Managing in an Activity Based Funding Environment

Transcription

1 Performance Activity and Quality Division Managing in an Activity Based Funding Environment A Practical Guide for everyone Version 1.0 improving care managing resources delivering quality

2 To request permission to reproduce these materials, please contact the Performance Activity and Quality Division at These materials are regularly updated. For the latest version go to the ABF/ABM intranet site at or the internet site at Department of Health, State of Western Australia (2012). Copyright to this material produced by the Western Australian Department of Health belongs to the State of Western Australia, under the provisions of the Copyright Act 1968 (Commonwealth Australia). Apart from any fair dealing for personal, academic, research or non-commercial use, no part may be reproduced without written permission of the Performance Activity and Quality Division, Department of Health Western Australia. The Department of Health is under no obligation to grant this permission. Please acknowledge the Department of Health Western Australia when reproducing or quoting material from this source. Important Disclaimer: All information and content in this Material is provided in good faith by the Department of Health Western Australia, and is based on sources believed to be reliable and accurate at the time of development. The State of Western Australia, the Department of Health Western Australia, and their respective officers, employees and agents, do not accept legal liability or responsibility for the Material, or any consequences arising from its use.

3 Contents Foreword 3 Acknowledgements 4 How to use this guide 5 Background What is the role of the Manager? How is WA Health funded? Where do Health Services source their funding? How does WA State Government allocate funds to WA Health Services? How does the Department of Health obtain funds from State Government? On reflection how is WA Health funded? What data sources are available within WA Health? Clinical applications Corporate applications How do I access information from these applications? What reporting is already available? What tools are being used to analyse information across WA Health currently? On reflection what data sources are available in WA Health? Business planning: objectives, strategies, goals/targets and reporting/measures What are objectives, strategies, goals/targets and reporting/measures? Why is business planning so important? Developing strategies that align with the whole organisation Example: Hospital A annual plan for Performance Management Framework triage 1 wait time key performance indicator On reflection business planning 25 1

4 5.0 Understanding costs, revenue, budgets and activity What are costs, revenue, budgets and activity? What are the different cost types? What is patient level costing and what is it used for? What are cost drivers? What can be done to improve the quality of costing data? What does it mean to unbundle your costs and activities? Surplus or deficit: the difference between income/revenue and costs How can Health Services influence prices? On reflection understanding costs, revenue, budgets and activity Understanding and managing activity and key performance indicators What is activity? How is activity classified? How is activity labelled (activity type)? Understanding the key performance indicator definitions How can I influence key performance indicator outcomes? Managing towards activity targets On reflection understanding and managing activity and key performance indicators Delivering service improvements What is Lean? What is Six Sigma? Understanding variance Identifying and verifying root causes Developing strategies and implementation Evaluating and sustaining improvement On reflection delivering service improvements 47 References 49 Attachment 1 51 Attachment

5 Foreword Each of us in WA Health is responsible for ensuring the best use of tax payer funds in the delivery of safe, high quality care to the people of Western Australia. This guide has been developed to assist anyone in WA Health to understand how to manage their area well in the new world of Activity Based Funding and Management. More than ever all managers, directors and executive directors, both clinical and corporate, must fully understand the details of our business: the services that we provide for, with and to patients and their families. We need to understand: activity what services are provided and to whom? What influences the level of demand for those services? What is the quality of the care being delivered? the costs of that activity how much does it cost to deliver that service? How does that compare with other similar services? Are costs being attributed appropriately? the revenue received to fund that activity where does the funding come from for this service? How does the revenue relate to the costs? What opportunities are there to source alternative revenue? Good quality information, available where and when it is required, is essential for managers to carry out their role effectively. This guide has been developed collaboratively by staff across WA Health. It provides an overview of some of the tools and support that are currently available to staff. It also poses a number of questions to assist staff in identifying areas of their business which could be improved. These tools will only be effective in continuously improving our services if staff at all levels work together to identify and meet the challenges we face. By building on our strong track record of working collaboratively we will all deliver better health care for patients and consumers. Mr Ian Smith Chief Executive WA Country Health Service (WACHS) Ms Nicole Feely Chief Executive South Metropolitan Area Health Service (SMAHS) Mr Kim Snowball Director General Department of Health WA Dr Dorothy Jones Executive Director Performance, Activity and Quality Division Department of Health WA Dr David Russell Weisz Chief Executive North Metropolitan Area Health Service (NMAHS) Mr Philip Aylward Chief Executive Child and Adolescent Health Service (CAHS) 3

