HOMECARE
ACTIVITY BASED MANAGEMENT AND COSTING: ESSENTIAL TOOLS IN COMPETITIVE BIDDING
by Vernon Pertelle RRT MBA T
he Medicare Modernization Act (MMA) includes mandates for competitive
bidding involving Durable Medical
Equipment/Home Medical Equipment (DME/HME). Home care providers [or HMEs] that desire to participate in competitive bidding must meet a set of minimum standards developed by CMS and in adhering to those standards; HMEs must understand their operations, cost structure and demonstrate financial viability. HMEs must proac- tively identify successful practices for efficiency, productivity and capital acquisition and will need to establish the framework to select ideal products that meet the needs of their patients. HMEs must iden- tify the appropriate technology for specific patients and understand the impact associated with services and delivery of the products. Many organizations have developed a comprehensive product ac- quisition process and possess evaluation tools that assist with making informed decisions regarding the purchase of equipment. There are some organizations that may not have a clear picture and not under- stand their overall costs thus are at risk of failure if they are selected to participate in competitive bidding. Today’s complex healthcare era requires new levels of sophistication and technology for HMEs to help them quantify outcomes from their practices and deal with the many challenges imposed by MMA and competitive bidding. Activity Based Management and Activity Based Costing are processes that can help HMEs quantify successful practices, eliminate waste, inef- ficiencies and help HMEs to survive in the competitive bidding en- vironment.
Activity Based Management Activity Based Management (ABM) is a process that has been
used for over 70 years. It has been proven to be successful in many industries and has helped organizations to increase efficiencies and successful practices. There are various resources available for HMEs to use and the resources are as diverse as ABM. Some resources focus solely on specific aspects of business operations while others address the overall operations. In some cases multiple approaches may be used to reinforce conclusions gained from a particular method. ABM can help owners and managers of HMEs empower themselves with the intimate details of their organization while creating continuous processes to improve or refine practices and identify areas of defi- ciencies in the day-to-day operations. ABM allows organizations to leverage technology to improve operational productivity and help identify the labor [or personnel] necessary to manage their business. In addition ABM creates process flows to flush out the details with each activity related to billing, delivery, customer services, manage- ment, sales and marketing and identify the direct and indirect costs associated with these activities. In order for an organization to begin using ABM they must first understand ABM and identify the tools ap- propriate for their specific organization. ABM focuses on the management of activities to continuously improve the value perceived by customers (physicians, payers, pa-
tients, etc.) and enhance gross profits and preserve margins through efficiencies, productivity, appropriate labor allocation and acquisition of capital. ABM includes cost analysis [or ac- tivity based costing] that helps identify an organization’s costs. Understanding the drivers of cost whether they’re direct or in- direct are of utmost importance for any organization and in competitive bidding is absolutely necessary. ABM includes an analysis of the activities or the specific tasks and helps outline process flows to eliminate waste, poor productivity and inef- ficient or "time-consuming" steps in the activities. Once process flows are clarified an activity analysis is conducted to identify performance gaps, inefficiencies etc. A performance analysis is conducted to quantify the impact of the activities. The outcomes of interest from new processes and operations must be identified prior to implementing them to allow the manager to measure results from changes made. ABM is a process that is used in conjunction with Activity Based Costing (ABC) and the processes are complimentary. In summary ABM is the effective planning of the HME’s activities to achieve con- sistency in performance to meet its goals, objectives and ac- complish its mission. ABM essentially changes traditional management practices and guides managers to identify suc- cessful practices and establish ongoing process controls to en- sure consistently good performance while assuring quality to meet the needs of the majority of customers and control op- erational expenses.
Activity Based Costing Activity Based Costing (ABC) is very similar to ABM how-
ever the process focuses on the methods of measuring cost and performance of activities as they relate to the cost of doing business. HME’s derive their revenue primarily from the reim- bursement received on the products provided to patients. The services associated with delivering the products are not typi- cally reimbursed thus ABC assigns cost to activities based on their use of resources and assigns cost to cost objects based on their use of activities. ABC recognizes the causal relation- ship of cost drivers to activities. Understanding these relation- ships is extremely important for an HME in competitive bidding. Reimbursement reductions due to inappropriate bids could result in an organization’s failure and survival in com- petitive bidding for organizations that participate will rely heavily on understanding the true costs (direct and indirect) of operating their business. Traditional cost models applies re- sources to products via direct and indirect direct costs. Direct costs are associated with products, materials and labor attrib- uted directly to the product and other resources are arbitrarily allocated to the product, typically through direct labor hours, labor dollars or machine hours. Sales,
continued on page 35 Focus Journal Winter 2012 11
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