Hospital Cost Centres
Below is the published article by Herman Leyenaar which appeared in the South African Institute of Chartered Accountants journal - Accountancy SA and also in the South African Medical Journal.
Article published in both journals in the late 1990s.
MANAGEMENT COST CENTRES HOSPITAL ACCOUNTING
The world-wide trend today is for the Health Sector to be under siege with increasing patient loads, more complex procedures and ever rising medical costs. The cost of hospitalisation is the most dominant cost factor absorbing most of the resources.
Managing the process between the conflicting vested interests of Funders, Providers and Patients is a mammoth task. This is one of the greatest challenges now facing the newly formed Health Management Organisations (HMOs). The key role players are the Funders, being predominantly Medical Aid Societies whose resources are paid for by members’ i.e. patients’ contributions, and Providers who consist of hospitals, doctors, nursing staff, pharmacists and other health care workers. All of this leaves the poor patient side lined and bemused while at the same time expecting enhanced services.
Traditionally hospital systems, especially in the government sector, have been unable to provide management with the necessary timely and meaningful information with which to manage.
In the government sector the hospitals are almost totally devoid of useful on going information. Managers are not in a position to make appropriate decisions as they do not know how much procedures or departments are costing. At best macro figures are provided for the hospital, (months after they have been incurred) for personnel costs, capital expenditure, pharmaceuticals, consumables and utility costs. Statistical data is gathered for input into official records which is used to help motivate for more resources, and clinicians utilise the information for further analysis within the medical fraternity, often for predominantly research purposes.
In the private sector many hospitals have very sophisticated systems to ensure all items directly used may be appropriately costed and charged for. This cost focussed approach is a recipe for over servicing and the long suffering patient has little or no influence, and eventually is simply forced to pay higher medical premiums.
Therefore, there is either no ability nor motivation from hospital management to manage more efficiently. In terms of optimising the use of the resources under their responsibility too many managers are not in a position to account for the various aspects from a financial perspective. The divide between clinicians and hospital administrators is a cause of great frustration which hampers any possible close working relationships for the benefit of the hospital and its patients.
Hospital management needs to become more business orientated with a system which provides both cost effective, and efficient meaningful, information. The outputs need to be prepared in a timely manner so as to be more useful and practical for day to day management.
Management should be optimising the utilisation of their resources without adversely impacting on the health delivery capabilities of the hospital and it’s staff. Improved management information and systems allows for better decision making which enhances health care delivery.
To succeed the cost of various activities, procedures, departments and services must be known by the individuals who are responsible for making the decisions at the “coal face”. Being effective means “Doing the right things” while being efficient is “Doing things right”, and when both are done in conjunction with each other at the right time the decision making process is enormously enhanced.
The solution to better performance is to have a well thought out structured approach to creating a comprehensive set of management information to add value. The creation and construction of the reporting outputs should be determined in a consultative and participative manner to maximise the benefits. It is absolutely critical for the clinicians and management to work closely together from the outset with a shared responsibility.
The entire process is built around an agreed structure for the hospital and all resources used or consumed must be accounted for in a matrix format and matched against revenues generated. This would consist of a Profit Centred (PC) approach with related activities, services or procedures matched to the resources needed to perform them. A Profit Centre is essentially:
any area or unit that is clearly identifiable in practice
is of sufficient significance to be accounted for separately
for which an individual is responsible and may be held accountable
where activities, procedures and/or services are performed
The diagram below is an example of a high level Profit / Cost Centre structure.
An essential ingredient of what may be termed a strategic cost management system is to extract and identify the major processes within the hospital as well as the cost drivers.
By creating a closer link between strategic and operational objectives a fuller and more dynamic understanding is gained. This becomes a major positive contributing factor to enhanced management performance at all levels.
Each PC will have assigned to it resources in the form of people and assets, activities, procedures, services and consumables, as well as revenues, in order for the manager responsible to review and monitor progress against budget.
The design and use of the system should in no way impinge on the health care delivery capabilities to patients. The medical care, which any patient needs, remains within the domain of the clinicians to ensure the appropriate health care and medical practices are correctly applied.
A matrix management format should develop with a peer review aspect built-in. Any areas or individuals who may either be under or over servicing patients will be monitored through the process of peer review and benchmarking. This approach is becoming the cornerstone of the new HMO culture.
The diagram below is an example of how information, which will have been prepared on an agreed common basis, may be presented and shared between PCs.
Managers, who in many instances will also be doctors, will be responsible for monitoring the results of their PCs. There would be an expectation for staff to be reallocated or deployed between PCs, such as wards, to maximise utilisation as patient loads fluctuate.
No system is of any use unless there is a correctly practised budgeting process in place. Effective budgeting starts with having a sound strategic plan with measurable results against which annual budgets can be compared.
The strategic plan should note the high-level core services aimed for over a 3 to 5 year period. The annual budgets on the other hand are prepared at an operational level and it is critical for them to be in sync with the strategy.
The budget process, including the higher level strategic elements, must be transparent and well communicated to PC managers.
This requires a participative and consultative management style by senior management and has been the catalyst for some positive form of cultural change. In many instances, traditionally senior management have tended to behave in a more remote and autocratic manner.
To achieve such a system involves a complex implementation process of change and training.
It is not the objective of this article to labour the difficulties and issues surrounding the implementation process. An overview diagram of the implementation process is noted below :
Suffice to say the implementation process must :
have top management support
be provided with appropriate resources
involve as many key role players as possible to maximise buy-in
recognise all stakeholders – including the patients who are often forgotten
be transparent and well communicated throughout the process
include genuine consultation and negotiation
However, an essential aspect of any major project of this nature is the correct application of change management.
It would be inappropriate to dwell too extensively on the change management issues. This should not be misinterpreted as dismissing or minimising the importance of change management, as without it, a large project is doomed to fail.
There are essentially three phases to building commitment to change from an initial contact to finally reaching an instinctive internalised organisation-wide acceptance. This is well illustrated in the diagram below.
There are enormous advantages resulting from the implementation of a management accounting and information system and these include:
“Ownership and Buy-In”
Decentralised identifiable Profit Centres
A spectrum of useful specific expenditure categories
Consumption based in same timeframe
Responsibility and accountability known
Consultative and negotiated activities
Meaningful information is presented in a timely manner
Report writing is flexible
On-going changes reflected
PC heads interpret reports more easily
Information is correlated between financial and non-financial activities
Decision making process is improved
Incentives and rewards linked to results
Planned measureable strategies
Budgets are used to manage
Results of remedial actions and decisions become defined
More accurate pricing and costing activities and procedures
A wider variety of services is likely
Patients receive better value for money
The debate is not whether hospital management information systems should be improved but rather how and when. The applications need to be affordable, yet provide the essential data and information needed by both hospital management and clinicians. The often quoted “cost benefit analysis” would point in favour of implementing an effective management accounting system providing hospital management, profit centre heads and clinicians with the tools to manage.
This will be for the benefit of all the stakeholders, from the hospital owners, managers, clinicians and of course the patients. It is after all the patients who are paying their monthly contributions in good faith in the expectation that at some future point in time they will receive the best service possible.
This article was written by Herman Leyenaar BCom CTA CA(SA) FCMA DipTaxLaw of HJL Management Consultants who has had considerable experience in hospital financial management. For further information you may contact him using this website contact.