6 Acknowledgements This guide is dedicated to all the patients, carers and families who use the WA Health System. We sincerely thank all the clinicians, managers and support staff who work tirelessly to deliver safe high quality care to patients, carers and their families. This guide was developed in response to feedback from approximately 180 Department of Health and Health Service Corporate Staff who attended the Finance and Business Forum in March They identified the need for a tool to assist the practical implementation of Activity Based Funding and Management across WA which spurred the creation of this guide. Writing of this guide was made possible through the collaborative efforts of Department of Health and Health Service Staff who provided input, guidance and feedback. Particularly, staff who are members of the: Implementation Tools Group Department of Health ABF/M team Business Improvement Program. Finally, the purpose of this guide is to help Managers understand and function in an ABF/M environment. We acknowledge in advance the Managers who use the information within this document to improve the quality of care given to the Western Australian Community. 4

7 How to use this guide This guide aims to provide all managers who are involved in the administration of health services with practical knowledge to enhance their understanding and management of budgets, costs, revenue and activity in an Activity Based Funding and Management (ABF/M) environment. This guide not only provides theoretical knowledge but also health specific application and examples of its use. This guide is not designed to be an all encompassing management accounting textbook but rather a starting point for Health Service Managers to begin triggering questions, ideas and actions that will ultimately lead to better outcomes for patients and the community through the implementation of ABF. At the end of each section of the guide there are reflection questions and suggested action steps. It is recommended that readers reflect on the questions and note key ideas and next steps. The action steps are suggestions only and may or may not be relevant to every reader. If there are any queries or questions: us: activity@health.wa.gov.au Phone:

8 Background This guide builds on a range of information that is widely used across WA Health. It is important that Health Service Managers read these documents in conjunction with this guide, to better understand the implications for their health services. Some of these documents are annual and the latest versions can be found on the ABF/M intranet site at Document Title Description Link WA Health Clinical Services Framework Sets out the planned structure of public health service provision in Western Australia over the next 10 years. au/publications/documents/ CLINICAL_SERVICES_ FRAMEWORK_WEB.pdf WA Health Strategic Intent WA Health Operational plan Annual Performance Management Framework ABF Budget: Model Parameters and Information on the Construction of AHS Service Level Agreements ABF Inpatient/ Emergency/ Outpatients Weighting Activity Schedule Clinical Casemix Handbook ABF/M Training and Education Manual 2.0 Health Activity Purchasing Intentions (HAPI) Admissions, Readmission, Discharge and Transfer Policy for WA Health Services Outlines the vision, missions and values of WA Health and key priorities. Captures new and existing priorities for the current year in line with the WA Health Strategic Intent Outlines the key performance indicators to be used, the reporting obligations, and the processes of monitoring and review of health service performance. Provides detailed technical information on the Activity Based Funding model which is used to determine the budgets for Health Services in Outlines the cost weights per DRG for Inpatient/ Emergency/ Outpatients activity. Outlines casemix and the importance of clinical documentation accuracy. Provides an introduction and overview of some of the main concepts of Activity Based Funding and Management. Outlines how Activity Based Funding and Management will apply from 1 July 2011 to 30 June Provides the overarching framework for rules and criteria that govern counting and labelling activity across the state. about/strategicintent.cfm HRIT/docs/publications/ _ WA_Health_Op_Plan.pdf activity/publications/index.cfm +support +support activity/publications/index.cfm activity/publications/index.cfm activity/publications/index.cfm circularsnew/circular.cfm?circ_ ID=

9 HA215B Reporting Rules and Guidelines for Non Admitted Patient Services WA Strategic Plan for Safety and Quality Action Plan Describes the counting rules and reporting cycle for non admitted patient services. Describes the annual strategies and actions for Safety and Quality in Health Care. circularsnew/circular.cfm?circ_ ID= health.wa.gov.au/policies/index. cfm 7

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11 What is the role of a Manager? What is the role of a Manager?

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13 1.0 What is the role of a Manager? Business management is the process of organising resources or people to accomplish goals and objectives. Business management is not just about managing budgets but making best use of limited resources in delivering high quality health services throughout WA Health. Business management is not the sole responsibility of staff with the title of Business Manager but all staff who have accountabilities for managing health services, people and/or finances. Staff with job titles such as Operational Managers, Medical Directors and Nursing Directors all have a degree of human resource, operational and financial accountability. This guide is for all managers of the business and not just the staff with the title of business manager. Essentially the role of managers has not changed in an ABF/M environment. They are still responsible and accountable for planning, organising, resourcing, leading, monitoring and improving health services and making best use of limited funds. What has changed is that there is now a transparent link between funds allocated and activity; and there are expectations to meet key performance indicators (KPIs) outlined in Service Level Agreements between the purchaser (Department of Health) and providers (Health Services). (8) Activity outputs, outcomes and quality are the key focus of ABF/M. Managers need to have an enhanced understanding of what their health service does to allow them to improve patient care. Managers need to: Understand how their health services are funded Ensure activity is collected, counted and classified appropriately Ensure activity is costed accurately Understand activity, revenue, costs, surplus/deficit and performance information Identify and manage variances in performance, and Develop, implement and monitor strategies to improve care. Shouldn t clinical managers focus on just treating patients and leave the bean counting to corporate staff? Good financial management is just one part of good general management and it is the responsibility of all clinical managers and directors. Clinical managers cannot properly manage health services without understanding financial implications. 9

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15 How is WA Health funded? How is WA Health funded?

