IHP 630 Module 7 Costing Paper Example

What a Knee Replacement Really Costs: Time-Driven Activity-Based Costing at Stonebridge

[Student Name]

Southern New Hampshire University

IHP 630: Healthcare Finance and Reimbursement

Module Seven Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

What a Knee Replacement Really Costs: Time-Driven Activity-Based Costing at Stonebridge

Stonebridge Regional Medical Center performs about 420 knee replacements a year, and its cost accounting system says it loses about $1,750 on each one paid by traditional Medicare. The orthopedic surgeons doubt the figure, and the board is considering whether to invest in the service or scale it back. This paper applies time-driven activity-based costing to estimate what a knee replacement actually costs and where costs could fall.

Why Traditional Costing Misleads

Like many hospitals, Stonebridge estimates procedure costs by applying each department's ratio of costs to charges to the charges on a patient's bill. Because charges are set by a chargemaster rather than by resource use, this method can overstate the cost of some services and understate others. It also buries costs such as operating room time inside broad averages, giving managers little insight into which steps drive cost.

The Method

Kaplan and Witkowski (2014) presented this time-based approach for measuring the cost of treating a patient across the full cycle of care. It requires two estimates for each resource, such as a nurse, a surgeon or an operating room: the cost of supplying that resource and its practical capacity, the time it is actually available for patient work. Dividing the first by the second gives a capacity cost rate per minute. Mapping the patient's path and multiplying the minutes each resource spends by its rate, then adding consumables such as implants, yields the cost of the episode. They argued that such accurate costs can transform how health care is organized and priced.

Calculating Capacity Cost Rates

An operating room nurse costs about $110,000 a year with benefits. After vacations, holidays, training and breaks, practical capacity is about 1,600 hours, or 96,000 minutes, giving a rate of about $1.15 per minute. An orthopedic surgeon's total compensation and support costs of about $600,000 over the same capacity give roughly $6.25 per minute. An operating room, including equipment, space and sterile processing, costs about $1.2 million a year and is practically available about 2,500 hours, or 150,000 minutes, for a rate of $8.00 per minute. Similar calculations were done for anesthesiologists, technicians, inpatient nurses, physical therapists and beds.

Mapping the Patient's Journey

The team, including a surgeon, nurses, a physical therapist and a finance analyst, mapped each step from the pre-operative clinic visit through surgery, recovery, a two-day inpatient stay and discharge, observing and timing a sample of cases. The table shows the resulting costs.

Table 1. Time-Driven Cost of a Knee Replacement

Note. Composite estimates from process mapping at Stonebridge.

Comparing the Two Estimates

Time-driven costing puts the episode at about $12,100, roughly $2,000 below the charge-based estimate of $14,100. Against a Medicare payment of about $12,350, the procedure breaks roughly even rather than losing $1,750. The difference arises mainly because the old method assigned operating room and inpatient costs using charge ratios that overstate orthopedic resource use. The board's decision about the service should rest on the more accurate figure.

Checking the Estimates With Clinicians

Before sharing results, the team reviewed the map with two orthopedic surgeons, the operating room manager and the inpatient unit's charge nurses. They corrected several times, for example adding fifteen minutes of turnover cleaning that the first observations had missed, and pointed out that complex patients with diabetes or obesity spend longer in surgery and recovery. The team therefore calculated a second cost for higher-risk patients, about $13,900, which will matter if the hospital negotiates bundled prices that do not adjust for risk. Involving clinicians also built trust in the numbers, which had been lacking under the old method.

What the Map Reveals

Kaplan et al. (2014) reported that clinical teams using this method at several health systems found opportunities to lower cost without harming outcomes, such as shifting tasks to appropriately trained staff, reducing variation in supplies and redesigning processes to remove delays. Stonebridge's map shows two large opportunities. Implants and supplies make up 57% of the cost, and surgeons use implants from five vendors at prices differing by up to $1,800 for comparable devices. Inpatient days account for about $1,500, and many healthy patients could go home after one night, or the same day, with appropriate support.

Estimating Savings

Standardizing to two implant vendors through a surgeon-led value analysis committee could cut average implant cost by about $900. Moving 40% of patients to a one-night stay and 15% to same-day discharge could reduce average bed and nursing costs by about $600. Replacing individual pre-operative education with group classes would save about $30 per patient. Together these would lower average cost to about $10,600, a margin of roughly $1,750 per Medicare case, or about $300,000 a year across Medicare volume alone.

Cautions About the Method

Keel et al. (2017) systematically reviewed hospital and clinic studies that used the method and found that it had been used in many settings, especially surgery, and could support process improvement, but that studies often departed from the method's recommended steps and reported their methods inconsistently. That variation makes comparisons across hospitals difficult. Stonebridge's estimates depend on sampled times and capacity assumptions that should be validated before being used for pricing or contracts.

Using Better Costs Beyond One Procedure

Accurate costs support several decisions: negotiating bundled prices with commercial insurers, deciding which services to grow and identifying unused capacity. The analysis found operating rooms used only 68% of their practical capacity, meaning added cases would cost less than the average suggests, which matters for the ambulatory surgery decision in Milestone Three.

Conclusion

Time-driven activity-based costing shows that a knee replacement at Stonebridge costs about $12,100, not $14,100, and that implant standardization and shorter stays could lower it to about $10,600. The method changes the board's view of the service from a loss to a potential strength and gives clinicians a clear map of where to act.

References

Kaplan, R. S., Witkowski, M., Abbott, M., Guzman, A. B., Higgins, L. D., Meara, J. G., Padden, E., Shah, A. S., Waters, P., Weidemeier, M., Wertheimer, S., & Feeley, T. W. (2014). Using time-driven activity-based costing to identify value improvement opportunities in healthcare. Journal of Healthcare Management, 59(6), 399-412. https://doi.org/10.1097/00115514-201411000-00005

Kaplan, R. S., & Witkowski, M. L. (2014). Better accounting transforms health care delivery. Accounting Horizons, 28(2), 365-383. https://doi.org/10.2308/acch-50658

Keel, G., Savage, C., Rafiq, M., & Mazzocato, P. (2017). Time-driven activity-based costing in health care: A systematic review of the literature. Health Policy, 121(7), 755-763. https://doi.org/10.1016/j.healthpol.2017.04.013