Learning Your ABCs is Key to Profitability

Activities based costing (ABC) is a model that that when applied to the pharmacy DMEPOS department, identifies cost pools or activity centers in a business, and assigns costs to products and services (cost drivers) based on the number of events or transactions involved in the process of providing that particular product or service.  And, just to spice it up a little, you must now add the cost of obtaining DMEPOS facility accreditation to your unit costs. 

The ABC costing model relates DMEPOS indirect costs on the basis of volume.

With the cost based on activities approach, the cost of serving a Medicare beneficiary can be ascertained individually.  By deducting the product cost and the cost to serve each beneficiary, the owner can determine the profitability of serving an individual beneficiary.

Know your true costs of providing a particular product and/or service, and you will be able to sell DMEPOS profitably. 

Thorough ABC assessment may:

• Identify the most and least profitable Medicare beneficiaries, DMEPOS products, and distribution channels.
• Determining the true contributors to and detractors from financial performance.
• Accurately predicting costs, profits, and resource requirements associated with changes in production volumes, organizational structure, and resource costs.
• Easily identifying the root causes of poor financial performance.
• Track cost activities and work processes.
• Arm pharmacy owners or DMEPOS managers with cost intelligence to drive performance.

To sell DMEPOS such as diabetes testing supplies, cost drivers must be grouped into value-added and non-value-added activities from the Medicare beneficiary's perspective.  Cost savings are then made by eliminating, or at least, minimizing the non-value-added activities.  When choosing DMEPOS cost drivers, make sure they are relevant and easy to measure.  You are not an auditor, bookkeeper or accountant.  Be as accurate as you can and this exercise will be productive. 

Use this protocol to assign expenses each cost driver:

1. Identify activities -- perform an in-depth analysis of the operating processes of each responsibility segment. Each process may consist of one or more activities required by outputs.
2. Assign resource costs to activities -- this is sometimes called "tracing." Traceability refers to tracing costs to cost objects to determine why costs were incurred.
   • Direct costs can be traced directly to one output.
   • Indirect costs cannot be allocated to an individual output.
   • General and administrative costs are those cannot reasonably be associated with any particular product or service (overhead). These costs remain the same no matter what output the activity produces.
3. Identify outputs -- identify all outputs for which an activity segment performs activities and consumes resources.
4. Assign activity costs to outputs -- assign activity costs to outputs using activity drivers.
   • Activity drivers assign activity costs to outputs based on individual outputs' consumption or demand for activities. For example, a driver may be the number of times an activity is performed (transaction driver) or the length of time an activity is performed (duration driver).

How much does it cost to perform or maintain the following DMEPOS cost drivers?

Intake:

• Review all documentation for Medicare compliance and claims accuracy submission
• Review all documentation for completion, medical justification and qualifications
• Obtain patient demographics
• Obtain CMN and/or physician's orders
• Verify coverage and benefits
• Ensure accurate product coding

Processing:

• Preparation and submission of all appropriate and required claim forms to Medicare, as well as secondary and/or supplemental insurance policies
• Timely and accurate electronic claims submission to minimize DSO (measure of the average number of days required to collect revenue after claim is submitted)

Reconciliation:

• Preparation of patient statements
• Cash posting of all funds received
• Timely follow-up of all outstanding claims and appeals
• Follow-up on denials and partial pays
• Preparation of second claim and submission for all co-insurance due and delinquent patient reminder notices
• Final Collections/write-offs as necessary

DMEPOS Delivery:

• Warehousing
• Delivery and time spent assessing home quality standards
• Vehicle maintenance, operations and maintenance costs

Other:

• Direct Costs:
  • Cost of DME
  • Accreditation
  • Advertising
  • Transportation
• Indirect Costs:
  • Personnel (Salaries, payroll taxes and benefits)
  • Technology (Hardware and software)
  • Postage, Supplies
  • Bad debts /Interest
• General & Administrative:
  • Rent, Telephone & Utilities
  • Insurance

Once you have completed the exercise, discovering how much a specific product category costs will likely lead to asking more questions that will, in the end, result in doing business better. Such questions might include;

• Is the profit worth the effort needed to get paid?
• How do you deliver products and services? Can you do it more efficiently?
• What products do you want to target? Are there any product lines you want to drop? Any you want to add?
• Are there any services you want to add or drop?
• Are you doing any unnecessary things?
• If your business is not automated at all levels, should it be?
• Can you be more cost-effective in the way you purchase products?

Are you a pharmacist that outsources the DMEPOS claims processing? You still incur cost drivers. Remember, intake, delivery and medical necessity documentation is STILL the pharmacy's responsibility. You are responsible for complying with government fraud audits, and your facility STILL must be accredited by September 30, 2009.

Outsourcing companies fees are typically volume driven, percentage of claim or set per claim fee, know those costs drivers and know your partner, their efficiencies affect your profitability.

Know your DMEPOS department's activities based costs and you will be able to make informed decisions that will impact your pharmacy's overall profitability.