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17 2.0 How is WA Health funded? Learning objectives Understand where Health Services source their funds Understand how funds are allocated to Health Services Understand the Department of Health (DoH) Budget Cycle Understand how the budget submission from DoH to State Treasury is prepared 2.1 Where do Health Services source their funding? The majority of WA Health s funding is sourced from WA State Government appropriations. It is important to note however a significant proportion of funding is sourced elsewhere such as Commonwealth revenues, Mental Health Commission revenue and own sourced revenue eg private fees. As part of the National Health Reform Agreement signed by the members of the Council of Australia Governments, the Commonwealth Government has agreed to fund an increasing proportion of efficient activity growth over time. However, the State Government will remain the dominant funder of public health services in WA. 2.2 How does WA State Government allocate funds to WA Health Services? The WA State Government, through the Department of Treasury, allocates funds to WA Health. These funds continue to flow to Health Services (HS) and other budget holders such as Public Health, Health Information Network (HIN), Health Corporate Network (HCN) and DoH Divisions. Funds allocated to HS eventually flow to hospitals and facilities. See figure 1. 11

18 Figure 1 Illustrates the flow of funds from State Government. State Government Health Service Budget Holders WA Health (Doh) Other Budget Holders Flow of Funds Facilities 2.3 How does the Department of Health obtain funds from State Government? The annual budgeting cycle is the process by which the DoH obtains and allocates funding from State Treasury. See figure 2. The State Government budget for the following financial year is usually published in May and ready for endorsement by the State Parliament by June prior to the start of the next financial year (Q4). During the first quarter (Q1) of the current year, funds are fully distributed to budget holders. These fully allocated funds are then loaded into the general ledgers. This process triggers regular reporting of expenditure and activity against the budgeted amounts. By the end of Q1 (September/October) the Health Services and Health Finance in the DoH start planning next financial year s budget submission or bid. 12

19 Figure 2 Annual budget cycle process between DoH and State Treasury. Current mid year position released DoH builds next financial years budget submission Q2 Oct-Dec Q3 Jan-Mar Government bilateral negotiations between State Treasury and DoH for next financial year Resource distributions for current year made to budget holders Q1 Jul-Sep Q4 Apr-Jun State budget published for next financial year The second quarter (Q2) of the budget cycle focuses on reporting the mid year position (mid year financial review) for current budget performance and developing the submission or bid for next financial year s funding allocation. The operational budget submission is based on activity estimates (activity based funding) from the clinical services framework demand modelling and costed using the Whole of Health Cost Model. The bid may also include many other considerations such as new and existing government priorities, enterprise bargaining agreements, capital expenditure, last year s budget and budget holder input. The budget submission will include next financial year s budget bid plus three years of forward estimates. Once next financial year s DoH budget bid has been submitted to State Treasury, the two government departments have robust bilateral negotiations (Q3) to finalise next year s WA Health funding allocation. This allocation is then published in the State Budget paper in mid May (Q4). What does it mean to have a fully allocated budget? This means all funds are distributed to budget holders and are not held centrally by the DoH. Therefore given that all funds are spoken for, there are no reserves for over expenditure. Over expenditure by one budget holder can only be off-set by reducing another budget holder s allocation within WA Health. 13

20 2.4 On reflection how is WA Health funded? How does my Health Service allocate funds to my hospital or division? Is a proportion held centrally? Answer: Next Step: How does my hospital or division have input into the budget submission? Answer: Next Step: Does my hospital or division have activity and funding budgets with forward estimates? Answer: Next Step: Suggested Actions Build relationship with local Performance and Finance Department. 14

21 What data sources are available within WA Health? What data sources are available within WA Health?

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23 3.0 What data sources are available within WA Health? Learning objectives Understand what data sources are available Understand how to access data Understand what reporting is already available Understand what tools are being used around various Health Services There are numerous data sources and IT applications being used within WA Health. Below is a list of the most commonly used applications and data sources that would be of benefit to managers Clinical applications Name of Application TOPAS HCARe PAS/WebPAS PSOLIS (Psychiatric Services On Line Information System) EDIS (Emergency Department Information System) Description TOPAS is the patient administration system that is used across WA Health sites within the metropolitan area. TOPAS is the primary platform used by ward clerks, clinical coders and finance staff to manage patient records. This application collects inpatient and outpatient activity data. HCARe provides the patient management and community services functionality for rural based health services. This application collects rural inpatient, outpatient and emergency department activity data. TOPAS and HCARe will be eventually upgraded to the new patient administration system PAS/WebPAS system. PSOLIS was developed to collect mental health clinical information for inpatient and community mental health services across WA. PSOLIS is designed to collect, report and manage a range of information such as patient demographics, clinical details, appointments, referrals, admissions, discharges, legal forms, management plans, services events and National Outcome Casemix Collection (NOCC) data measures. EDIS is a clinical information system used to record clinical treatment, monitor patient status and track associated activities of patients presenting to the Emergency Department. EDIS is used in the metropolitan area and Bunbury. The rest of WACHS uses the ED module in HCARe. 15

