Headquartered in Philadelphia, AmeriHealth Mercy is a Medicaid managed-care organization that serves nearly 2 million members. It also provides claims processing, customer service call center, pharmacy benefit management, and enrollment services to other health-care organizations. Five years ago, AmeriHealth Mercy began to research activity-based costing techniques that could help it deal with the complexity of its growth, pressure from customers to lower costs, and the need for data to support pricing decisions.

BPM Magazine: What led AmeriHealth Mercy to undertake activity-based costing?

Jim Shoemaker: We started using it for two main reasons. One is that we were getting involved with selling services to other health plans, and we needed a way to be able to allocate our costs to those areas so that we could determine what our costs are for servicing those customers. The other reason we looked into activity-based costing is that our corporate office provides services like payroll and HR to our regional offices, so we needed a way to allocate costs down to them.

BPM: What benefits has your company seen from using activity-based costing?

Shoemaker: As our customer base expands, we can easily determine an appropriate allocation of costs for our customers and products. Also, we use activity-based costing as the basis for setting prices when we price out our services. Before, we just assumed that if we processed a claim for one customer, it was the same as processing it for another customer. Once we got into activity-based costing, we started looking at things like how many claims are automatically processed, how many are received electronically versus on paper -- drivers that impact the costs associated with each customer. So we were able to see that really some customers were costing us more than others. That helps us when we go back to negotiate contracts to either try and get more revenue out of those customers or find ways to lower their costs.

BPM: Has this level of insight into costs improved the company's profitability?

Shoemaker: Most definitely. One of the things that we found could save us a lot of money was auto-adjudication, which is automatically processing claims. We focused on improving our processes so that we can auto-adjudicate more claims and thereby eliminate some of the staff needed to process claims. Another area that we focused on recently was rework. Claims often have to be reprocessed as a result of being paid incorrectly; reasons may include incorrect configuration of provider contracts or payment rules in our system, incorrect address information, or human error in processing the claim. Activity-based costing was a way to put a value to the rework efforts. A lot of people talk about needing to reduce the amount of rework, but once we assigned a dollar value to it -- and it was in the millions of dollars -- it got everybody's attention. That really helped people focus on why they needed to reduce the amount of rework that we do.

A lot of times, what you're working on improving is common sense, they're things people know have to be improved, but when you're able to put a dollar amount on what the inefficiency is costing you, it really grabs senior management's attention.

BPM: How did AmeriHealth Mercy go about implementing activity-based costing?

Shoemaker: Our processes were very manual at first. We would get information from the various departments in spreadsheet format and load it into an Access database. Then we had a huge spreadsheet that had columns set up for the different drivers by department. We would manually input the costs for each department and use formulas to do some allocation. We couldn't get down into much detail because of the limitations of Excel.

BPM: How much staff time was spent updating this spreadsheet?

Shoemaker: We updated it quarterly. It would take one to two weeks' worth of work to get it updated.

BPM: How have you refined those processes in the past four years?