Feature / Return on investment

Patient level costing systems boost the quality of local costing data and can be used to compile better reference cost returns as long as a few key issues are kept in mind. Helen Strain reports.

The reference cost deadline for the 2011/12 submission is fast approaching. So it’s timely to bust a common NHS myth that if you do patient level costing you’ll have difficulties producing your reference cost return.

The requirements of the reference cost return do vary from the way many organisations report their costs internally, partly to meet the demands of the way national payment by results tariffs are set and calculated. But there are tools and workarounds available for organisations that use patient level costing.

There has been significant development in costing in the NHS in the past few years. The implementation of patient level costing by many acute organisations, and an increasing number of mental health bodies, is arguably the most high profile of these developments. But far from creating difficulties with costing returns, patient level costing should in fact lead to more robust reference cost submissions.

The clinical costing standards for 2012/13 have been published by the HFMA and are available ​here. This is the second year the HFMA has updated these standards, providing national best practice guidance on producing robust clinical costs. But as those who are working on the reference cost submission will know, changes need to be made to patient level costing models to produce the reference cost return.

Recognising this, the Department of Health has published Patient-level information and costing systems and reference costs best practice guidance for 2011/12. This identifies the differences between patient level and reference cost models and offers best practice and workarounds used by NHS organisations to produce reference costs.

The HFMA Costing Special Interest Group provided input into this document, and it is regularly being reviewed in light of best practice within the NHS. One of the group’s members is Boo Tse, finance manager at York Teaching Hospital NHS Foundation Trust – York received a commendation from the Audit Commission during its audit of reference costs (as part of the PBR data assurance audits for 2010/11). She identifies key areas to consider when preparing reference costs from a patient level cost model:

Other income This non-contractual income (previously referred to as category C income) is income not directly related to patient care from sources other than contracts with NHS commissioners. Reference costs requires this income to be netted off the quantum whereas many organisations, in line with Standard 6 of the clinical costing standards, identify this income separately. In using patient level costs for the cost return, it will be important that any netting off is done against relevant costs – for example, medical and dental education levy is credited against junior doctor costs.

Work in progress For reference costs, adjustments are required to reflect spells completed in the year (bringing forward activity and costs for prior years) or to exclude incomplete spells from the current financial year. It is important that associated costs are adjusted and patient level costing systems set up to do this. Some organisations may adopt a different approach in their internal reporting.

Exclusions The reference cost guidance provides a list of excluded services each year. Organisations may treat these costs differently within their own costing models. Patient level cost models should be set up to ensure costs can be tracked through the system so they can be excluded for the reference cost submission. In addition, the treatment of private patients is likely to differ within patient level models. This is because many organisations seek to accurately cost private patients and identify specific income earned. However, for reference costs the working assumption of no surplus or loss may be particularly challenging. 

Adjustments to fixed internal corporate trading accounts As part of service line reporting, an organisation may use a contribution-to-overheads approach to reporting costs at specialty level. This is often because the direct and indirect costs are seen as being more controllable by the clinical service teams running the service lines. While this may be appropriate for internal reporting, all costs have to be absorbed into the relevant unit costs for reference costs.

Excess bed days Costs of excess bed days will be included within inpatient costs in patient level costing models. So for the reference cost submission the activity needs to be identified using the grouper, and costs separately identified. Care should be taken when identifying this activity as critical care periods and rehabilitation episodes are usually included within patient level costs and activity, but will need to be removed from the episode before excess bed day calculation. Trim points should be applied after all critical care and rehabilitation adjustments have been made.

The treatment of unbundled items is another key difference between how costs are reported within organisations and the requirements of reference costs. These services are now separately identified and funded under the currency defined by HRG4. However, to cost a pathway of care, many organisations include the costs within internal costing models. These services include chemotherapy and radiotherapy, high-cost drugs, radiology, and critical care.

Ms Tse stresses the importance of reconciling activity data back to source. This is to ensure that accurate and up-to-date activity figures are used in costing. By checking that the activity that is picked up and fed through costing systems reconciles back to activity reported elsewhere in the trust – for example, finished consultant episodes, outpatient attendances or critical care bed days – trusts can provide a check that they are using the right level of activity within their returns. In essence this ensures the denominator of their cost calculation is correct and ensures more accurate unit costs.

This issue was also identified by the Audit Commission in many of its audits as part of the PBR assurance framework for 2010/11.

There are areas of costing for reference costs that can provide challenges when feeding into patient level costing systems. These may take time to work through and include:

• Incorporating multi-disciplinary teams
• Collecting information on and building in ways to allocate any new excluded costs correctly – those only excluded for reference cost purposes
• Different treatment of cystic fibrosis patients

The reference cost process also provides an opportunity to check the data quality of costing systems. This includes looking at how well resources match to patients – the percentage of pathology tests or theatre minutes accurately matched to patient episode/ attendance, say – and how costs are allocated.

While many organisations will be continually developing the quality of their costing, comparing reference costs to national average unit costs provides a way of identifying any data quality issues. The Audit Commission’s PBR benchmarking tool provides a very quick and easy way of achieving this.

Comparing local cost methodology to the clinical costing standards is also a useful exercise. Taken one step further, calculating a materiality and quality score (MAQS) – a self-assessment method to provide an assessment of the costing process, described in the standards – can help organisations identify where improvements in costing can be made.

This year there are additional challenges in terms of the reference cost return. Mental health will be taking only its second run at cluster-based costs. And many organisations – acute and mental health – will have added or expanded community services as part of the Transforming community services initiative.

The HFMA Costing Special Interest Group hopes to develop case studies during the year to share experience and spread good practice of costing in these areas. The mandatory spell-based collection for 2011/12 will also give this year’s costing activity a new dimension.

Helen Strain is HFMA costing lead