ABC going back to basics
Category: Activity Based Costing
We, as a department were justifiably proud of our achievement but were not content to rest on our laurels. DPC approached us and asked if we would like to take part in their ABC program. I thought we had an issue with literacy, but in fact ABC stood for activity based costing. The drive behind this was to study the process and look at what is value added activity as opposed to non-value added or wasted activity.
We had already undertaken a major process review as part of our modernisation funding; this led to automation being introduced. We felt we were efficient compared to previous work practices but could not quantify this. ABC gave us the opportunity to gather data on our new process and see if it could be refined. With a background of cost improvement and ever-competing demands on resource, this was an opportunity we could not pass up.
Richard Warren, Director of Operations at St Jude Children’s Research Hospital, Memphis, USA presented their experience at the Frontiers meeting in Manchester. At St Jude, all care is provided free and funding is based on charitable donations. The laboratory had a process they considered to be good, but had familiar cost pressures. They undertook the ABC study and were surprised by it findings.
They found similar issues to those in the UK. They felt that their staff were very good technically but did not have the tools, training or knowledge to convert good clinical practice into good economic practice without compromising the former. They used expertise from the diagnostic industry to help them through this process, the ABC program. They needed to reduce costs and improve the quality of healthcare delivery, a difficult balancing act. The only way this can be achieved is by concentrating on the good things they do whilst removing the inefficiencies in the system, i.e. do not do activity that is non-value added.
The issue they faced was that if the data they were using was poor, then the assumptions they made could be incorrect resulting in bad decision making.
Most cost is indirect cost; this is the staff to run equipment, the capital charge and facilities. ABC allows indirect cost to be factored more appropriately into the equation. This can have a significant effect on overall finances. The analogy used was going to a cash point and drawing out £100. If the cost to drive there is £5 then you end up with £95. If you go five times in the week and get £20 each time when the indirect cost of £5 per trip is factored in you are left with £75. More activity generated more resource consumed, lower return.
The result of the ABC study was that they found 89% of what they were doing was non-value added and that 32% of their activity was non-business sustaining. This came as a shock as they thought they ran a tight ship. Some of their assumptions on cost were incorrect thus leading to poor decisions being made, one assay they priced at $6.2, but when indirect cost was added the true value was $33.6. They made a loss of $27 every time they ran that test!
The service was reconfigured using the new data and a process was then put into place to manage new developments using sound management tools rather than assumption. Already the changes have resulted in savings of $150,000 pa in one area alone.
The modern pathology service in the UK is looking towards networking and outcome based quality standards. ABC allows good information to be provided by a network to decide what should be done where. There is a significant investment in resource to make a network viable; most of this resource is indirect cost. We do not have good data on current costs yet we are making decisions, much like those in America, on poor data.
At the North Middlesex we are currently building our data which will enable us to look again at what we do. As DPC is an immunoassay company we are looking at this area of our practice first but will expand it to all of our activity when we have become experienced with the system.
With new legislation such as the Human Tissue Bill, efficient use of resource becomes essential. If the wrong test is performed on the wrong sample without patient consent then this could lead to a legal minefield. Staff time must be taken on ensuring we do the right thing to the right person at the right time, if we do not manage to do this, we could be breaking the law. That would be a large indirect cost to factor in!
David Ricketts FIBMS
Clinical Biochemistry Department
North Middlesex University Hospital NHS Trust