Accounting for Costs in Healthcare
As part of a project this summer with colleagues at IHI, we’re looking at different ways to track costs of healthcare services.
We particularly want to understand how an organization should proceed if leaders want to understand the costs of a care cycle.
Organizations working to deploy Lean as a management system are particularly sensitive to cost and waste when considering the care cycle as a value stream so understanding the Lean perspective is part of our challenge.
For example, Toyota has a radically different view of cost accounting compared to most other companies:
“...[the Toyota] strategy consists of a minimalist approach to standard cost accounting, and a strong focus on cost planning. American managers [hired to work at the Toyota transplant facility in Kentucky starting in 1984] were again shocked that their experience had almost no relevance under Toyota’s approach. They were used to bombarding production managers with all sorts of detailed numbers to control their behaviour, but Toyota wanted them to report only scrap costs and supply expenses to production groups.
“Toyota recognized that cost accounting can never be a source of competitive advantage, and consequently chose to make accounting as trouble-free as possible to the shopfloor. As a general manager at TMC [Toyota Motor Company] put it succinctly, ‘cost is there to be cut, not to be calculated.’ Toyota presumes that the shopfloor knows what to do to cut costs even without seeing accounting costs. This makes sense because costs are visible on the shopfloor. Relieved of responsibility for shop floor control, accounting focuses on the area where it can be of true help: minding the cost of future models in development. Its job is to make sure that new models will make enough money to justify the effort of team members.”
(source: Kazuhiro Mishina, Chapter 4: “Making Toyota in America: Evidence from the Kentucky Transplant, 1986-1994”, Between Imitation and Innovation: The Transfer and Hybridization of Productive Models in the International Automobile Industry, Robert Boyer et al. editors (1999), Oxford University Press)
Last week as part of our inquiry, several of us discussed Lean accounting concepts applied to healthcare with Brian Maskell.
Our project team appreciates Brian’s knowledge and willingness to help us learn. Brian is co-author with Bruce Baggaley and Larry Grasso of Practical Lean Accounting, 2nd edition and has worked for more than 20 years to develop theory and practice for useful performance measurement.
Practical Lean Accounting is a clear and thoughtful guide to Lean Accounting applied to manufacturing companies. The authors outline how to move from typical cost accounting systems to an accounting system that will support effective Lean practice.
Brian’s perspective aligns closely with what Mishina observed about cost accounting at the Toyota Kentucky plant and applies to healthcare as much as it does to auto manufacturing.
Brian emphasizes that cost accounting is non-value added activity, so we should seek to reduce it to the absolute minimum needed for financial regulations and operations guidance.
On the other hand, managers and point-of-care staff working in a value stream ought to have at least weekly information about costs and quality to help them understand the state of control (predictability) of their work processes.
Thus, any cost-accounting system for organizations embracing Lean should have both low complexity and provide meaningful weekly data to the value stream managers.
Those are stringent criteria to meet and useful provocations for any organization, whether they are committed to Lean or not.