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Cost Variance — A key tool for self-funded budgeting

October 16, 2017 | Christina Bialas

What is Cost Variance?

Cost variance, in the healthcare industry, is a budgeting term that represents the difference between a budgeted amount and the actual cost of a medical procedure.

There is two type of cost variances:

1. Favorable Cost Variance: When the cost of a medical procedure is less than anticipated, and payment equates to a remainder of funds. (Budgeted Amount – Cost = Positive Amount)

2. Unfavorable Cost Variance: When the cost of a medical procedure is more than the budgeted amount, and more funds are required. (Budgeted Amount – Cost = Negative Amount)

Self-funding benefit providers will want to pay close attention to their cost variance. It is an important tool for healthcare budgeting, determining what coverages to include in a benefits package and choosing what medical facilities employers should send their employees.

How does cost variance occur?

Cost variance is a result of RBP (reference-based pricing). Medical procedures don’t have a set price and vary based on location, facility, prescriptions and other factors. Because of this, it is impossible for employers to set an exact budget, so they have to estimate. Using historical data and healthcare reports, employers can make a well-informed budget, but it is still wise to pay close attention to cost variance.

How can a TPA help with cost variance?

TPAs help employers closely monitor cost variance by providing a CVR (cost variance report). CVRs analyze costs and revenues, giving employers a close look at their budget’s execution throughout the year. Varipro delivers these reports monthly, bringing any extreme variances to employers’ attention. TPAs also use cost variance data to negotiate RBP, finding employers the best quality and most affordable services, while making sure that medical providers are not gauging costs. Cost variance data is also an excellent tool for determining a stop-loss policy, which TPAs can manage for employers as well.

Learn more about reference-based pricing here: https://www.varipro.com/what-is-reference-based-pricing/