3 million increase in overhead costs. Depending on the cost objec-tive, the same cost can be considered direct or indirect. When radiologists cannot articulate their value, they risk losing control over how imaging is delivered and supported. (b) Factors influencing the cost of imaging for the various links in the value chain illustrate the central role of the referring provider on both upstream and downstream links while experiencing no costs themselves. In the United States, recent payment trends directing value-based payments for bundles of care advance the imperative for radiology providers to articulate their value. Cutting housekeeping personnel prolongs turnover times in procedure rooms dedicated to image-guided interventions and leads to delayed patient management and unproductive technologist, nursing, and physician waiting. The outcome of the activities, which in the case of radiology is images and image-derived information, is the creation of value for customers and margin for the firm. With medical bills representing the principal cause of personal bankruptcy in the United States (1) and with up to a third of medical testing and treatment not improving health (2), physicians’ impact on patient well-being is modulated through financial health, as well as physical health (3). While referrers represent the next downstream link in the industry value chain and trigger the purchase of imaging services, they do not pay for imaging and thus do not incur cost, which are directly transferred downstream to patients and payers. Recently, time-driven ABC (TDABC) was developed to streamline and improve upon ABC, enhancing the practicality of the initial analysis and of updated analyses over time (36). Figure 2b: The linear organization of a typical industry value chain does not reveal the complex cross-linking relationships that exist in the imaging industry value chain. Because CMS sets prices for Medicare and Medicaid, radiology providers have little direct influence on government payer costs. It establishes current state costs and can establish a framework for subsequent analysis of costs associated with various process components and a strategy to manage those costs. 2, © 2021 Radiological Society of North America, Medical bankruptcy in the United States, 2007: results of a national study, Best care at lower cost: the path to continuously learning health care in America, Physicians’ role in protecting patients’ financial well-being, Value of imaging. II. If the address matches an existing account you will receive an email with instructions to reset your password. Moreover, without an effective alignment of organizational cost management priorities with departmental reward systems, the mere awareness of cross-organizational costs may not lead to productive decision making for cost savings. Radiology 2001; 218:25-26. Thus, the technologist’s contribution to the cost of the unenhanced head CT scan is calculated as $78 ÷ 4 = $20. Simply being the nearby hospital does not auto-matically stake your hospital’s financial claim. Figure 3b: Billing and payment for an episode of care corresponding to the initial emergency department presentation, subsequent hospitalization, and outpatient management of a patient with an acute pulmonary embolism. Look further and you can see directly into an organization’s soul, revealing its fundamental beliefs and priorities. One important activity in the Radiology Department is transcribing digitally recorded analyses of images into a written report. The attribution of variable costs should be straightforward, assuming consumption is tracked and referenced to individual cost objects, such as procedures or patients. Figure 4: RCC and RVU methods of costing. Radiology services are often a substantial part of the patient’s hospital expense; therefore department personnel need to be familiar with business services, which is the department that monitors billing procedures. Charges evolve over time based on strategies directed toward revenue generation across payer contracts. Perhaps the greatest impact of ABC is the allocation of overhead expenses according to utilization. The speed of a ball tossed between two boys on a moving train will be different when measured by someone on the train, someone by the side of the tracks, and someone observing with a view of the Earth’s spin and orbit using telescope from outer space. In the United States, overhead costs represent 43%–45% of total hospital costs (19), and the portion of overhead costs specifically attributable to “administrative costs,” which exclude costs of housekeeping, dietary, pharmacy, social services, and other general clinical services, is 25.3% of total hospital costs (20). From radiology’s point of view, “it’s managing a couple of different front doors because in the middle is your imaging department just as it always has been,” he added. (a) Current fee-for-service structure presents multiple bills and is thus highly inefficient for the patient and the insurer. Following a discussion of the rationale for measuring costs, this review contextualizes costs from the perspectives of a variety of stakeholders (relativity), discusses core concepts in how costs are classified (rudiments), presents common and improved methods for measuring costs in health care, and discusses how cost management strategies can either improve or hinder high-value health care (realities). This begins with the development of an