Costing is the fountainhead of resource

Costs can be seen as part of a patient’s consumption of resources as opposed to a hospital’s budget heading. A reduction in average patient cost then leads to higher revenue for the hospital, says Sheenu Jhwahar

According to a major World Bank study of public hospitals (Barnum and Kutzin 1993), the share of public sector health resources in developing countries consumed by hospitals is found to range from 50 to 80 per cent. This figure is bound to have increased over the last few years.

An addition of the private sector allocations to the public sector resources, further signifies the enormity of the finances being used up. As the cost of health care continues to rise significantly, health care providers, who had little interest in the mechanics of health care costing, have had to develop a working knowledge in this area to reduce costs.

It would not be wrong to say that development of cost information is the primary level of information required in order to develop management control in hospitals. This is because, costing of the ‘patient episodes’ is a tool for estimating both supply and demand for the different hospital services.

Cost accounting describes the aspect of accounting, which collects, allocates, and controls the cost of producing a service. This information is primarily reported to management to enable control of costs and to ensure the financial viability of units, departments and divisions.

Costing is the fountainhead of resources. These resources are required by every organisation, and the hospital is no exception to this rule. It is also a fact, however, that not much information is available on departmental cost accounting in hospitals. As financial management techniques, cost finding and accurate allocating help to identify data for making more informed decisions concerning, feasibility, viability, strategic marketing, and resources allocation and investment decisions within the hospital.

Besides, a hospital cannot set rates and charges, which are realistically related to costs, unless the cost finding system accurately allocates both direct and indirect costs to the appropriate cost centre.

A hospital may have records of the total amount of expenditure and revenue earned. The cost thus computed in totality, gives the absolute operating cost. However, this can be inadequate.

Depending upon the resources used by a single department and the proportion of utilisation of it by patients, reveals the real feasibility, profitability and utilisation of the department and not of the hospital as a whole. For this, the hospital must be costed departmentally.

The type of information available for cost analysis varies substantially across countries and hospitals, from extensive to rudimentary. Hospitals vary in the extent to which costs are allocated to specific hospital departments, and the accuracy with which such allocations are recorded.

In this respect, some studies have also been done across the globe. In one such study, the objective was to cost a clinical unit over one month in 1991, to cost treatment of individual patients from audit data, and to compare this costing method with the hospital charging system.

Design undertaken- a financial breakdown was obtained for one month’s work. Ward stay, operating time, investigations, and outpatient visits were costed, and a formula (episode=days on ward hours of operating + investigations + outpatient visits) was used to cost patient episodes from audit data.

Clinicians can produce a financial analysis of their work and cost their patient’s treatment. Audit is strongly advocated as a planning tool.

Similarly, in another case, the data-tree costing project in Wales has provided the Welsh pathology laboratories with a standard package that allows pathologists to understand, how their own laboratory’s test costs are compiled.

The software provides answers to the question “what if...” and shows instantly the effect of salary or consumable cost alterations. Resource management at a laboratory is enhanced by a greater knowledge of costs, particularly in relation to volumes of work.

Clinical information systems that link resource-use to clinical decision-making are necessary tools for effective hospital management. An article describes the cost-finding research undertaken to develop a model for laboratory tests. The method separately calculates direct labour and direct consumable costs and apportions indirect labour, indirect consumable costs and department overhead costs to each test in each accounting period.

In respect to today’s corporate culture, we can well say that, faced with stiff competition, hospitals can increase revenue by knowing product line costing and closely monitoring their productivity. Product line managers often must make a decision based on accurate cost information. A method is needed to determine that more accurately. By using a standard model, product line managers can better estimate the cost intermediate and end products, and hence better estimate the costs of the product line.

The message being delivered to hospitals is, that today’s bottom line is not based on a listing of activities done, but rather on what outcomes, what impact on community problems, what benefits, theses activities have achieved. It is important to see that outcome-based evaluation methods once adopted do not degenerate into habitual production of largely morbidity and mortality rates alone.

Material managers must contribute a business-oriented understanding of costing and entrepreneurship while embracing a clinical-oriented goal of caring. Although many health care organisations may not fully realise the benefits of standard cost accounting techniques, it is a fact that this can lead to more realistic performance measurements and information system improvements that alert management to losses from un-recovered overhead in time for corrective action. In fact, in the current scenario not only product costing, but also a new futuristic technique has come about, that of ABC-activity-based costing.

Activity-based costing, an approach that has proved to be an improvement over the conventional-costing systems in product costing, has been introduced at several places. By combining activity-based costing with standard costing, health care administrators can better plan and control the costs of health services provided, while ensuring that the organisation’s bottom line is healthy.

Once the basic system is established in a department, detailed financial monitoring should become practicable. The necessity for a standard comprehensive procedure of this nature, based on sound-cost accounting principles, appears inescapable, particularly in view of its potential application to management budgeting.

Costs can now be seen as part of a patient’s consumption of resources as opposed to a hospital’s budget heading. A reduction in average patient cost might then lead to higher revenue for the hospital. An analysis of the situation shows management involves operational control, management control and strategic planning. Operational control deals with day-to-day management on the task level. Management control involves ensuring that managers use resources effectively and efficiently to accomplish the organisation’s objectives.

It includes both control of unit costs of intermediate products, which are procedures and services used to treat patients and are managed by departmental heads, and control of intermediate product use per case (managed by clinician). Information from the operation and management levels, feed into the strategic plans conversely, the management level controls the plan and the operational level carries it out.

It is suggested that such a system of cost allocation would also enable members of the medical profession to be more cost conscious. It does thereby prove that detailed costing system is essential for growth because it nets efficiency and ensures savings.

The author is clinical auditor, Mid Stafford General Hospital, UK. Email:sheenujhawar@yahoo.com