The average case looks fine. The real ones don't.
Reimbursement is paid per case or per pathway, but cost is usually known only as a department average. Average a profitable routine procedure with a complex one that ran over and you get a number that is true for nobody. We cost care the way it is delivered, step by step along the patient pathway with TDABC, so you can see which procedures and pathways cover their cost and which quietly run at a loss.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
Reimbursement is paid per case, but hospital cost is usually known only as a department average, and step-down allocation distorts the cost of a procedure by 20 to 40 percent. TDABC costs care the way it is delivered, step by step along the patient pathway, so you can see which procedures and pathways cover their cost and which quietly run at a loss, a number defensible enough to take into a payer negotiation.
Department averages hide the real cost.
Most hospital costing divides a department's total cost by its activity to reach an average per case. That average is built from cases that look nothing like each other: the day-case that goes to plan and the complex admission that needs an extra two days, a return to theatre and intensive nursing. Both are charged the same cost, and the tariff is set as if both were typical.
The result is a service line that appears to break even while a handful of pathways quietly run at a loss and a few routine ones subsidise them. Until cost is measured the same way reimbursement is paid, case by case, the picture stays invisible to the people setting budgets and negotiating funding.
TRUE COST VS REIMBURSEMENT
Illustrative. Four pathways paid the same tariff. Routine and day-case work sits comfortably below reimbursement; complex and chronic pathways cost more to deliver than they are paid.
Two cases, same tariff, opposite cost.
Coded the same
Two admissions fall under the same DRG and are reimbursed the same amount. On the service-line report they are identical units of activity.
Delivered differently
Case A is a clean two-day stay. Case B runs to six days with two complications and a return to theatre, drawing far more theatre, ward and imaging time.
True cost separates them
Time and cost each step the patient actually passed through and Case A nets a healthy surplus while Case B costs more to deliver than the tariff pays.
It informs, it does not ration
The point is not to avoid complex cases. It is to fund them honestly, negotiate the tariff with evidence, and redesign the steps that add cost without adding outcome.
Same code on the system, one funds the other.
| Case A | Case B | |
|---|---|---|
| DRG tariff | €4,100 | €4,100 |
| Length of stay | 2 days | 6 days |
| Complications | None | Two |
| Theatre & imaging time | Standard | 2.4× standard |
| True cost (TDABC) | €2,760 | €4,920 |
| Net per case | +€1,340 | −€820 |
Averaged together they look like a service line that breaks even. Measured case by case, one pathway is funding the other, and only the case-level view tells you which to protect and which to renegotiate.
EVERY PROCEDURE, BY VOLUME AND TRUE MARGIN
Illustrative. Plot procedures by volume and true margin against tariff and the loss-making pathways an average kept hidden separate from the ones that cover their cost.
Cost follows the patient, step by step.
Map the pathway
Every step a patient passes through: consultation, diagnostics, theatre, ward, pharmacy, follow-up, with the staff and equipment each uses.
Time and cost each step
TDABC costs each step per minute of the clinical and support capacity it consumes, including the cost of unused capacity rather than spreading it.
Sum to case and pathway
Steps roll up to a true cost per case and per pathway, comparable directly against the tariff or bundled payment.
Compare and act
Pathways rank against reimbursement. The shortfalls become candidates to redesign, renegotiate or fund with eyes open.
Defensible cost for value-based care.
Value-based care needs a credible cost per outcome, not a department average. With true cost per pathway, funding conversations, bundled payments and service-line decisions rest on numbers a clinical director and a finance director can both stand behind.
The model is built with your teams and handed over, so the costing stays current as pathways change.
Frequently asked questions
- Why are department averages a problem in healthcare costing?
- An average blends a profitable routine case with a complex one that ran over, producing a number that is true for nobody. Reimbursement is paid per case or pathway, so the only useful cost is the one measured the same way, case by case.
- What is time-driven activity-based costing in care?
- It times each step a patient actually goes through (consultation, theatre, ward, imaging, follow-up) and costs it per minute of the staff and equipment used, then sums the steps to a true cost per case and pathway. It is the time-driven method brought into hospitals for value-based care.
- Do we need a new IT system to do this?
- No. We work from the activity, staffing and financial data hospitals already hold. The model is built alongside your finance and clinical teams so it stays usable after handover.
- How does this support value-based care?
- Value-based care needs a defensible cost per outcome, not a department average. A pathway-level TDABC model gives the cost side of the value equation, so funding, bundled payments and service-line decisions rest on real numbers.
Six ways the department average hides the truth.
See which pathways cover their cost.
The Profit Check takes five minutes and no data upload. It points to where your cost and your tariffs are most likely to be out of line, and what it is worth to measure properly.