understanding of the providers’ own costs, as well as the complex interrelationships and imaging-associated costs of other participants across the imaging value chain. In most industries, the purchaser of goods and services is the exclusive entity to derive value from that purchase. Claiming a share of the capital budget for imaging equipment is not always hard, but it certainly can seem overwhelming. (a) Flow of payments for imaging. The time and expense of creating and maintaining an ABC model can be a major barrier to its adoption, particularly in health care. When mapping radiology’s value chain within the health care value system, a far more complex set of dynamics emerges, where multiple distinct entities purchase, consume, and influence the cost of radiology’s primary product: images and image-informed information (Fig 2). Alternatively, when faced with a reduction in revenue for existing activities, TDABC can inform workflow reorganization and resource modifications to accommodate the reduction while preserving margin. Approaches to managing these four scenarios are included in the Appendix E1 (online), which highlights the application of the principles and techniques described throughout the remainder of this article. Flexed: Your radiology department budget calls for the performance of a certain number of procedures. Mobile Imaging • Fleet of 15 mobile MRI units ... Best practices for staffing and expense management Enhanced order-to-scan retention/capture Dashboards to track metrics in real time While it has been said that costing is not rocket science, it is useful to appreciate that like the universe, there is relativity in costing. First, because cost driver selection for overhead cost allocation can have a profound impact on production department expense, clinical departmental managers should seek to partner with hospital finance and accounting departments when they are establishing overhead allocation methods. The RCC method assumes that costs are proportional to charges, an assumption that does not reflect reality (24,25), but persists as a common basis for hospital cost accounting. Returning to our original motivation to measure value and margin, the cost term common to both definitions must be viewed from two entirely different perspectives. The RCC is computed at a departmental level by dividing the sum of all departmental expenses by the sum of charges for all billable activities over a period of time. At the level of costs attributable to an episode of care, an important source of waste includes medical procedures that cost more than the value they create (38) and imaging studies that are not indicated by the patient’s condition. Bottom-up product-level costing, where costs are quantified in direct relation to resource utilization, represents an effective solution to the limitations of top-down costing, providing valuable inputs to decision making in the interest of delivering quality care in a cost-efficient manner. While this approach might support the strategy of having a profitable cancer center within 2 years, a costing strategy that favors the cancer center may mask unfavorable performance characteristics that reduce the hospital’s overall financial performance and competitive position in the marketplace. By imposing a single-driver rate for each activity, traditional ABC does not accommodate services with multiple cost drivers such as patient registration, where both patient number and case complexity determine resource requirements (37). I. Perspectives for the academic radiologist, Approaches for economic evaluations of health care technologies, The Patient-Centered Outcomes Research Institute (PCORI) national priorities for research and initial research agenda, Measuring radiology’s value in time saved, How information gives you competitive advantage, Managing costs throughout the value chain: research on strategic cost management, Delivery of appropriateness, quality, safety, efficiency and patient satisfaction, How much do common imaging studies cost? Despite a similar cost basis between the two centers, costs attributable to each of the two procedures vary substantially depending on the costing method and the center. Online supplemental material is available for this article. In this example, staff effort is measured for at least six activities. Note that radiology department produces a greater number of bills that are on average much smaller than the department of surgery’s bills. Readers may find it most useful to read the Appendix only after completing the main text. Our service includes general radiology, covering imaging such as x-ray, and cardiothoracic radiology which deals with scans and images of the chest and heart. Variable cost units are consumed entirely by a cost object and thus in aggregate vary with the volume of an activity. Departmental activities are identified through value chain analysis and might include scheduling, preprocedural planning, communications and preparation, image acquisition, image processing and archiving, interpretation, reporting, postprocedural consultation, and revenue cycle management. In the short run, fixed costs are not eliminated by a reduction in utilization. ABC thus refines the attribution of marketing overhead to $3 million to each of the three strategic service lines and $143 000 to the remaining departments, improving departmental managers’ ability to assess the impact of marketing expense on procedural