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By Monica E. Oss

I heard an interesting comment at a recent meeting when two managers of a provider organization were talking about the upside of value-based payment models – “we won’t need to worry about unit costs and productivity anymore.”

I’m sure most managers realize that is not the case. In fact, managing unit cost is just as critical, if not more, in a value-based payment environment. Value-based payment models are focused on realigning incentives to provide high quality service while keeping the cost of services down (see Medicare Preparing To Shift 50% Of FFS Reimbursement From Volume To Value By December 2018, Medicare Moving FQHC Reimbursement From FFS To Bundled Rates, and After SGR Fix, FFS Takes Another Hit). But unit costs are a critical element in the evolving value equation – and controlling unit costs will remain an important strategic issue.

And for those organizations still working with fee-for-service (FFS) reimbursements, our current market is making managing unit costs more vital than ever. A review of Medicare and Medicaid fee-for-service (FFS) payment rates show minor increases in FFS rates – certainly not enough to keep up with operating costs; especially with rising per-consumer costs due to the increase in volume of services, new technology, and the increasing number of consumers with multiple chronic conditions (see Medicare Unit Cost Increases As Of April 2015: 2014 To 2016 and Key Components of USPCC Trends: 2011–2016).

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Ken Carr, Chief Financial Officer, The Centers, Inc. and OPEN MINDS advisory board member

The question for most executive teams is how to improve their unit cost management. The key, according to Ken Carr, Chief Financial Officer, The Centers and OPEN MINDS advisory board member, is to “think about manufacturing around a particular price. It’s not just math – a lot of what we’re talking about is understanding the operations and the workflow, because you can’t do all of that without the pieces.”

Ken elaborated on this in his recent presentation at The 2016 OPEN MINDS Performance Management Institute, Reengineering Your Unit Costs: How To Reduce Your Unit Costs When Market Rates Go Down. He laid out the four keys to best practice management of unit costs:

Service line-specific cost accounting – The first component in the process is the ability to understand and measure costs in general (and unit costs in particular) by service line. More “global” measurement and management of costs is not useful as executive teams think more about the financial sustainability of specific services (see The Three Keys to Reducing Your Unit Costs and The Overhead Factor In Unit Cost).

Target costing – This is a pricing method to reengineer the cost of a service to hit a specific target market rate, or the maximum amount of cost for a service that can be incurred to earn the required profit margin. The key element is the ability to reengineer your costs so your price to the payer or consumer is within their “acceptable” range. After you determine the acceptable rate for the service, you determine what it costs your organization to deliver that unit of services — and if your costs exceed the rate, its time for “backwards engineering” to bring your costs in line. The reality is, there are only so many cost variables that you alter – including wages and benefits of direct care staff, staff productivity, volume of consumers served, administration/overhead, etc. (see Target Costing & Managing To Market Rates and Using Process Engineering (& Process Metrics Management) As An On-Going Tool For Managing Costs & Improving Operations). But this is a necessary step to be competitive in our value-driven market.

Automated process measurement (and management) systems – Performance measurement needs to be automated with multiple systems connected to monitor unit costs in the real time. Electronic health record systems, financial management systems, human resource management systems, and customer relationship management systems can all be integrated to provide the real-time monitoring and reporting data you need to manage on a daily basis. Automated, up-to-date process measurement will allow you to make data-driven management decisions and take action quickly to address problems (see What Do You Need To Demonstrate & Manage Your Value? and Making Performance Real).

Metrics-based business process management – Metrics-based management is a model of managing processes, outcomes, and performance that relies on qualitative and quantitative measurement of the current performance, the desired performance, and the objectives and action plans to improve performance. Metrics-based management requires both strategic management to identify your performance goals, and business process management to optimize day-to-day organizational processes (see What Is Metrics-Based Management & How Do You Do It? and Two Uses Of Metrics-Based Management – Strategy & Business Process Management).

A big piece of the metrics-based management process is operational reengineering – driving operational change for the organization’s structure, staff/jobs, and technology. And in those areas, your goal is to “track the people and what they do” (including consumers, staff, and administration), and “track the paper and where it goes” (including consumer medical records, service delivery and billing, and routine financial workflows).

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For more, check out The 2016 OPEN MINDS Performance Management Institute pre-institute seminar session, Using A Metrics-Based Management Approach To Manage Unit Cost & Pay-For-Performance Contracts. And be sure to join me in New Orleans on June 8 for the session, Innovation, Diversification & Scalability: How To Develop A Profitable New Service In A Competitive Market at The 2016 OPEN MINDS Strategy & Innovation Institute.

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