Healthcare Costing some concepts

Importance of Costing in Healthcare: World over hospitals are seen as important and necessary community resources that should be managed for the benefit of community regardless of the fact whether the hospital itself has to make surplus or not.

 

In private sector, with increasing competition, hospitals are always under pressure to control costs while holding the price line. Hence it is imperative that cost analysis and cost finding are made to help managements in taking informed decisions for

1.    Investing in infrastructure

2.    Pricing: Assessment of tariff.

3.    Development of pricing packages and specific products

4.    Monitoring performance and service delivery

5.    Department wise performance analysis including capacity utilization of departments and equipment at a given level of resources in terms of manpower and equipments.

6.    Budgeting.

7.    Developing long term strategy.

 

Costing of hospital operations is complex since multiple services across departments are rendered to the consumer.

 

Setting Up a costing system for healthcare Unit: Setting up a good costing system, involves the following steps.

1.    Define the final product.

2.    Define the cost centers

3.    Identify the full cost for each input.

4.    Assign inputs to each cost center.

5.    Allocate all costs to final cost centers.

6.    Compute unit cost for each final cost center.

7.    Report results.

 

The final output decides the methodology and hence following suggestions are made for determination of the final product depending upon the end use.

1.    Cost per Bed.

2.    Cost per patient.

3.    Cost of each department.

4.    Cost per standard procedure/treatment/package

 

The Methodology: The following methods or a combination are followed.

1.    Top Down Method/absorption costing. This is mainly used when one wants to assess department costing and used by adopting case mix groups.

2.    Bottom up approach/Micro costing/Activity Based Costing. This is used when one wants to arrive at the cost of various procedures and packages including day care procedures.

3.    Marginal Costing. This is used while devising strategy for aggressive pricing and to increase the capacity utilization of equipments, OTs, Labs and wards.

4.    Mixed Approach. Use absorption costing based on case mix groups when it is required to ascertain the cost of each department and the procedure within the department. It is useful when patient cost under each department needs to be arrived at.

Use marginal costing when we have to increase capacity utilization or when we need to outsource any service whether medical or non medical.

Use micro costing when we need to design cost of procedures and packages. It is also used in costing day care procedures.

The combination of top down approach and micro costing will help us in establishment of cost per patient when the patient is availing multiple services.

 

Common steps in analysis of cost:

 

1.    Identification of departments in to medical, clinical and service departments. It will be prudent to follow the principle of case mix groups where in homogeneity is the criteria for classifying the medical departments.

2.    Maintaining the number of departments to the minimum levels is desirable.

3.    Fixing Primary and secondary cost centers among the departments. Primary cost centers are those where in cost can be segregated directly and the revenues are identifiable.

4.    Secondary cost centers are those where in costs have to be accumulated and distributed among the primary cost centers.

5.    Identifying the cost drivers within each cost center. This is important in accumulating the costs though respective cost drivers. For example while OT complex is a cost center, the OT Hour is a cost driver.

6.    Identify within medical and clinical departments, department which generate revenues as well support other revenue generating department (Secondary Departments). For example Lab generates direct income as well as supports other medical departments as part of various packaged products.

7.    The costs of service departments are to be apportioned among the medical and clinical departments. Ex: Costs of house keeping, laundry, boiler, AC maintenance etc.

8.    Analyzing and arriving at appropriate parameters for allocation and absorption of costs of medical and non medical service departments is to be done.

9.    In respect of Micro costing or Activity Based Costing, Procedures to be costed are to be defined. This definition will include room stay wherever applicable, surgeon fee, anesthetist fee, OT charges if applicable, consumables, medicines and investigations etc to a precise level.

10.                        Patient is taken as the unit of costing.

11.                        Resources consumed by the patient are identified for every procedure. It could be from Average Length of stay (for cost of room, nursing care laundry expenses and diet food where applicable) medicines, materials and doctors fee etc.

 

Certain Key Issues involved in costing under various methods are given.

 

1.    Apportionment/allocation of huge indirect cost.

 

Most of the service departments and secondary departments support other departments. We need to apportion or allocate their costs to other departments. It is difficult to arrive at a reasonably accurate basis since multiple departments are involved and data capturing is difficult. For example, when a ward is used by multiple specialties, the costs accumulated at the ward level are apportioned among the user departments based on patient service days. However, the intensity of cost incurred by a patient who may stay for lesser days than another is not captured. Hence we try to use Resource Intensity Weights to each type of specialty for the length of stay of the patients.

 

Resource Intensity Weights try to allocate weights to different components of common costs since the intensity in using common ward costs like nursing, materials and other ward manpower cost will differ among the patients of different user departments.

 

2.    Selection of Time Horizon.

 

Selection of time horizon for the study could have impact on cost of services in different ways. (a) The behavior of certain costs could change with time. (b) The time horizon will also decide which cost should be included in the study. The costs which remain fixed will change with time frame over a longer period. The costs which are measured should be incurred in the same time period.

 

3.    Classification and Codification of all resources.

 

Difficulties are faced in classifying the resources and their relation to the costs is established-whether direct or indirect cost-to their final cost center. For example, the unit of service for OP medical service could be per visit or per hour or per patient. This needs to be decided based on the unit of cost that we want to adopt like whether we want to cost service per patient or per intervention.

 

4.    Difficulty in estimating and identifying costs where multiple services are rendered to a customer.

 

Many times, when multiple procedures are performed on a patient, the data is known by the major procedure. This poses difficulty in identifying and allocating costs.

 

5.    Package Costing and Costing Procedures.

 

Package costing has to take in to account the costs of different procedures from different departments involved in a package. This again involves costing of each department under which these procedures are covered.

 

When we take up Micro costing or costing of standard procedures, several key issues like:

1.    apportioning fixed/common costs,

2.    elimination of duplication of several costs like room rent and nursing charges etc when combination of procedures for same patient is performed

3.    Intensity of resources used for different procedures etc

have to be considered.

 

Use of Micro Costing along with absorption or top down method becomes necessary with health insurance industry trying to standardize cost of various standard procedures.

 

Hence the following key aspects in micro costing are to be considered.

 

1.    Define standard procedures under OP, IP and day care with all components of services like stay (for IP and day care), materials, medicines, doctors’ fee and investigations etc.

2.    Determine the unit of service-mostly per intervention or per patient.

3.    Patient specific consumption of resources or such units of services have to be captured.

4.    Trace indirect cost applicable to the respective department under which the procedures are covered and apportioning these to procedures.

5.    Trace patient specific direct costs.

6.    Measuring all costs in terms of units of service defined earlier.

 

The following areas (indicative) are ideal for capacity utilization/ utilization of equipments.

 

1.    Labs and diagnostic divisions.

2.    OT complex.

3.    Costing of wards.

4.    Costing of utilities like laundry and air-conditioning etc.

 

Conclusion: To sum up, no one method will be suitable for all purposes. The selection of costing system and conducting costing studies at different points of time will depend on the objective and perspective of the study or the system.

 

 

 

About the writer:

 

Manivannan a Chartered Accountant by Profession has been consulting many industries for the last two decades before specializing in healthcare for the last 8 years. He has been consulting the largest chain of hospital in the country till recently.

 

He has been conducting costing studies for several large and small hospitals for the last two years.

 

Presently as Director- Parama Healthcare Private Limited, he has been implementing IT solutions in healthcare. He has taken part in many leadership programs including the one conducted by Harvard Medical University. His company offers an umbrella of solutions dedicated to hospitals.

 

Recently he presented a special paper on costing of hospital operations to AIIMS at their exclusive seminar at Goa.