Tuesday, November 8, 2011

ABCs of Efficiency

In past posts I have spent some time talking about improving efficiency by changing little things, common sense things . I have given examples of some things that I have seen in my travels that just wasted money. The problem still remains, if you are stuck in a particular work-flow, you may not be able to see the inefficiencies let alone correct them. So, this post will serve to introduce the reader to a handy-dandy little idea for spotting inefficiencies. It is as easy as ABC.

No, I am not referring to singing a child’s song in the office. I am actually referring to a completely ingenious method called activity based costing (ABC). This method is used by some of the most efficient companies to identify areas of inefficiency by considering indirect costs invested in to various activities. For the novice, I will first explain indirect costs. To do that, we will start with direct costs.

Direct costs directly relate to the activity at hand. For example, in a doctor’s office the cost of a disposable surgical tray, can be ‘directly’ subtracted from the payment for the surgical procedure to have a better understanding of the actual value of the surgery. Look at it this way… the patient will need to have a minor procedure in the office. The insurance will pay $200. In order to perform the surgery, the doctor must use a disposable surgical tray that he bought for $50 from a medical supply company. As there is rarely additional reimbursement for the surgical tray, the surgical tray is an expense the doctor can easily and directly subtracted from the value of the surgery. With that, the surgery is actually only worth $150 ($200-$50).

Now think of the other costs associated with the surgery. First there was a the receptionist who checked in the patient. Next the medical assistant helped the patient undress and the nurse took the vital signs, etc. The salaries of these staff members are cost too. Since these workers each assist multiple patients and do other non-surgery related tasks as well, it is difficult to relate their salary to the surgery. Because we cannot relate it directly to the originally mentioned surgery, it is an indirect cost.

In true activity based costing, each task resulting in indirect costs would be calculated on an ongoing basis and it is a bit more complicated than this. While it is possible, it may not be practical for many healthcare providers to do this all the time like a large manufacturing company might; however, it is practical and beneficial to do an ABC assessment as part of an overall financial health check-up for medical practices.

Since few medical practices have the high-end tracking and accounting systems required to really perform activity based costing. I will give you a little tip on a easy way to do your own variation on ABC. It is best to hire an outside party to do this review as an outsider will not have the same bias staff may have. Plus, you do not want to upset the existing workflow. There is no need to hire someone really expensive – a pre-med student from the local college will be very glad for the internship opportunity to learn about the business aspects of medicine.

To begin, the office manager or doctor should use Excel to make a list of functions in the office. The functions will be listed in the rows of the first column. Functions, for example, might be front desk, billing, nurses, medical assistants, etc. Under each function, itemize tasks completed by these functions in rows beneath each function. The items on the list should be relatively broad while breaking down the major tasks in the office. For example, telephone calls should be an item but don’t break down the list by the type of phone call unless you are assessing billing where it would be helpful to assess the time dedicated to patient calls versus accounts receivable follow up.

At this point, the intern gets to work! The intern should be instructed to watch different functions work and record the approximate time in minutes associated with each task. For the most comprehensive results, the intern should spend a 2-3 full days with each function. Be sure that the time spent with each function is equal so you can compare apples to apples. To avoid disruption and skewed results, the intern should limit their interaction with the staff; however, some questions are inevitable as the intern may not recognize some of the tasks without asking . Don’t worry too much that the times are not perfect. In this assessment we are only trying to get a relative understanding of times as we look for patterns indicating inefficiency. The intern should also be instructed to documenting any additional tasks, missing from your worksheet that seem to be a major part of the function’s job. At the end of each day of the assessment, the intern must record the total time for each task by function.

When the intern is done evaluating with each function (2-3 days data recorded)

First, average the time associated with each task.
Next, average the salary (e.g. cost) per minute by function.
Now, multiply the average cost by the average task time
Finally, multiply the total from the last step by the number of working days in an average month to come to your monthly cost per task.

Now, you can evaluate your practice to see exactly how you are spending money. If you find that one task is very expensive as compared to others, you can look for ways to streamline that task. Here's a sample:

There is, however, a big caution here! DO NOT assume that an expensive task has no return on investment. DO NOT eliminate tasks because they look expensive in a general assessment like this. The purpose of this assessment is to determine if the costs are effectively accomplishing goals of the practice. You need to use this tool as a guide to begin a search for inefficiencies in processes ONLY. Remember, this is simply the a first step to help you determine if the costs are making effective use of resources.


Related Posts Plugin for WordPress, Blogger...