volumes and revenue generation. Because the categorization of cost as fixed versus variable is time dependent, cost layering has been proposed as means of stratifying costs based on their sensitivity to changes in resource utilization and thus the likelihood that their management will result in short-run savings (50). Patients, employers, and the government are grouped as “society,” reflecting their end-purchaser status. Tunnel vision on the procurement prices for preferred supplies, such as a favorite contrast agent, risks missing cost-savings opportunities through the purchase of alternate products that are equally effective. The potential economic value of the radiology department should not be underestimated. When compared with the hospital setting, overhead expenses in outpatient imaging centers represent a substantially lower percentage of total costs, estimated at 15%–25% (21). While ABC has been transformative for identifying and managing costs in some industries, as traditionally implemented it has important limitations. Question: Standards For Nonmanufacturing Expenses For A Service Company The Radiology Department Provides Imaging Services For Emergency Medical Center. Radiology, cost effectiveness, daignostic quality Ongoing advances in technology provide radiology with solutions that have improved diagnostic quality, reduced the harm posed to patients, helped address large and diverse populations and supported clinical needs. How do the new technologies alter the basic functions of an academic radiology department? DRG = Diagnostic Related Group. Which driver is correct? In posing a simple question, “How much does a two-view chest radiograph cost?” the answer is very different when viewed from the perspective of the provider versus the patient. The financial-justification step of capital budgeting can be particularly daunting, but it will be less difficult if it is preceded by an understanding of pro forma development and the concepts that underlie it, including total cost of ownership. Department of Radiology Medical Center North 1161 21st Ave. South Nashville, TN 37232 (615) 343-2617. How will the new technologies affect medical care? 38, No. By using RCC, the cost of a procedure is calculated as the charge for that procedure multiplied by the department’s RCC rate. Myopic cost management driven by incentives that emphasize short-run savings can lead to reductions in flexible labor that shifts low-level work to far more expensive workers. (b) Factors influencing the cost of imaging for the various links in the value chain illustrate the central role of the referring provider on both upstream and downstream links while experiencing no costs themselves. Finally, when aggregated up to a nationwide level, cost management efforts that create capacity but not savings do not address the unsustainable growth of health care spending in the United States. 6, 18 April 2017 | Radiology, Vol. One of these activities, “acquiring images,” is then allocated across a set of imaging examinations, which in this example, are all referenced by CPT code, but could also represent different imaging procedures that are billed under the same CPT code, such as the cardiac MR imaging example given in the text. Virtually every industry uses costs to guide pricing; the use of charges to infer costs is unique to health care. These tensions should be minimized when a single entity bears responsibility for the costs of image production and interpretation, as would occur when radiologists are employees of a health system. To a physician focused on the health of his or her patients, what could be more tangential and irrelevant than cost accounting? Radiology practices that emphasize high-volume examination interpretations by physicians in lieu of uncompensated time at tumor board, risk added costs through inefficient patient work-ups and delayed management. RVUs are derived from published national benchmarks. (d) A large private orthopedic practice referring 30% of your musculoskeletal magnetic resonance (MR) imaging volume has decided to build an imaging facility and directly employ radiologists. Requirements: 1. Professional (oval) and facility (rectangular) providers have a direct relationship with the patient and payer when collecting revenue. The patient activities of our department encompass clinical care and research support in the areas of Body Imaging, Interventional Radiology, Neuroradiology, Nuclear Medicine and Clinical Image Processing Service (CIPS).. Some managers seek to measure success in terms of capacity created (reduced length of stay opens more hospital beds or 30-minute MR imaging slots allow more people to be imaged). The provider sets a charge for the service, and the combination of the patient and the patient’s insurer pay a price that will be a negotiated fraction of the charge or a fixed fee. One Important Activity In The Radiology Department Is Transcribing Digitally Recorded Analyses Of Images Into A Written Report. Panel. Under the current model, providers and facilities bill and collect revenue from patients and providers independently. By using these data, the cost implications of process changes can be forecast. ABC reveals that 90% of the $10 million expense is applied equally to television and print advertisements for three strategic service lines of cardiac, oncologic, and orthopedic care. Managerial estimates and employee surveys, which often substitute for direct