Cost variance and cost accounting are gaining popularity throughout the healthcare industry. CFOs and finance teams love these tools, but the methods are far from perfect. They create significant hidden impacts elsewhere in the organization, including supply chain, data analysis, and service line leaders.

In this article, we’ll explore together the hidden impact of cost variance and cost accounting in orthopedics.

Cost Variance and Cost Accounting in a Nutshell

Case cost, if is unfamiliar, is simply the cost of any individual procedure in an individual case. Case cost variance, then, is any difference in cost between instances of the same procedure.

For years, hospitals have needed to be able to obtain better insight into case cost and how it varied by physician. Cost accounting solutions targeted at the CFO as well as clinical information systems began to address the issue of variance and identify physician procedures and practice patterns that caused case costs to escalate. These solutions help identify physician-level, case-level, or procedure-level cost variance. In other words, administrators can identify that they are spending more when Dr. Smith does a knee replacement than when Dr. Gutierrez completes the same procedure.

The automation of surgical preference cards, which provide a logical set of instructions for positioning as well as what supplies and equipment are required for a specific procedure, was introduced to help.

And finally, EHR solutions have introduced some technology that helps users try to understand and better formulate data on case cost variance.

Thanks to these advancements, the healthcare industry is starting to get to a place where it can provide granular, case-by-case data that reveals the cost variance between similar procedures.

The Problem With Cost Variance and Cost Accounting Practices

These tools are empowering hospital systems to identify cost variance – areas where savings are possible. That’s a great thing, of course. But there’s a problem: these tools don’t provide real solutions to access those savings. Most of the time, they simply identify a problem.

Administrators then kick that problem over to supply chain: “Hey team, we identified some cost variance. Go figure it out.” This message gets sent to service line leaders and value analysis people as well. But by and large, supply chain is expected to fix it.

The thing that hospital administrators are missing in this process is that identifying cost variance isn’t the end of the process. There is a ton of manual work that goes into actually resolving case cost variance. When that work – usually spearheaded by supply chain – isn’t well supported with technology and automation in supply chain, then case cost variance analysis itself does not succeed as it could.

Realizing Value Requires a Robust Strategy

If a healthcare system wants to see real value from case cost variance initiatives, it’s going to require a robust strategy. It’s not enough to just look at the variance as a single event. Supply chain teams have to understand all of the components being utilized in a particular construct. They also must be able to understand how those constructs and components perform against market benchmarks.

It’s not uncommon for supply chain teams to find issues between the PO file and the case file. Part of the issue lies in getting an accurate picture of what components were actually used in a construct by physician, procedure type, and vendor. For example, once they have this built to a reasonable level, they have to go rebuild that at market benchmarks. This means the already resource-strapped supply chain has to build it twice: first, they have to fill in the pieces of what was actually used on the case and secondly, how it compares to the market. If the supply chain team is limited to only benchmarks from the GPO, they are missing a critical element in being able to drive savings.

When it’s all said and done, it’s not uncommon for the data clean up process to take three to four weeks for a well-trained, full-time supply chain resource. And then even once the work is done, there is often a lack of trust in the final data result. Those who have actually done the work often don’t feel as though the data is complete or necessarily trustworthy.

Project Delays Mean Starting Over

Another issue with this process is that project delays often mean starting over. These efforts require the attention of a skilled, sometimes specialized staff member. Most hospital systems are limited in supply chain staffing, either by headcount or talent gap constraints. If the specialized resource assigned to reconciling this data gets reassigned to something more urgent, the work being done will more than likely be lost.

This is because old data doesn’t work. Clinicians expect current data. Try making this presentation with old data, and the excuses will flow. “Those prices aren’t right anymore” or “we’ve switched to another vendor already”, “we’ve added this component” and so on.

Significant – But Often Invisible – Work

Building all this information is, as we’ve already said, is significant, time-consuming work. And essentially this is the hidden impact of cost variance and cost accounting in orthopedics. Identifying cost variances does nothing on its own. It takes significant work in supply chain and value analysis.

The time it takes to manually reconcile data for every component in a construct is significant, and the time it takes to compare similar constructs and nuanced procedure types (say, an uncoated knee versus a revision knee versus a hybrid) is several orders of magnitude higher.

Here’s a key observation: all this work is often invisible to the C-suite. They don’t see it. With their case cost variance tools, all they see is that there is a variance, and they task their overworked, under-resourced supply chain team with resolving it.

But this work is real. It’s time-consuming. And it’s costly.

(And we haven’t even touched on the soft skills work that comes afterward, when supply chain is tasked with more or less convincing clinicians to go along with the changes that would resolve the variance! This, too, eats up precious resources in supply chain.)

An Automated Approach is Key to Success

The deeper down the cost variance rabbit hole you go, the clearer this realization becomes: your limited supply chain team will never keep up with cost variance initiatives when running them manually. There’s not a hospital in the country that’s well-resourced enough in supply chain to keep up. While increasing headcount is probably a welcome suggestion, it’s not going to completely solve this problem.

The clear solution? Supply chain teams need to introduce data, technology, and automation into this process. However, there aren’t very many solutions available that can do this kind of automation well. The level of information needed to make sense of these complex orthopedic parts and devices is hard to come by. UNSPSC isn’t going to solve it. (Read why UNSPSC is flawed when it comes to orthopedic parts)

One great resource is Orthopedic Network News, which understands not just the device-level enrichments, but also the construct logic and how components come together on a case.

Of course, to be useful, this information needs to be immediately aligned to the hospital purchase history, case file, and market benchmarks – something Curvo’s clinical spend management solution does automatically. This data is built into the Curvo platform, giving its users unprecedented access to data that enables them to derive tangible savings from their cost variance initiatives.

With this continually updated data, supply chain has the information they need at their fingertips every time a cost variance issue arises. Armed with the right data, supply chain can take action quickly.

Ready to Achieve Cross-Functional Collaboration?

Armed with up-to-date data and appropriate automation tools thanks to the Curvo platform, supply chain can accomplish more than they could before, opening the door to cross-functional collaboration among the clinicians, the finance team, and the supply chain side.

By completing the picture and delivering a more strategic approach, supply chain teams and clinicians can regularly evaluate variance in major categories like joints and spine. Armed with data, the conversation changes from a project once every 18 months to quarterly conversations that are focused on insights, allowing clinicians and supply chain to collaborate on savings opportunities.

Interested in learning more? Schedule a demo today to see for yourself how Curvo’s automation tools and data insights can help solve your cost variance woes.