CBS - Health Costing Experts is Transforming Activity Based Costing through Activity Based Management
From ABC to ABM: Transforming Unit Based Costing Through Activity Based Insights
With healthcare organisations under pressure to do more with less - managing rising costs, regulatory complexity, and mounting patient expectations – we're seeing a global movement towards finance reform. One significant shift helping healthcare providers meet these demands is the evolution from Activity Based Costing to Activity Based Management.
This reflects more than a change in accounting practices, it represents a paradigm shift in how healthcare organisations understand, manage, and improve their operations. It’s a transformation from simply knowing what things cost to actively managing and improving how resources are used.
Helping health organisations deliver better healthcare to more people
Understanding Activity Based Costing
Traditionally, hospitals and health systems have used departmental budgeting or top-down allocation methods to distribute costs. These approaches often obscure the true cost of delivering specific procedures or services, leading to inefficiencies, misinformed pricing, and missed opportunities for savings.
Activity Based Costing changed that.
Activity Based Costing (ABC) is a method that assigns costs to services based on the actual activities and resources required to produce them. For instance, rather than allocating overhead evenly across all surgeries, ABC tracks the resources consumed by each step in the surgical process - pre-op assessments, anesthesia, surgery time, recovery, and follow-up.
In a hospital setting, this means costs can be traced to specific procedures, patient types, or departments. The results are more accurate and granular, allowing administrators and clinicians to see where resources are being consumed and why.
Key Benefits of ABC in Healthcare:
Precision in costing: Enables true cost analysis of services and procedures.
Improved pricing decisions: Supports more accurate DRG (Diagnosis Related Group) reimbursement analysis.
Benchmarking and comparisons: Facilitates intra, and inter-hospital performance evaluation.
Foundation for performance measurement: Lays the groundwork for value-based care models.
However, while ABC provides insight into cost structures, it does not inherently lead to improvement. That’s where Activity Based Management comes in.
The Rise of Activity Based Management
Activity Based Management (ABM) builds on ABC by not only tracking costs but also using that data to drive strategic and operational decisions. Where ABC is about what things cost, ABM is about what to do about it.
ABM is both a mindset and a system. It empowers healthcare administrators to use activity data to:
Identify inefficiencies
Improve patient throughput
Optimise resource allocation
Align operations with strategic goals
For example, if ABC reveals that post-operative recovery in one department costs significantly more than in another (despite similar patient profiles), ABM would prompt further investigation. Perhaps there's a longer average length of stay, more nursing hours, or excessive diagnostics being ordered. ABM helps identify these root causes and informs corrective action - whether that’s process redesign, staff reallocation, or clinical pathway optimisation.
A Paradigm Shift: From Costing to Continuous Improvement
The transition from ABC to ABM marks a shift in organisational culture - passive cost reporting to proactive performance improvement.
This evolution supports the healthcare sector’s increasing emphasis on value-based care, where outcomes and efficiency matter as much as service delivery. ABM enables hospitals to:
Link cost with quality: Understanding the cost of complications, readmissions, or extended stays allows for targeted improvements.
Improve service line profitability: By drilling into the drivers of cost and revenue at a granular level.
Facilitate evidence-based management: Providing hospital executives with hard data for decision-making.
Our Activity Based Managment service page is essential reading prior to embarking on this paradigm shift.
Introducing Hospital at a Glance (HAAG)
One of the most powerful tools to emerge from ABM systems in healthcare is Hospital at a Glance (HAAG). HAAG provides a real-time, visual snapshot of hospital performance across all departments - distilled from activity based data.
Think of it as a living dashboard, built on the foundation of ABC and powered by the insights of ABM resulting in a visual application designed to help with hospital patient flow.
What HAAG does:
Enables staff to quickly see where demand pressure points may occur
Helps to review possible staffing and capacity issues by surveying nursing staff at the beginning of every shift
Highlights urgent and emergent needs to the duty manager and their responses are recorded and made visible
Shows how the hospital is responding to events and fluctuations in the hospital system
Provides management-level visibility into every department's costs, outputs, and KPIs
Drills-down from high-level summaries to transaction-level details
Contains cross-functional understanding by enabling clinical, operational, and financial leaders to view the same truth
Has dynamic responsiveness, allowing administrators to identify and respond to emerging issues in near real-time
For example, if a department is suddenly experiencing higher than average cost-per-case for a common procedure, HAAG can alert leadership and point directly to which activities (extra diagnostics, delayed discharges, etc.) are driving that change.
“[HAAG is] an easy-to-use tool that has enhanced the ability to both respond and document response to hospital needs across our two sites.”
Nina Hartley, Acting Director of Nursing and Midwifery at Te Whatu Ora - Lakes
Real-World Impact
Hospitals that have embraced the ABC-ABM-HAAG trifecta are reporting measurable improvements:
Cost reductions of 10–20% without compromising patient outcomes.
Improved operational decision-making, from staffing to capital investments.
Increased clinician engagement, thanks to transparency and fairness in how performance is evaluated.
Accelerated readiness for bundled payments and value-based care models.
One public hospital, for instance, used ABM to uncover that their orthopaedics unit had a 25% higher average cost per knee replacement than comparable facilities. With HAAG, they traced the discrepancy to longer pre-op diagnostic routines and extended post-op physiotherapy sessions. By reengineering those processes, they reduced costs while maintaining quality of care - and used the savings to fund a nurse-led home recovery pilot.
Challenges and Considerations
Transitioning to ABM is not without challenges. It requires:
High-quality data integration, especially from disparate clinical, operational, and financial systems.
Cultural change, moving teams from siloed operations to cross-functional collaboration.
Leadership commitment to continuous improvement, not just cost control.
Yet for those who make the leap, the payoff is significant: not just better margins, but better care.
Conclusion: A Smarter Way to Manage Hospitals
In a sector where margins are thin and accountability is growing, ABC and ABM offer hospitals a way to reclaim control. ABC helps you understand your costs. ABM helps you act on them. Together, with HAAG as a real-time lens into operations, they equip healthcare leaders with the tools to thrive in a value-based future.
The journey from ABC to ABM is more than a technical upgrade - it’s a strategic evolution toward smarter, more sustainable healthcare management. Hospitals that embrace this shift are not just counting costs; they’re building a system where every activity is measured, every decision is data-informed, and every patient benefits.
