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

Abstract

Time-driven activity-based costing (TDABC) provides a powerful approach to more targeted cost accounting based on resources actually used by patients during a cycle of care. Since its introduction in 2004 by Kaplan and Anderson, TDABC has gained increasing popularity in defining the actual costs of care for various orthopaedic processes and pathways. TDABC may demonstrate lower costs of care compared with traditional cost accounting methods, including ratio of costs to charges and relative value units. Weaknesses of traditional methods include approaching costs through the lens of charges, revenue, processes and procedures, adopting a “top-down” approach, and potentially overestimating costs. In contrast, TDABC builds costs from the individual level, taking a front-line, condition-focused, and patient-centered view. Existing organizational decision-making is oriented around revenue metrics (relative value units and ratio of costs to charges) rather than cost metrics, yet alternative payment models are shifting toward fixed revenues for certain conditions or procedures. The variability, including both financial upside and loss, will primarily be a function of the cost of care—a number that is profoundly opaque in most health care settings. We view TDABC as an approach that sheds light on variation, offers a more granular differentiation of costs compared with traditional approaches, mitigates risk, and sparks opportunities for increasing operational efficiency and waste reduction. The goal is to identify and provide the greatest-value orthopaedic care.