What Are the Uses and Limitations of Time-driven Activity-based Costing in Total Joint Replacement?

Abstract

Background With increasing emphasis on value-based payment models for primary total joint arthroplasty (TJA), there is greater need for orthopaedic surgeons and hospitals to better understand the actual costs and resource use of TJA. Time-driven activity-based costing (TDABC) is a methodology for accurate cost estimation, but its application in the TJA care pathway across institutions/regions has not yet been analyzed. Questions/purposes In this systematic review of studies applying TDABC to primary TJA, we investigated the following: (1) Is there variation in TDABC methodology and cost estimates across institutions? (2) Is a standard set of direct and indirect costs included across studies? (3) Is there a difference in cost estimates derived from TDABC and traditional hospital cost-accounting approaches? and (4) How are institutions using TDABC (process and outputs) with respect to the TJA care pathway? Methods A comprehensive search strategy was developed that included the keywords “TDABC,” “time-driven activity-based cost,” “THA,” “TKA,” “THR,” “TKR,” and “TJR” in the PubMed/MEDLINE, EMBASE, Web of Science, Ovid SP, Scopus, and ScienceDirect databases for articles published between 2004 and 2018 as well as extensive hand searching and citation mining. Relevant studies (n = 15) were screened to include THA or TKA as the focus of the TDABC model, full-text articles, TDABC-based cost estimates for TJA, and studies written in English (n = 8). Due to the heterogeneity of outcomes/methodology in TDABC studies involving TJA, quality assessment was based on each study’s adherence to the seven steps delineated by Kaplan et al. in their original publication introducing TDABC in health care. Results There was substantial variation in TDABC methodology (especially in scope), adherence to the seven steps of TDABC, and data collection. Only five of eight studies incorporated indirect costs into their TDABC calculation, with notable differences in which direct and indirect expenses were included. TDABC-based cost estimates for TJA ranged from USD 7081 to USD 29,557, with variation driven by the TJA timeframe and whether implant costs were included in the costing calculation. TDABC was most frequently used to compare against traditional hospital accounting methods (n = 4), to increase operational efficiency (n = 4), to reduce wasted resources (n = 3), and to mitigate risk (n = 3). Conclusions TDABC-based cost estimates are more granular and useful in practice than those calculated via traditional hospital accounting; however, there is a lack of standardized principles to guide TDABC implementation (especially for indirect costs) due to institutional and regional differences in TDABC application. Although TDABC methodology will likely continue to vary somewhat between studies, standardized principles are needed to guide the definition, estimation, and reporting of costs to enable detailed examination of study methodology and inputs by readers. Level of Evidence Level III, economic and decision analysis.

Time-Driven Activity-Based Costing: A Better Way to Understand the Cost of Caring for Hip Fractures

“…This approach allows for larger-scale financial evaluations and ensures solvency, but is not accurate at the patient-level because it assumes that each type of service utilizes indirect costs in the same proportion and from a single shared well without regard to differences in time or personnel required on an individual basis. 16 - 19 Relative value units (RVUs) are, in theory, more refined than CCRs because they estimate the time and complexity of services before allocating costs to specific procedures. However, they are imprecise, leading to “unintended cost distortions” in practice.…”

“…However, relying on self-reported time estimates introduces bias, particularly because productivity is often reported at 100% theoretical capacity, when in reality productivity levels tend to be closer to 80-85% of theoretical capacity. 19 This bias puts cost driver rates too high. Furthermore, the implementation of ABC is an enormous burden in terms of data collection and analysis.…”

“…Whenever there is a change the entire model requires updating, including re-interviewing staff to update the cost drivers of activities. 19 …”

“…One systematic review recommends that a set of principles be standardized to guide TDABC implementation, especially in regard to indirect costing, proposing that, at a minimum, maintenance, informational technology (IT), hospital administration, and billing costs be included as standard in TDABC costing since these are most commonly recorded and constitute the largest sources of indirect cost. 19 …”

Editorial Commentary: The Value of Time-Driven, Activity-Based Costing in Health Care Delivery

“…2 The review by Koolmees et al, along with several others, highlights variation in costs and thus the potential to inform clinicians and administrators ways to more effectively optimize resource allocation and waste reduction. 4,9 TDABC can indicate whether variability comes from the cost level, e.g., labor cost or variably priced and billed inputs such as implants, or instead lie at the charge level. Further, in relation to value-based bundled payment models, TDABC may indicate whether professional fees of clinicians entitled to separate payments can or cannot be carved out and billed separately while preserving the core savings of the payment model.…”