Value-based healthcare is closely related to positive health outcomes. Value is often measured as a ratio of patient outcomes and cost associated with a condition. The time-driven activity-based costing (TDABC) project measures patient-reported outcomes in the form of a three-tier model, allowing healthcare organizations to manage costs and improve quality of outcomes, and therefore, value of care.
Geography: United States; Focus Area: Healthcare costing model for improved care quality and outcomes
The time-driven activity-based costing model (TDABC) was initially proposed by Kaplan and Anderson in 2003 as a costing model for organizations that factored resource spending, process design, and the complexity of individual channels, customers and orders based on data from existing ERP and CRM systems. TDABC is different from activity-based costing as it mitigates inherent problems of the latter, such as an inability to capture complexity of operations, high cost of building and maintenance, and long-drawn implementation process.
How TDABC Addresses Deficiencies in the Activity-Based Costing Method
Building traditional activity-based models requires managers to assign the costs of department resources to products and consumers who use them. The approach works for small settings but not large scale projects on an ongoing basis. Oftentimes estimates of product, process, and customer costs become inaccurate because of infrequent updating (Kaplan & Anderson, 2004). As a consequence, cost drivers are perceived as inaccurate, which steers attention away from addressing the problems of inefficiency in processes, unprofitable products and customers, and excess capacity. More problems arise in response to complexity in operations (added resource requirement, more detailed activities).
The TDABC model simplifies these problems, as managers get the opportunity to estimate resource demand for each product, transaction, and customer, rather than associate costs to activities initially, and then to products or customers. This approach estimates cost-drivers accurately by estimating unit times for transactions, even when they are complex or specialized (Kaplan & Anderson, 2004).
The first step in the TDABC approach is to estimate practical capacity of resources as a percentage of their theoretical capacity (by applying a value such as 80%-85%). While it is a common method to measure the capacity of resources in terms of time, other units may also be used such as cost per megabyte or cost per cubic meter. The next step is to estimate the unit times of activities. The cost per time unit of resource supply is calculated (through surveys, interviews, or other instruments), as an approximate value. These estimated values are multiplied to obtain cost-driver rates. These rates are used to assign costs to customers when transactions occur. The rates tend to be lower than costs estimated using the traditional ABC method, and may be applied to individual transactions or customers, or other pricing strategies (Kaplan & Anderson, 2004).
TDABC costs are calculated and reported on an ongoing basis. Reports are used to understand business activities and the time spent on these activities, review unused capacity for successful decision-making. The final step is to update the model that reflects current operations, add more cost drivers (that may change due to changes in resources supplied or efficiency of activity as a result of technology, process reengineering, or quality programs) and activities by estimating unit time. Finally, time equations are incorporated to reflect the impact of activity and order on processing time.
Typical TDABC Implementation for Value-Based Healthcare
The TDABC model has undergone several improvements over time. In a typical TDABC project, the value-based healthcare (VBHC) team defines goals. In the project starter kit prepared by Harvard Business School, outcomes are measured in three tiers (survival and degree of functional status, recovery and complications during treatment, and long-term health sustainability). Patient reported outcomes serve as benchmarks for the process of treatment (Harvard Business School, 2020). The phases of the TDABC process spans across three phases: preparation, data definition, access, and analysis, roll out. During the TDABC project, the care delivery value chain (CDVC) is defined for a specific medical condition, process maps are prepared, time estimates obtained for each process, the cost of supplying healthcare resources to patients is estimated, the capacity of each resource estimated and capacity cost rate calculated, and finally, the cost of patient care is calculated.
Keel and team (2017) further elaborate that organizations and department boundaries are not considered, instead, all processes along the care continuum are captured for the specified medical condition. Providers receive bundled payments for each CVDC, which promotes accountability. Linking outcomes to costs makes it possible to improve care as providers compete on the basis of value. Although considerable research is directed to define outcomes for a medical condition, more emphasis needs to be placed on developing a standard for calculating costs, thereby controlling costs. Researchers observed the application of TDABC across healthcare settings to either influence reimbursement policy or realize operational improvements. TDABC was adopted to accurately capture the cost of care at any level of care and complexity with simplicity and efficiency.
TDABC Typical Sequence of Steps
In the studies analyzed, TDABC consisted of seven steps: selecting the medical condition i.e. interrelated patient circumstances including comorbidities and complications addressed in a coordinated way, defining the CDVC, develop process maps for every activity in care delivery, estimating time for every process, estimating costs of supplying care resources i.e. direct costs, indirect costs, capacity, and capacity cost rates, and finally, calculating the total costs of patient care.
TDABC made the calculation of total costs through the use of multiple time drivers, reduced resource waste, redundant human resource, waiting times, and non-value added steps. TDABC was suitable to manage complex costing, making it compare costs and reimbursement. As a result, it was possible to reward physicians and administrators based on their performance, and support the goals of VBHC.
Calculating capacity cost rates (CCRs) was simpler than calculating ABC. A number of factors influence the cost of patient care, such as constraints due to organizational boundaries, using different methods to define components (process maps, time estimates, or resource allocation), and not allocating support resources as per model requirements. Finally, certain aspects of TDABC implementation may be simple and others more complex. TDABC is not a replacement for an existing system, rather a method that needs to be gradually incorporated into existing functional systems for reliable and stable processes in healthcare costing to create value.
Therefore, the model proposed by Kaplan and Anderson improves upon the activity-based costing method by introducing a key factor i.e. time in the analysis. The TDABC model continues to gain widespread adoption in costing healthcare systems for value-based care. In future, analysis derived from implementing the model is likely to feed into policy systems that optimizes processes, costs, and reimbursement.
Keywords
value-based healthcare, care delivery value chain, healthcare costing, Kaplan and Anderson, time-driven activity based costing, TDABC
References
Harvard Business School. (2020). The Time-Driven Activity-Based Costing (TDABC) Starter Kit. In Harvard Business School. Harvard Business School. https://www.isc.hbs.edu/Documents/pdf/2020_TDABC_Project_Starter_Kit.pdf
Kaplan, R. S., & Anderson, S. R. (2004). Time-Driven Activity-Based Costing. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.485443
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
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