Academic journal article Journal of Healthcare Management

Using Time-Driven Activity-Based Costing to Identify Value Improvement Opportunities in Healthcare

Academic journal article Journal of Healthcare Management

Using Time-Driven Activity-Based Costing to Identify Value Improvement Opportunities in Healthcare

Article excerpt

Robert S. Kaplan, PhD, senior fellow and professor, emeritus, Harvard Business School, Boston, Massachusetts; Mary Witkowski, fellow, Harvard Business School, and MD candidate, Harvard Medical School, Cambridge, Massachusetts; Megan Abbott, MD, attending physician, Maine Medical Center, Portland; Alexis Barboza Guzman, project consultant, Institute for Cancer Center Innovation, Houston, Texas; Laurence D. Higgins, MD, chief, sports medicine and shoulder service, Department of Orthopedic Surgery, Brigham and Women's Hospital, Boston; John G. Meara, MD, DMD, director, Program in Global Surgery and Social Change, Harvard Medical School, and plastic surgeon-in-chief, Department of Plastic & Oral Surgery, Boston Children's Hospital; Erin Padden, operations coordinator, sports medicine and shoulder service, Brigham and Women's Hospital; Apurva S. Shah, MD, assistant professor, orthopedic surgery, Department of Orthopaedics and Rehabilitation, University of Iowa Hospitals and Clinics, Iowa City; Peter Waters, MD, John E. Hall professor of orthopedic surgery, Harvard Medical School, and orthopedic surgeon-in-chief, Orthopedic Center, Boston Children's Hospital; Marco Weidemeier, consultant, medical management, Schön Klinik, Prien am Chiemsee, Germany; Sam Wertheimer, senior policy associate, Massachusetts Health Policy Commission, Boston; and Thomas W. Feeley, MD, professor and division head, University of Texas MD Anderson Cancer Center, Houston, Texas


As healthcare providers cope with pricing pressures and increased accountability for performance, they should be rededicating themselves to improving the value they deliver to their patients: better outcomes and lower costs. Time-driven activity-based costing offers the potential for clinicians to redesign their care processes toward that end. This costing approach, however, is new to healthcare and has not yet been systematically implemented and evaluated. This article describes early time-driven activity-based costing work at several leading healthcare organizations in the United States and Europe. It identifies the opportunities they found to improve value for patients and demonstrates how this costing method can serve as the foundation for new bundled payment reimbursement approaches.

For more information about the concepts in this article, contact Dr. Kaplan at


Healthcare organizations have begun to feel the pricing pressure from payers, such as federal, state, and commercial insurers and self-insured corporations. Payment rates are being capped or reduced and new reimbursement methods introduced just as access is being extended to previously uninsured populations.

In this rapidly changing and increasingly constrained environment, providers that learn how to lower their costs in a sustainable manner while maintaining or improving outcomes can survive and prosper. Their executive leadership must set an objective to increase the value that their organization delivers to patients in the form of improved healthcare outcomes at lower cost (Porter, 2010; Porter, Pabo, & Lee, 2013).

The greatest opportunity for lowering costs without sacrificing quality, safety, or outcomes is gained from helping clinicians intelligently reengineer their clinical and administrative processes (Hoffman & Emanuel, 2013; Berwick, 2012). Some clinicians, however, resist top-down pressure to assume responsibility for cost reductions (Tilburt et al., 2013). Others may recognize that cost considerations should be incorporated into physician treatment decisions and clinical process designs (Brook, 2011) but lack the information or organizational support to institute significant changes. The existing cost systems in healthcare impede clinician-driven cost reduction and process improvement initiatives. These systems rely on inaccurate and arbitrary cost allocations and provide little transparency to guide attempts by first-line care providers to understand and modify the true drivers of their costs (Kaplan & Porter, 2011). …

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