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The advent of Accountable Care Organizations is causing providers to rethink their legacy financial models as they seek to effectively quantify and understand the clinical or financial experience of their patients.
The advent of Accountable Care Organizations is causing providers to rethink their legacy financial models as they seek to effectively quantify and understand the clinical or financial experience of their patients—a fundamental requirement for managing patient care and financial risk effectively. In much the same way, clinical trial sponsors seek similar transformation when it comes to managing their clinical programs and optimizing research and development (R&D) spend. Many are looking to two proven project management methodologies—activity-based costing and earned value management—as a path forward.
Activity-based costing is a cost accounting methodology that assigns costs to an organization’s activities (or cost drivers) related to its products and services to reflect the extent to which the activities (in this case R&D and clinical trial initiatives) consume the organization’s resources. It provides a higher degree of specificity and insight than can be achieved through traditional cost accounting methodologies. Earned value management aims to measure project performance in a more objective manner, looking at completion of authorized work against budget allocated for that work, finding the “earned value.”
Clinical studies present increasingly daunting project planning and tracking challenges, with hundreds and even thousands of complex and interdependent variables—such as site selection, patient enrollment and monitoring, data capture, regulatory approvals and more—that need to take place in the proper sequence. Slight changes from the operational plan during study execution can have a dramatic effect, presenting challenges for companies when designing a clinical plan to best achieve the goals of the study.
Historically, health sciences organizations tracked these variables in silos and often on spreadsheets, precluding the enterprise visibility required to implement activity-based costing and earned value management. Understanding the costs of various clinical trial components is a complex task, and many organizations cannot accurately assign costs to various activities associated with a study. Traditional methods using spreadsheets, generic planning software, and ad hoc planning processes have led to lengthy planning and contracting cycles, inaccurate budgets, and high variances between planned budgets and actual costs.
Health sciences organizations seek better visibility into the operational and financial plans for their studies as well as the ability to quickly model new scenarios as clinical assumptions, business requirements and outsourcing needs change. These capabilities drive more efficient and accurate clinical study planning, budgeting, outsourcing, and execution.
Creating an environment for activity-based costing and earned value management requires six primary components:
A large pharmaceutical company recently used this approach to support a move to an outsourced clinical development model to allow the company to focus on core capabilities. It looked to optimize clinical study planning and sourcing and rationalize deployment of R&D spend, while achieving more accurate clinical trial budgeting and planning.
The organization adopted an activity-based costing approach and deployed a solution that gave it the ability to accurately and rapidly model clinical trial costs and resource requirements and analyze contract resource organization (CRO) proposals for more precise budgeting and better insight into timeline and cost implications. It also created a consistent work breakdown structure across all proposals, and gained greater confidence in accuracy of CRO partner budgets. Further, replacing spreadsheet-based models and desktop information archiving with a central repository for all clinical trial budgeting information significantly improved historical data and collaboration, driving faster and better insight. For example, the outsourcing contracting team can now respond in as few as five minutes to internal client questions about study budgets.
Activity based-costing and earned value management can empower health sciences organization with new precision when it comes to managing their clinical programs. The key to success is creating a solid information foundation that aggregates key data and enables flexible and comprehensive analysis.
Mukhtar Ahmed is Global Vice President, Life Sciences Strategy, Oracle Health Sciences.