24 3.0.2 Corporate applications Name of Application Lattice/Alesco RoStar FTE system (Full Time Equivalent) Oracle/HCARe Financials Trendstar/ PowerHealth Solutions Description Lattice or Alesco are comprehensive computerised human resource management systems. RoStar staff rostering system is a generic rostering package linked to Lattice/Alesco. FTE system outputs accrual accounting interfaces to Health s financial systems and Clinical Costing Interface System (Trendstar/Power Health Solutions). Oracle Financials is used by metropolitan health services and HCARe Financials is used by rural sites. Typical functionality covered includes: general ledger, accounts payable, accounts receivable etc. Trendstar will be replaced by PowerHealth Solutions. This system is a tool to collect costs, associated procedures and analysis on patient level costs over time. 3.1 How do I access information from these applications? The WA Health Information Register outlines what data sources are available, brief descriptions of the data sources, who the custodians are and how to contact them. The Data Stewardship and Custodianship policy (OD 0321/11) outlines the responsibilities of Custodians, Stewards and Users in accessing and using data. A link to the register and the policy is provided below. Information-Register.aspx Why is it important for Managers to know who their Finance and Performance colleagues are? It is vital that managers of health services have strong relationships with their area performance and finance colleagues. These staff have access to a wide range of data relating to activity, costs and revenue about your work area. Managers will not be able to properly manage their units without timely, accurate and useful information. Health Service Finance and Performance units will have data warehouse stores of clinical activity data and financial information. 16

25 3.2 What reporting is already available? The Department of Health provides a number of reports to Health Service Chief Executives. These reports cover various activity, budget and performance indicators that assist managers to understand their health services. Reports such as the ABF/M Performance Management report can be made available to delegated managers with approval of the Chief Executive. This monthly report outlines progress against annual PMF KPIs. Health Service Performance and Finance units develop and produce a myriad of reports. Each Health Service have slightly different functions and formats but all Health Services report on activity, finances and performance. It is important that managers discuss their needs and access the reports that are readily available. Benchmarking organisations like Health Round Table (HRT), Women s Hospitals Australasia (WHA) and Children s Hospitals Australasia (CHA) can provide hospitals with excellent activity and cost benchmarking information. This enables hospitals to compare performance with similar peer hospitals within Australia and to understand why there are differences in quality and cost. Benchmarking data can be accessed via your Executive Director or your local Performance teams. 3.3 What tools are being used to analyse information within WA Health currently? There are numerous tools and applications being used to report, analyse and understand health information. A starting point for managers of health services is to access current Health Service reports and data sources for financial and clinical information as well as an analysis tool to link to the data source. Below is a list of analytical tools currently being used by health services: Microsoft Excel Microsoft Access IBM SPSS Statistics IBM Cognos Business Intelligence and Performance software SAS SQL Server Analysis Services SQL Server Reporting Services Tableau It is important that managers discuss with their finance and performance units what is currently being used in terms of tools and receive training on how to use them. Your performance teams are there to help you understand your business. 17

26 3.4 On reflection what data sources are available in WA Health? What information do I currently receive about activity, costs and revenue for my work area? Answer: Next Step: What do I need to know to manage my business area? Answer: Next Step: Where can I get access to data/information? Answer: Next Step: Can I use the existing reports already available? Answer: Next Step: Do I have access to the right tools I need to carry out my work? Answer: Next Step: Do I need help interpreting and understanding the implications of the data to my area? Answer: Next Step: 18

27 Do I need training to make best use of the tools I have? Answer: Next Step: Suggested Actions Build relationship with Data Analyst Discuss information needs with Analyst Access data sources Access relevant existing reports Review personal development needs 19

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29 Business planning: objectives, strategies, goals/targets and reporting/measures Business planning

