Today’s healthcare landscape is increasingly unpredictable. With constant legislative changes – like the impending repeal of the Affordable Care Act – providers are uncertain about the industry’s future, especially when it comes to managing the rising costs of care. In 2016, National Healthcare Expenditures (NHE) in the U.S. grew 4.3 percent to $3.3 trillion, causing payers to implement alternative payment models (APM). These APMs hold healthcare providers responsible for excess costs and base reimbursements on the quality of patient care.

Additionally, with immense industry consolidation increasing competition for high-margin business, now is a pivotal moment for hospitals as they look to protect margins, grow revenues, and lower the cost of care. To be successful, hospitals must be bold about fixing out of date cost models and investing in smarter, data-driven cost accounting strategies. Healthcare organizations need agile cost tools and models that give decisionmakers relevant and insightful cost information.

Today’s cost models: What went wrong

Hospitals have access to a plethora of healthcare cost data, but this information often omits important information on the indirect costs of patient care. Standard cost data focuses solely on patient fees, relative value of services, or the volume and duration of patient activities. Data on indirect costs, which is already housed in other parts of the organization, accounts for services like the number of hours a nurse spends with the patient or behind the scenes administrative activity. Both these sets of data must be collated to provide a wholistic picture of the true price of care.

Even with complete data, many healthcare providers lack the tools needed to glean insights that drive cost-saving decisions. Cost accounting technology can analyze vast amounts of data and provide clarity on how new and innovative cost models can improve upon past methods. Traditional cost models can have a negative impact on margins by reducing revenues. To increase revenue, hospitals must rely on a data-driven cost model that knows exactly what to charge for each service, allowing them to break even or profit from every patient interaction. Creating a cost model based on an analysis of direct and indirect data is the only way to optimize price without affecting the patient. This is especially essential as APMs cause hospitals to assume more risk.

Tomorrow’s cost model: Constantly evolving

Identifying the correct cost model through cost accounting technology is a never-ending process. Healthcare leaders need the ability to adjust models as new services are added, legislative changes are made, and policies are implemented. By utilizing data from various sources – including enterprise resource planning (ERP) tools – cost accounting technology can provide insights on when and how cost models need to be altered in real time.

Hospitals must review this data more frequently than quarterly or annually to make changes that have real impact. An agile cost model should be evaluated on an ongoing basis – looking closely at its ability to support all methods of allocating costs, perform detailed costing around precise focus areas, and allow organizations to easily pivot strategies. Solutions should also be able to link to all patient costs, identify variations and best practices, and garner insights into payer reimbursement models. With constant feedback on these details, hospitals can evolve with changing circumstances to always be improving patient care.

Effective cost accounting: The elements of success

The right cost accounting tool will apply analytics and AI to data from various sources to provide recommendations on how to streamline costs. It should pull data from clinical, billing, payroll, scheduling and supply chain systems as well as the general ledger to provide a complete overview of direct and indirect costs. This strategy determines the cost of care by measuring capacity – or how much care is given – instead of just allocating costs to patients. Allotting costs based on capacity gives timely answers by accurately providing insight into the indirect labor involved in patient care – helping leaders make quick decisions.

In the future there will be a bigger focus on protecting margins. As such, now is the time to begin reconfiguring cost accounting strategies. As the industry continues to evolve, organizations will need cost accounting technology that supports their cost models, combines indirect and direct cost data, and provides flexibility. By thoroughly understanding the complete cost of care, health leaders can make important cost-cutting decisions that positively affect the quality of care while benefiting the hospital. Having intuitive data that provides actionable insights on the cost impact of care down to the patient-level is essential.

Mark Weber is the senior vice president of  healthcare development for Infor.