The tariff is the same for everyone. The cost is not.
Two patients with the same procedure code can cost the hospital amounts that differ by half. Length of stay, theatre time, the implant chosen, complications, the follow-ups. Step-down allocation flattens all of that into a department average. Time-driven costing rebuilds the procedure one resource at a time, so the number you defend in a payer negotiation is the number it actually cost.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
Traditional step-down allocation distorts the cost of a hospital procedure by 20 to 40 percent, because hospital overhead, well above 100 percent of direct cost, is spread by averages rather than by actual use. TDABC instead costs each step of the patient pathway, pre-op, theatre, length of stay, therapy and follow-up, multiplied by a capacity cost rate per resource. The result is a procedure cost accurate enough to defend in reimbursement negotiations.
The cost driver is the pathway, not the code.
Step-down allocation spreads hospital overhead by ratio of cost to charges, so high-overhead, low-touch cases are over-costed and long-stay, high-touch cases are under-costed. Two patients booked under the same code can sit half a cost apart, and the difference is not random: it clusters around complications, length of stay and implant choice. A cost difference of roughly a third between an open and an endoscopic version of the same procedure is invisible under a department average, even though both carry the identical code.
Documented pathway costs in the sector span orders of magnitude, from a couple of hundred for a single step to tens of thousands for a complex multi-level case. An average hides that spread. Pathway costing exposes it, which is the only way to manage it.
WHERE A FIXED TARIFF GOES
Illustrative. For a knee replacement, clinical staff and implants dominate the cost. When the tariff is fixed, protecting margin means knowing which block is moving on a given case, and why.
Sum each step, at its real rate.
A procedure cost is the sum of each pathway step multiplied by its capacity cost rate: pre-op assessment, theatre time across the full clinical team and room, ward stay at the bed-day rate, physiotherapy sessions, follow-up consultations, plus the implant. Because each term is driven by what the case actually consumed, the cost moves with the case rather than with the department.
Map the pathway
Pre-op, theatre, ward, therapy, follow-up, with the staff and equipment each step uses.
Set a capacity cost rate
Cost per minute of each resource at practical capacity, 80 to 85 percent of theoretical, so idle time is not buried in the rate.
Cost each step
Minutes consumed times the rate, plus consumables and implants. The case carries what it actually used.
Compare to the tariff
True cost against reimbursement, case by case, so the conversation with a payer rests on a number you can defend.
Frequently asked questions
- How do you calculate the true cost of a procedure?
- Cost each step of the patient pathway, pre-op, theatre, length of stay, therapy and follow-up, using a capacity cost rate per resource, then add consumables and implants. Step-down allocation alone distorts the figure by 20 to 40 percent, because hospital overhead well above 100 percent of direct cost is spread by averages rather than by actual use.
- Why do two patients with the same code cost different amounts?
- Length of stay, theatre time, implant choice and complications differ. The procedure code is identical; the resource consumption is not. Within the same code, case-level cost can vary by half, and the expensive cases cluster around complications, long stay and implant choice rather than appearing at random.
- Why does a defensible procedure cost matter?
- Reimbursement is paid per case, so the only useful cost is measured per case. A pathway-level cost is accurate enough to take into a payer negotiation and to decide which pathways to redesign, rather than relying on a department average that is true for nobody.
Know the procedure cost before the next negotiation.
The Profit Check takes five minutes and no data upload. It points to where your procedure cost and your tariffs are most likely out of line, and what it is worth to measure properly.