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31 4.0 Business planning: objectives, strategies, goals/targets and reporting/measures Learning objectives Be able to define what an objective, strategy, goal/target or measure is Understand the relationship between objectives, strategies, goals/targets and reporting/measures Understand how Department of Health objectives can be linked to hospital or divisional strategies, goals and measures Be able to develop objectives, strategies, goals and measures that are relevant to sites and divisions 4.1 What are objectives, strategies, goals/targets and reporting/measures? Objectives are the key goals which will help achieve the organisation s mission and vision Strategies are the options open to you to achieve your objectives Tactics are the actions to realise these strategies Targets/goals are the measureable outcomes expected from implementation Measures and reporting are tools to monitor progress When setting objectives, goals and strategies they should be specific, measureable, achievable, realistic and time-bound (SMART). 4.2 Why is business planning so important? Business planning is a standard process for any organisation. The process engages the service line teams/divisions/specialties to develop and own strategies and plans that help the organisation meet its future short- and longterm objectives. It would be very difficult for teams to meet targets and objectives without a plan. The documented annual plan describes the strategies and tactics, identifies who will be responsible for implementing the change, and the timeframe for deliverables. An annual plan initiates the business planning process. Effective business planning is a cycle of activities going from objectives to developing strategies to implementation to monitoring performance to evaluation back to objectives. Health services will need a clear process for monitoring and evaluating progress against the defined plan. Figure 3 illustrates the cycle of processes for annual planning. 21

32 Figure 3 Illustrates the cycle of processes for business planning. Missions and Objectives Evaluation and Review Devise Strategies Monitor Performance Implementation 4.3 Developing strategies that align with the whole organisation When developing strategies that align with your organisation s objectives can you answer the below considerations: Does the strategy align with the WA Health Strategic Intent? Does the strategy align with the WA Health Clinical Services Framework? What is my hospital s mission/vision? What are the organisation s objectives? What is my hospital s expected performance (budget, activity and quality)? How does that relate to my work area? What is my hospital s current performance? How is my hospital performing against peer benchmark (cost and quality)? What are my best/worst performing areas (cost to revenue and quality)? What are the current priority areas? 22

33 Figure 4 is an illustration of how WA Health s objectives can flow through the organisation to service line teams. It is vital that staff within the service line teams are engaged and participate in the planning process. Figure 4 Illustrates the flow of objectives throughout the organisation. Department of Health Performance Management Key Performance Indicators (KPIs) Area Health Services Set objectives to meet all KPIs Site or Hospital Set objectives to meet subset of KPIs that are relevant Engage service lines to develop plans and strategies Service Line Team Develops strategies and plans to meet subset of relevant KPIs On the following page is an example of a plan to improve emergency department wait time performance. It is worth noting that emergency department s strategies are aligned with the Hospital s, Health Service s and the Department of Health s expectations. 23

34 4.4 Example: Hospital A annual plan for PMF triage 1 wait time KPI Strategic Mission Enhance patient care Objective Strategies Target Tactics Measures Responsible Timeframe Meet PMF performance targets for Emergency Department wait time for patients Triage 1-5 Develop clear treatment and data process for Triage 1 Raise awareness of wait time targets 100% Triage 1 seen immediately by Doctor 100% of staff aware of targets Develop and implement new process Monthly KPI updates during first 5 mins of team meeting 100% Triage 1 seen immediately by Doctor 100% of team meetings starting with KPI updates Dr Joe Bloggs Emergency Department consultant Emergency Department CNS March 20XX Now Reduce Emergency Department overcrowding Occupancy to not exceed 40 in Emergency Department on any given day Reduce unnecessary stay in Emergency Department for admitted inpatients 85% of Admitted patient leaving Emergency Department for Wards within 4hours Admit to ward Project lead July 20XX Early Senior Doctor input 100% having senior input within 2hrs Emergency Department Director July 20XX Nurse Practitioner in treatment stream 98% of patients either Admitted or Discharged within 4hrs Nurse practitioner February 20XX 24

35 4.5 On reflection business planning Does my Division or Hospital have a plan to manage and meet activity, budget and performance targets? Answer: Next Step: Does my Division or Hospital have an annual business planning process? When do teams get together to plan strategies, goals and measures? Answer: Next Step: Does my Division or Hospital have regular meetings to discuss progress and issues related to strategy implementation? Answer: Next Step: Do my Division s or Hospital s objectives and strategies align with Health Service and Department of Health strategic and operational plans? Answer: Next Step: Does reporting reflect the goals and targets of the organisation? Answer: Next Step: Suggested Actions Review or Develop Health Service, Hospital and Divisional Annual Plan Review WA Health Clinical Services Framework

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37 Understanding costs, revenue, budgets and activity Understanding costs, revenue, budgets and activity

