Feature / Against the clock

Time-driven activity-based costing – or TDABC – provides a tool for service improvement, but what does it mean? EY consultants Simon Collier and Chris Cheyne explain

Delivering change in the NHS can be challenging because of the complexity of pathways of care and the sheer number of individuals and teams involved. To make change happen – for example, to improve the efficiency of a particular process – a compelling case needs to be made and articulated in a way that is widely understood.

The most convincing cases for change articulate the benefits, such as the financial savings or additional activity, alongside some idea of how the change can be achieved. One approach that has been used successfully to build such cases is time-driven activity-based costing (TDABC). 

Developed by Robert Kaplan and Steve Anderson of Harvard Business School, TDABC is a cost analysis methodology that identifies the cost of an activity by multiplying the unit cost rate per minute of the resource used by the time required to perform the activity.

Unlike traditional forms of top-down activity-based costing (ABC), which portion out costs to different products and services on the basis of total expenditure, TDABC builds up the cost of a product or service using data on actual resource usage.

Through its Approved costing guidance, Monitor has recommended the adoption of the TDABC approach by trusts in the development of patient-level costing, citing TDABC’s ability to ‘increase the transparency and objectivity of costing’. By adopting a bottom-up approach to costing, the gap between total expenditure and total cost as calculated through TDABC or other methodologies can be hugely useful in terms of revealing the implied inefficiency/ wastage within a particular function or the organisation as a whole.

TDABC builds on patient-level costing rather than replacing it, with both approaches looking to allocate costs to patients and services as closely as possible to reflect the resources consumed by those patients. To an extent, the difference is in the detailed data available to allocate all resources on the basis of a time driver.

The real advantage of the TDABC approach is that it cannot be done without a thorough understanding of the process in question and the resources being used. As a consequence, engaging with clinical and operational staff is unavoidable, with TDABC exercises most effectively completed collaboratively, involving interviews, observations and process-mapping exercises with staff to build an accurate picture of what resources are being used and how.

At EY, we have found (in work with trusts in the UK and globally) that the tangential benefits of this approach were three-fold. First, in common with patient-level costing in organisations where engagement between the finance department and the wider organisation is lacking, TDABC provides a great way of breaking down barriers and building the department’s ability to act as a business partner to the organisation.

Conversely, it improves understanding among clinical and operational staff of the costs associated with the delivery of care. Staff told us that for the first time they were being provided with cost information broken down to a level of granularity that was meaningful to them, such as the cost of a theatre list that goes unfilled or an extra 20 minutes spent with a patient in an outpatient appointment.

Second, the collaborative approach required by the process-mapping brought together all those different individuals and teams involved in a given patient’s pathway of care, fostering understanding of interdependencies and the downstream impact of earlier activities, such as how the design of pre-operative assessment will impact on cancelled operations.

Third, it allowed those same staff to take ownership of that pathway of care and use the opportunity presented by the exercise to draw out ideas and viewpoints on improvement opportunities.  In doing so they identified ways in which things could be done differently, whether this meant removing non-value-adding process steps, avoiding waste or indeed building business cases for change on the basis of the costing information generated and opportunities identified.

Unsurprisingly, in cash-strapped hospital trusts, it is often the availability of robust costing information that makes the difference between a business case being rejected or given serious consideration.

That costing information can also throw up surprising results. In one UK trust’s ear, nose and throat department, for example, it was demonstrated that an innovative new treatment – a hemostatic agent used to treat epistaxis (nosebleed) patients – which had been widely assumed to be prohibitively expensive, could deliver significant savings for the organisation through dramatic reductions in length of stay.

Audiology case study

Having previously been paid a locally agreed tariff per attendance, the same trust’s audiology department faced the prospect of a new single tariff for some patients for the delivery of a pathway of care over a three-year period, under the new any qualified provider (AQP) contract.

The TDABC approach was used to help understand likely volumes of follow-up and aftercare work for the cohort and whether the AQP contract could be delivered profitably. The exercise comprised the following activities:

• Process mapping the AQP pathway
• Developing unit cost rates for resources used in the delivery of the AQP pathway – namely, clinical and non-clinical staff within the audiology department, audiological equipment, patient appliances (hearing aids and accessories) and consultation space
• Estimating the time taken for each process step through clinic observation, shadowing and interviewing staff.

Having identified the time and resource usage for each process step, as well as the different time drivers (case-specific characteristics) that could drive the cost of the AQP pathway up or down, the findings were validated in meetings with the clinical teams.

An additional and important next step was to then use the TDABC findings and potential improvement opportunities identified through observations and interviews with staff to initiate a discussion based on lean principles around simplifying processes and removing waste, particularly unproductive time. Some of the key findings were:

• The profitability of each of the key variants of the pathway (for example, where patients need wax removal or additional aftercare) was found to be significantly lower than first estimated.
  Each audiologist was spending 25 minutes per day searching for a suitable room and lost/ misplaced equipment.
• Clinicians were unnecessarily doing administrative work that could be performed by support staff.
• Seven minutes per patient was spent entering the same data into multiple systems and an average of 10 minutes per patient dealing with equipment breakdowns
• A number of key risks were identified that could escalate the cost of delivering the pathway – for instance, wax removal, demand for aftercare, banding of staff.

The TDABC review allowed the audiology department to put together a credible business case for investment in new hearing aid fitting and programming equipment based on time wasted dealing with equipment breakdowns and connectivity issues.

This upgrade, along with other enablers (such as the lean transformation of consultation rooms and improved stock management) has made changes to clinic templates possible, with each clinician now able to see an average one extra patient per day.

An accurate understanding of the risk of cost escalation and variation according to case specific characteristics is also enabling the service to better manage its costs and make informed decisions about service protocols.

As a result of this extra activity, income to the department went up by 4.7% compared with the previous year, despite an anticipated fall as a result of the new contract.

In terms of lessons learned from the work to date, it is clear that some basic project management rules apply. For example, it is important to make sure there is a clear understanding of the roles and responsibilities of the finance department and the service.

The finance department will typically be able to provide short-term support to complete a TDABC review. But responsibility for acting on the findings of that review and delivering improvement should revert to the clinical and operational leadership of the service.

While TDABC can be a resource-intensive process, particularly in the absence of systems to capture information on resource consumption at a patient level, there is a good case to be made for such exercises to address particular business challenges. These include known performance issues in a particular service or function, understanding the profitability or otherwise of a pathway of care (as described in the audiology example) or in discrete episodes of care, and costing up a proposed new service development where there is no existing data to draw on.

Simon Collier is director, Chris Cheyne is performance improvement manager at EY UK and Ireland Advisory Services