observation to quantify resource allocation (34,35), while expedient, are hindered by biases and distortions (36). Providers tend to take a “set it and forget it” approach, leading to costs that do not evolve with clinical practice and associated variations in resource costs and utilization rates. Radiology providers on the other hand experience multiple external factors that affect imaging costs, but in an environment where prices are contractually set, radiology providers have relatively little direct influence on the downstream costs of imaging that are experienced by patients. It deals with setting up a breakout of examinations into specific categories … The preservation of margin among the multiple providers will necessitate a revenue distribution system that aligns with costs. This generic description of “costs” that is not referenced to the entity sacrificing resources is as meaningless as absolute speed. (c) The value derived from imaging while distributed across the value chain will be most apparent for links that derive direct value from imaging information. Beyond the rationale described for radiology-specific scenarios, bundled payments further extend the importance of accurate costing for health system strategy and decision making. Operational budgeting and budgetary control in diagnostic radiology. Business of Radiology 101 Income Statement: Expenses. RCC costing for chest CT and radiography at two different centers is modeled in Figure 4. In contrast, margin is an internal characteristic of a firm and therefore its cost term must be defined from the provider’s perspective. Utter the word “cost,” and the mind swells with snickering associations to bean counters, number crunchers, and bureaucrats. The fixed-cost dilemma: what counts when counting cost-reduction efforts? Finally, TDABC provides a rational basis for managing costs associated with care bundles and allocating associated revenue to departments based on actual costs. Radiology diagnostic service (including interventional) 53,416: 183,540: 928,777: 1,591,285: Radiation therapy: 2,975,493: 3,104,262: 3,196,789: 3,468,228: Total: 3,047,054: 3,298,472: 4,144,250: 5,091,515: Diversity of services offered (number of different services available) 2007: 2008: 2009: 2010: Nuclear medicine: 73: 159: 128: 169: Radiology diagnostic service (including interventional) … Why should radiologists care? By using a straight line annual depreciation, the cost rate for the CT scanner would be calculated as ($1 500 000 ÷ 8 y) ÷ [12 h/d × (6 d/wk × 52 wk/y − 12 downtime days)] = $52 per hour, and the contribution of the CT scanner to the cost of the unenhanced head CT scan would be $13. From the perspective of a professional radiology practice, a hospital department, or an entire health system, without margin there is no growth and no future. Organizational overhead costs are mostly generated by nonrevenue-producing “service departments.” Hospital service departments include housekeeping, security, laundry, facilities and grounds management, pharmacy, human resources, infection control, information technology and management, health and safety, compliance, social services, contracting, purchasing, revenue cycle, compliance, legal, marketing, accounting, human resources, and general administration. Charges correspond to all departmental charges derived from corresponding charge masters. Alternatively, if larger bills involved greater effort to address insurance company scrutiny, a higher likelihood of nonpayment, or targeted collection efforts versus write-offs, then a revenue basis or a hybrid approach might be preferable. In addition to the expense of equipment purchases, the expense of equipment maintainance (i.e., service contracts) must be considered a significant component of any budget of a radiology department. The firm’s value chain is one link in an industry value chain that links individual firm value chains from upstream suppliers to the end consumer. the radiology services billed before any adjust-ments, are also referred to as gross charges . for radiology. Consider a hospital with a $10 million annual marketing budget that it allocates equally across 10 clinical service lines, adding $1 million of overhead annually to each department. Variable costs in a radiology department include catheters, contrast materials, and part-time or contract labor. Most U.S. physicians are familiar with work RVUs as weighting factors that are set by the CMS and intended to reflect relative effort across medical procedures (27). For a radiology department operating within a larger organization, organizational overhead represents another source of departmental costs. Consequently, the value and cost of radiology are highly diverse among many health care stakeholders. Patients, employers, and the government are grouped as “society,” reflecting their end-purchaser status. In contrast to an operating budget, which often accounts for relatively fixed yearly expenses and contracts, the Capital Budget includes major purchases such as new or replacement machinery, products, or devices. (a) Flow of payments for imaging. That price presents the provider’s revenue for the service. Expenses are typically presented The widespread adoption of ABC has revealed common distortions of traditional costing methods, including tendencies toward over-allocation of overhead expense to high-volume products and services and under-allocation to low-volume products (29). The