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39 5.0 Understanding costs, revenue, budgets and activity Learning objectives Understand the importance of compliance to the National Costing Guidelines Understand patient level costing and how the information can be used Define the different cost types Identify cost drivers Understand what it means to unbundle costs Understand how revenue is generated Identify the difference between cost and revenue by activities Understand the relationship between costs, revenue, budgets and activity Understand how Health Services can influence price 5.1 What are costs, revenue, budgets and activity? Costs are the expenditure of funds to deliver a service or product such as salaries and maintenance. Revenue is income received by an organisation for delivering activity to patients like funds from State Government and own sourced revenue eg private patient fees. A budget is an agreed plan about the future operations of the organisation expressed in defined estimates of costs, revenues, resources and activity targets. Activity refers to everything that a health system does for, with and to patients, residents, clients and their families and carers and the community. 5.2 What are the different cost types? Costs can be defined as being direct or indirect. Direct costs are expenses directly related to the delivery of activity to patients such as medication, surgeon s wage and prosthetics. Indirect/overhead costs are expenses not directly related to delivery of activity such as administration, corporate overheads, house keeping and medical records. 27

40 5.3 What is patient level costing and what is it used for? Patient level costing is the output of a modelling process by which direct and indirect costs are allocated to single services and those services are matched to individual episodes of care. For example when a patient has a CT scan at the imaging department, the cost of that scan is matched to that patient episode via various data linkages. Figure 5 illustrates the inputs for the patient level costing process. It is the combination of activity data from various systems, like TOPAS, and cost centre data matched together using an allocation methodology. It is vital that managers ensure activity and cost centre information is a true reflection of their service s profile and have input in the costing process to ensure the costs are matched appropriately. Understanding costing information is just one part of understanding the health service. It is important that managers review, understand, analyse and manage their costs. Figure 5 Illustrates the inputs for the patient level costing process. Activity Data Cost Centre Data Allocation Methodology Patient Level Costing 28

41 The patient level costing information is used for various purposes such as: Helping managers understand their costs Benchmarking and comparing services Managing budgets and activity Comparing costs of services to activity National Hospital Cost Data Collection (NHCDC) submission Setting State and Commonwealth prices/weights Developing budgets Negotiating for funds Building a relationship with Health Service Performance and Finance staff is critical for managers to understand their costs. 5.4 What are cost drivers? A cost driver is a factor that influences the cost of activity. Being able to review, understand and analyse costing information is essential for health services to succeed in an activity based funding environment. Managers will need to cross-examine information to enhance their understanding of their services and then use it to make evidence based decisions. Table 1 is an example of what costing information may look like for DRG F10B which is interventional coronary procedures with acute myocardial infarction without catastrophic complications or co-morbidities. Managers could interrogate the costing information in table 1 by asking and finding answers for questions like; Why is there such a large variation in minimum and maximum costs? What is driving the cost for this DRG? Why do some patients have ICU costs but others don t? What is influencing the cost of CCU, ICU and prosthetics for this DRG? What is the ratio of direct to indirect costs? Does this meet national benchmarks? How do our costs compare with exemplar benchmarks? Are the costing components a true reflection of what is happening in clinical practice? For example, there are very limited allied health costs allocated in example DRG F10B. Is this true in clinical practice? Once managers have thoroughly interrogated the information they will have a clear understanding of what is driving the cost and why there are variations beyond expectations. 29

42 Table 1 illustrates a fictitious example of costing information for DRG F10B. F10B Interventional Coronary Procedures W AMI W/O Catastrofic CC Direct Indirect median $ Max $ Min $ median $ Max $ Min $ Ward Medical 662 5, , Ward Nursing 339 4, ,537 Non Clinical 284 2,623 4 Allied Health Operating Room 2,223 1,334 Coronary Care Unit 2,333 6,999 1,174 3,522 ED Costs ICU Costs 6,665 2,876 Ward Supplies 375 3,432 0 Other Medical Costs Pharmacy 241 1,801 Radiology 51 1, ,142 Pathology 241 Specialist Procedure Suite 13,621 10,147 Prosthetic Costs 2,027 17,670 4 Hotel Oncost 325 1, HCN HCN Oncost Total 7,347 35,748 1,914 4,538 18, What can be done to improve the quality of costing data? Having good quality and timely costing information is necessary for effective business management in an ABF/M environment. Managers will have a key role in ensuring the accuracy of costing information and therefore enhance the understanding of their health services. Managers can improve the quality of costing information by: 1) Ensuring activity captured by your Health Service or Division is counted, coded and classified correctly and is a true reflection of what is actually occurring. 2) Unbundling the expenditure by ensuring cost centre structures and cost allocations align with the activity types (acute inpatients, sub-acute, ED, outpatients, teaching training and research). 30

