Cost-per-test: Decoding the different calculation methods
December 5, 2023eValuate: For Effective Laboratory Cost Management
January 9, 2024Cost-per-Test: Activities are the key
In the first post of this three-part cost-per-test series, we explore the concept of cost-per-test and its necessity for accurate calculations to support laboratory finance and cost management. The second post delves into different methods of calculating cost-per-test, discussing their benefits and drawbacks. We conclude that selecting the most suitable method depends on your needs and available resources.
The last method discussed is activity-based costing (ABC), offering a detailed breakdown of costs, leading to a deeper understanding of cost-drivers and their impact on your cost-per-test. Unfortunately, the challenges of implementing ABC are significant, requiring further investigation due to resource and time intensiveness.
Activity-Based Costing: An Overview
Implementing activity-based costing is a systematic process involving the identification, analysis, and allocation of costs based on activities. Begin by identifying all activities contributing to production of goods or the delivery of services. For laboratories this is performing tests.
Classify and group activities into cost pools based on the consumption of similar types of resources. Then, determine the costs associated with each cost pool, including staff, materials, equipment, and overhead costs. Allocating overhead costs can be complicated, especially when it's unclear how to attribute a portion of a cost to each cost pool, such as rent across different clinical departments.
Identify the factor, or cost-driver, that influences the cost of each activity, which can be labor hours, the number of samples, or the number of requests. Finally, calculate the activity rate by dividing the total cost by the total quantity of the cost driver, enabling the estimation of the cost per test.
Why Do Laboratories Struggle to Implement ABC?
Implementing ABC in a laboratory setting poses challenges due to the numerous complex activities and the number of unique tests performed. Reasons for this difficulty include:
Data Collection and Analysis
Collecting accurate and comprehensive data on activities, resource consumption, and costs is demanding and complex, given the high number of tests performed.
Activity Identification
Identifying and classifying diverse activities, from sample collection to maintenance of specialized equipment, can be intricate due to the variety of tests and their associated processes.
Cost Assignment
Estimating the portion of a single cost to assign to a cost pool is challenging and time-consuming, especially with different overhead costs.
These challenges make ABC implementation in laboratories resource-intensive and costly.
A New Approach: Is It Possible?
To address these problems and still achieve detailed results, considerations must be made for a simplified yet reliable ABC-based cost-per-test calculation method. The main considerations are:
- The method must be reliably repeatable to account for organizational changes, test menu, technologies employed, and processes.
- Data collection and cost allocation processes must be simple to perform, making the solution financially viable and reducing possible resistance to change from employees.
Where Do We Start?
Considering the challenges presented, remediations can be applied:
Data Collection and Analysis
Standardizing data extracts can simplify the cost model's maintenance. Data sources may include the laboratory information system, finance system, and HR system.
Activity Identification
Defining the organization as a hierarchy instead of cost pools can provide a more straightforward structure for assigning activities.
Cost Assignment
Using a hierarchy for cost assignment simplifies the process, allowing for repeatability.
Hierarchy and Structure: ABC for Laboratories
What do we mean by hierarchy? In this post we introduced a simple laboratory organization hierarchy, as can be seen below.
Simple Laboratory Hierarchy
A practical example can be seen below, describing a part of an organization, with two laboratories, each with a Chemistry and a Hematology department. It also lists two tests performed for each department.
Sample Laboratory Hierarchy
On the hierarchy you can allocate costs and activities to any of these blocks. For instance, the cost for rent can be applied to the laboratory level, so each laboratory will have its own rent cost. Stationary costs might be incurred on the department level, with reagents and consumable on test level.
All that would be left is the defining of an agreed-upon method to calculate the breakdown of costs from organization to site level, from site to department level, and then from department to test level, essentially defining different cost-drivers for the different levels.
Conclusion
While appreciating the detail provided by the activity-based costing methodology for cost-per-test calculation, we acknowledge the challenges preventing laboratories from implementing this methodology successfully. We proposed a laboratory-focused redefinition and updated interpretation of ABC to simplify cost and activity allocations, improve repeatability, and expedite the data extraction and analysis process.