terms cost and expense are generally used syn - onymously. Therefore, the technologist cost rate is $130 000 ÷ (0.8 × 2080 hours) = $78 per hour. Note that attributed RVU-based procedural costs differ even when using the same benchmarks for RVU values for the two centers. Direct costs are the costs of resources directly consumed by a cost object and are further characterized as variable or fixed costs (Table). Why should radiologists care? The Department of Radiology is also a leader in the field of theranostics, in which a nuclear medicine therapeutic agent is paired to a diagnostic agent. It actually performs more scans than expected, but the costs increase, too. This includes the transfer of low-level work to costly specialists after support staff is cut, underinvestment in space and equipment, a narrow focus on procurement prices, maximization of patient throughput, and a failure to benchmark and standardize (48). For radiologists seeking a deeper understanding of their position within a health care system, the blend of conscious decision making and passive neglect that represent an organization’s approach to cost accounting and cost management reflect that organization’s psyche and commitment to delivering on its mission, valuing its contributors, and optimizing its performance. Thus, costs cannot be determined from outside sources; they require introspection and analysis. What steps can you take to preserve margin? While the cost of health care is defined relative to who is paying, there is little disagreement that it is too high and growing at an unsustainable rate (51). While not necessarily a pathway to cost reduction, capacity creation may enhance margin by supporting volume growth and thus increasing revenue with minimal marginal costs of one more patient imaged or an empty bed filled. For Nih/Foundation Studies That Require Rascal-Pt Approval from Radiology What should be the minimum value of the contract? In each of these scenarios, understanding the cost of providing service and ensuring that it does not exceed the associated revenue is critical to maintaining or preferably growing margin. In fact, Kaplan and Porter have recently posited that the fixed cost dilemma is a myth and that most health care costs including personnel, space, and equipment could be variable costs if only executives were more attentive and open to the reinvention of long established organizational norms (51). While the literature is replete with calls for radiologists to quantify the quality of their work (11,12,54), understanding and engaging in the process of costing are equally important. Evert H. This article is concerned with establishing a revenue and expense budget for a diagnostic radiology department. Although, per-patient costs decrease, aggregate bottom-line costs do not. Lack of a purchasing relationship at adjacent points along the industry value chain is atypical for most businesses. Figure 6 diagrams a 10-step process to apply TDABC in health care, which is enabled by the development of a detailed process map of all activities included in a procedure or care bundle (step 4), an undertaking that shares similarities and may realize synergies with “value stream mapping” in lean management (47). For example, they suggest that if underutilized equipment were sold and excess space were repurposed, sold, or subleased, then these traditionally fixed costs would become variable costs. Three distinct relationship linkages are illustrated. With approximately 75% of hospital costs being fixed direct or overhead costs, the allocation of these costs across the breadth of medical activities is a huge challenge. As the adage goes, “no margin, no mission,” over the long run, margin is the enabler of value by supporting efforts that enhance quality through investment in research and development, technology and infrastructure upgrades, and education and training. Alumni News Announcements Upcoming Events . Cost drivers are identified and quantified for each activity that contributes to a final product or service. Accountants consider the terms indirect and overhead as synonymous; however, some authors attribute the term indirect to departmental overhead costs and reserve the term overhead for extra-departmental overhead costs (18). When do you hire an additional radiologist and when will the hire breakeven? For example, the hospital has a new cancer center that key stakeholders insist must be profitable within 2 years. Indirect or overhead costs cannot be identified with or traced to a specific cost object (17). The RSNA designates this journal-based SA-CME activity for a maximum of 1.0 AMA PRA Category 1 Credit™. Because service departments do not generate revenue, their costs are allocated to “production” centers such as radiology, surgery, laboratory, and emergency services as overhead expense where they can be offset by revenue production. 0, 10 October 2018 | RadioGraphics, Vol. ■ Maximizing the value of imaging requires cost management in addition to improvements in quality and outcomes. ■ Understanding how costs are allocated and shifted within and among clinical departments is critical to avoiding costing misalignments that can mask both under- and overperformance that lead to inefficient and lower value health care. Because CMS sets prices for Medicare and Medicaid, radiology providers have little direct influence on government payer costs. 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