43 3) Building a relationship with your costing departments. 4) Understanding your Health Service s patient level cost allocation methodologies and processes. 5) Interrogating and questioning costing information if they appear to be incorrect. 6) Reviewing current cost centre structures and management processes. The Australian Hospital Patient Costing Standards published by the Commonwealth Department of Health and Ageing provide information and direction in allocating costs to activity Why should Managers care about data integrity around costing information? Patient level costing information, in an ABF/M environment, has great importance as it is an input into developing activity based budget submissions to State and Commonwealth Departments. If activity is not classified and costed correctly, then funds allocated using this information may not be a true reflection of need. It is the responsibility of health services to ensure their costing submissions are a true reflection of activity. that is nationally consistent. A link to the standards is provided below: Costing-Standards 5.6 What does it mean to unbundle your costs and activities? Unbundling is a mapping process of segregating and aligning costs to the appropriate activities as shown in figure 6. The process of unbundling the health services finances will greatly enhance the understanding of the activity profile and resources being consumed and allow managers to make more informed decisions about their health services. Managers need to have an intimate knowledge of what and where resources are being utilised if costs are going to be aligned appropriately to activity. Managers must discuss cost centre structure with their local Finance Departments to determine whether new cost centres need to be created or a fraction of the cost centre is used to align costs to activity. For example, the cardiology unit may want to create two new cost centres for resources expended from research and teaching activities or the unit may decide to fractionate (apportion) the resources spent. for example 10% of Consultant time is spent in training and 2% in research, therefore 10% of the Consultant s wage is apportioned to training and 2% to research activities. 31

44 Figure 6 Illustrates the unbundling of costs and activity. Bundled Activity Costs and Resources Acute, Sub-acute, ED, Outpatient, Non-Hospital, TTR Unbundled Activity Activity Acute care costs and resources Acute Care Acute care activity Sub-acute care costs and resources Sub-Acute Care Sub-acute care activity ED care costs and resources Emergency Department Care ED care activity Outpatient care costs and resources Outpatient Department Care Outpatient care activity NHP costs and resources Non-Hospital Products Community-Based Activity nhp activity TTR costs and resources Teaching, Training and Research TTR activity 5.7 Surplus or Deficit: the difference between income/ revenue and costs In an ABF environment, revenue is calculated by multiplying the activity weight of the patient episode by price. When we subtract the cost of producing that activity there will either be a surplus or deficit of funds. Revenue = Activity Weight X Price Surplus/Deficit = Revenue - Cost With good costing information it is possible to understand if there is a surplus or deficit by area, hospital, division, specialty, team, activity and patient. Table 2 illustrates an example of how health services information can be used to better understand financial performance and focus service improvement projects and further analysis. 32

45 Not all services delivered are expected to have a surplus. What managers need to understand is why certain service lines may have a surplus or deficit of funds. As Commonwealth efficient prices are set it will become even more important that managers understand why there may be a variance to the national benchmarks for costs. The costing information does not look right so why should I bother looking at it? Costing information is a very powerful tool in an ABF/M environment. Reviewing and questioning the costing information is a vital step to improving the quality of the data along with building a relationship with your finance department. Empowered with quality costing information health service managers will have a greater understanding of their services resource utilisation, be able to make more informed decisions and be in a much better position in negotiating for future State and Commonwealth funds. Table 2 Illustrates the costs and revenue by specialty for a fictitious health service in order of highest to lowest % surplus/deficit. Service Line Weighted Activity Price $ Revenue $ Direct $ Costs Indirect $ Total $ Surplus/Deficit Geriatric Acute 150 5, , , , ,967 73,184 9% Renal Dialysis ,166, , ,735 1,073,530 93,350 8% General Medical Outpatients , , , ,450 28,050 6% General Surgery Outpatients , ,811 98, ,248 17,952 6% Renal Acute Inpatients 120 5, , , , ,994 32,526 5% Plastic Acute Inpatients ,421 5,421,000 3,347,468 1,802,483 5,149, ,050 5% Cardiology Outpatients ,400 23,338 12,566 35,904 1,496 4% Allied Health Outpatients ,692,800 1,680, ,781 2,585, ,712 4% General Surgery Acute Inpatients ,421 16,263,000 10,253,822 5,521,289 15,775, ,890 3% Emergency Department ,125,000 23,648,625 12,733,875 36,382, ,500 2% Geriatric Outpatients ,500 59,560 32,071 91,630 1,870 2% Plastic Outpatients , , , ,150 9,350 2% Cardiology Acute Inpatients 50 5, , ,183 94, , % Orthopaedics Acute Inpatients ,421 27,105,000 17,794,433 9,581,618 27,376, ,050-1% General Medical Acute Inpatients ,421 10,842,000 7,188,246 3,870,594 11,058, ,840-2% Orthopaedics Outpatients , , , ,875-23,375-5% Geriatric Rehab Sub-acute 640 9,846 6,301,440 4,382,652 2,359,889 6,742, ,101-7% Neurology Sub-acute 500 9,846 4,923,000 3,455,946 1,860,894 5,316, ,840-8% Neurology Outpatients , ,529 84, ,352-17,952-8% Neurology Acute 800 5,421 4,336,800 3,072,623 1,654,489 4,727, ,312-9% Total 119,968,640 77,906,517 41,949, ,856, ,460 0% Total $ % 33

46 5.8 How can Health Services influence prices? Each year, Health Services will receive an activity based budget from the State Government. They will then load an approved budget allocation to the general ledgers. Throughout that year, Health Services will deliver activity which will incur costs. Costing and activity information is matched together through a costing process which forms the costing submission. This costing submission is a key input for National pricing and State budgeting processes for future funding cycle (figure 7). The quality of the costing submission is a key influencer in determining the National Efficient Price. Health Services can play a key role in enhancing the quality of the costing submission by: 1. Ensuring activity and cost centre information are captured accurately. 2. Being involved in the costing process with their local costing teams by providing them information about the business which will assist in the matching of costs to activities. Figure 7 Illustrates the importance of the costing submission in influencing pricing and budgets. ABF Budget Allocation Process Pricing Process Budget to General Ledger Costing Submission Activity and Expenditure Costing Process 34

47 5.9 On reflection understanding costs, revenue, budgets and activity How well do my Hospital/Division costs comply with National Costing Standards? Answer: Next Step: Does there need to be a change in how we input information into cost centres? Answer: Next Step: Are costs being allocated to cost centre in alignment with the activity produced? Answer: Next Step: Do I know who and how costing information is being submitted for my hospital or site? Answer: Next Step: Do I know what the cost drivers are for specific activity types? Answer: Next Step: 35

48 Do I know how much revenue is generated by my hospital or division and whether that activity generates a surplus or deficit? Answer: Next Step: Is the level of reporting adequate to cover revenue, profits, loss, spending and activity? Is reporting unbundled enough for proper management? Answer: Next Step: Suggested Action Build relationship with local costing team Access patient level costing information Review cost centre information Review activity based costing information Discuss information needs with Finance and Performance Develop plan with Health Service Finance to align costs to activity 36

49 Understanding and managing activity and key performance indicators Understanding and managing activity

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51 6.0 Understanding and managing activity and key performance indicators Learning objectives Be able to define activity Understand the importance of knowing the classification methodology and how the data is collected Have an understanding of commonly used activity and KPI terms Understand the importance of having a detailed knowledge of the PMF KPIs that affect your work areas and how to influence them Understand what to consider when managing towards activity targets 6.1 What is activity? Activity refers to everything that a health system does for, with and to patients, residents, clients and their families and carers and the community. In order to understand and fund activity, Health Services need to have systems in place to be able to collect, count, code or classify and cost activity appropriately. 6.2 How is activity classified? Activity is classified using various systems based on the care setting of the patient. The table below outlines the activity type and correlating classification system. Activity Type Acute Inpatient Care Emergency Department Care Outpatient Services Subacute Care designated units Subacute Care non-designated unit Classification System Australian Refined Diagnosis Related Group (AR-DRG) Urgency Related Group (URG) National Hospital Cost Data Collection Tier 2 Clinics Metropolitan Area Tier 1 Clinics Country Areas Australian National Subacute and Non-Acute Patient (AN-SNAP) AR-DRG AR-DRG classification is a system used to relate the number and type of patients treated in a hospital (the casemix) to the resources required by the hospital to treat those patients. The clinical casemix handbook outlines this system in greater detail. There are currently 698 DRG types. 37

52 URG (urgency related group) Classification is a 78 class Emergency Department patient classification system. The URG class is dependant on the disposition, triage category and the principal diagnosis. Tier 2 or 1 clinic definitions classify non-admitted, non emergency department patient services. The clinic class is based on the specialty or function and whether the clinic is procedural, medical consult, diagnostic or nursing/allied health related. There are currently 110 tier 2 type clinics. AN-SNAP is an 83 class classification system for palliative care, rehabilitation, psycho geriatric, geriatric evaluations and management and maintenance care type patients. 6.3 How is activity labelled (activity type)? In order to collect activity data correctly managers need to understand the rules and criteria to count and label activity consistently and appropriately. The Admissions, Readmissions, Discharge and Transfer Policy for WA Health (Operational Directive 0343/11) provides this framework. It is the responsibility of Health Services to ensure the rules described in this policy are applied consistently and accurately Understanding the Key Performance Indicator (KPI) definitions The annual Performance Management Framework establishes the KPI to be used, the reporting obligations, the processes for monitoring and review of health service performance, and the thresholds for rewards and potential remediation for poor performance during that year. This framework forms the basis of the Performance Agreements for the Chief Executives. In conjunction with the PMF the DoH will publish the Performance Management Report Definitions Manual which details the KPI descriptions and definitions. A link is provided below: The State Health Information Standards Committee (SHISC) formerly the WA Health Management Information Group (WAHMIG), provides detailed definitions of numerous commonly used reporting indicators. Their definitions outline descriptions, guide for use, limitations, formulas, inclusions, exclusions, scope, data source and more. A link to WAHMIG s definitions page is provided below however over time SHISC will adopt and rename policies, definitions and websites. 38