Importance of Costing Systems in Hospitals

Modern day hospitals provide a variety of services to patients under one roof. It is akin to a large service organization considering the number of personnel involved and the capital-intensive nature of the business be it the civil structures, operation theaters & equipment, diagnostic and therapeutic equipment, resuscitation equipment, gas lines, surgical instruments, consumables, etc. Moreover, it is a 24 x 7 operations with people playing a vital role in the well being of the patients in the hospital.

Unlike hotels or the hospitality industry, there are several distinguishing factors in a hospital such as:
  • It provides a fundamentally humanitarian service. Thus, hospitals cannot turn away needy patients just because they do not have money to pay or because it is a Medico-legal case. Hospitals have to factor in costs incurred during such a scenario in the financials.
  • Corporate hospitals have a profit motto. However, they also have a Corporate Social Responsibility in which they serve certain sections of the population, at no or little cost.
  • Other than corporate hospitals, we have either Government run or charitable trust run institutions. So, public funds which is involved needs to be efficiently deployed so that healthcare needs of a large mass of the population is met. This is true even if the objective of the institution is not to make profits.
  • Certain class of hospitals, which are predominantly trust run or enjoy municipal / Government benefits are supposed to reserve a proportion of beds for the economically weaker section and/or for patients below the poverty line. Hospitals have to create an Indigent Patient Fund to cater to these patients.
  • Services provided by hospitals are the same across classes of patients; however, hospitals tend to cross-subsidize general patients by charging higher to deluxe class patients.
  • Hospitals today service corporate as well as insurance / TPA patients. Because of the commitment to serve large number of beneficiaries, they tend to demand and get discounts on rack rates.
  • Pharmacy stores are also to be differentially charged to BPL patients compared to regular patients.
  • “Packages” also form a mainstay in the business especially in the cardiology, orthopedic, gynecology and obstetrics specialties as also routine daycare surgeries such as cataract, appendectomy, hydrocele, pilectomy, renal calculi or hernia.
  • Hospital Accreditation and quality standards ensure that hospitals follow documented policies and this helps hospitals in having predictability of outcomes.
The above complexities necessitates that the hospital management put in place robust costing systems. However, traditional hospital managements have not given serious thought to the same. The corporate world has adopted and benefited from good costing systems, since the early 1930’s. The same holds true of modern day corporate hospitals, who believe in providing cost effective services to patients and ensuring patient loyalty to the healthcare provider.

It is sad to see that in most hospitals, even today, the process of fixing the Schedule of Charges has no scientific basis. They simply survey nearby hospitals for their rates and fix their rates a tad above or below the other hospitals, depending on the Management Philosophy / Marketing Strategy.

Traditionally, hospitals used Bed Occupancy as the yardstick of measurement of performance. With the advancements in medical technology, the average length of stay (ALOS) is reducing and hence, bed occupancy is not the main performance measure any longer. The increased utilization of costly resources, e.g. equipment in operating theatres, ICUs, Cath-Lab, Pathology Lab etc. & Doctors’ times are the key to success in hospitals.

Importance of a good costing and management accounting system
The scenario in the past few years has changed dramatically within the healthcare industry. Established names in the industry are facing tremendous competition from the newcomers. Thus, each hospital has to be competitive both in terms of the quality of services as well as cost management.

Until a few years ago, it was practically absurd to think of a Marketing function within a hospital. That situation is passé with almost every hospital worth its salt employing marketing professionals to attract new corporates. Hospitals also employ Loyalty Cards, Discount Health cards to attract and retain customers.

The advent of health insurance companies has also queered the pitch. With the costs of treatment going up and the privatization of the insurance industry, the hospitals are forced to give quality service at highly competitive prices as the insurance companies will pay only for the services that are desired and will also monitor the services that are rendered closely. This leads to deductibles, co-payments and all claims by hospitals do not get settled hundred per cent. There is also a time element involved as costs are incurred upfront and outstanding amount is received only after a couple of months.

It is therefore imperative for hospitals to have a system to control the costs, while at the same time providing high quality service to the patients.

The Costing Problem
Patients undergoing treatment receive services of varied nature from different departments. The hospital has to recover the expenses of the direct departments as also of the support departments from the patients availing of these services.

Nowadays, any composite hospital with latest facilities for advanced medical/surgical procedures in the various areas of treatment will have nearly 50 or more revenue centers and about 10 to 15 supporting service centers. Furthermore, most of the revenue centers, particularly, in-patient wards, will have classification depending on the level of services for different class of patients according to their monetary or other needs. Again, each department, other than Wards, undertakes several types of procedures/operations etc.

All these make the list of procedures and classification of services quite large. It is for this reason that ascertaining true costs of various services and fixing of the Schedule of Charges becomes extremely complex. Costing needs to be done after careful analysis of past data, comparative data from other hospitals, study of utilization of capacities. Costing techniques shall be applied to provide acceptable costs and charges, enabling optimization of capacity utilization, which, in turn, result in better overall revenues and leave adequate funds for growth and development of newer and advanced facilities.

Setting up a Costing System
Unlike in other industries, where pricing of products / services is generally uniform except in special cases such as exports, institutional sales etc., in hospitals most of the services rendered are charged at different rates based on class of patients. Besides, a category of patients are given free or semi-free treatment, where the charges are nil or kept very low.

Thus, the final charges or pricing has no direct relevance to ‘costs’ individually. But, the overall revenue expected from the charges recovered from all patients has to cover the total costs incurred, to make the procedure or department self-supporting. This matching of expected revenue and costs can be done only on the basis of exhaustive analysis of past quantitative and financial data. Thus, detailed statistics play an extremely important role in Costing of services and fixing of schedule of charges.

Based on such analysis, discussions with medical personnel of each department, regarding the practical problems and expected quantum of each procedure withclass-wise level of patients and detailed budgeting of revenue has to be made. This forms the broad structure for cost allocation to the various cost centers and fixation of individual charges. Keeping in mind the purpose and its importance to the hospital in recovering all expenses incurred, the procedure for cost allocation should be designed so as to obtain accurate and realistic results. We shall not go into the intricacies of these procedures in this article but limit ourselves to the basic steps for the purpose of ascertaining the final costs to obtain the desired results.

Broadly, the steps needed are:
  1. Identify the various cost centers in the Institution and arrange them into:
    1. Revenue producing centers by charging to patients for the services and
    2. Supporting non-revenue producing centers
  2. Allocate direct expenses to all centers by analysis of each element of cost
  3. Develop cost allocation criteria for allocating costs of supporting cost centers to other supporting cost centers and revenue producing centers, ultimately bringing all costs into revenue producing centers, do this on the basis of services rendered for other centers.
  4. Now, each revenue center has the total direct costs of the center and indirect costs representing the allocated expenses of the supporting centers.
  5. The total costs thus arrived at for each of the revenue providing centers is to be appropriately distributed among the various services rendered to the patients by that center. This involves not only finding the nature of the services but also learning the general application of the services to the patients. This should be done in conjunction with the medical personnel and modalities determined for each type of service.
Once the costs are available for each profit & cost center, they can be used for the various purposes identified earlier. Typically, to arrive at the above costs, one needs to setup various monitors across the hospital, which will give the necessary data for computing the costs. Computerization could significantly simplify the process of data collection and analysis. A good Hospital Management System software should form the basis for the costing system.

Objectives of a costing system

Utilization of resources:
A costing system should monitor the resource utilization across the hospital. These resources can be infrastructure, equipment, materials or personnel. Each department has a key driver and the system should track these drivers on a continuous basis. This will ensure that each department is efficient.

Department-wise profitability analysis
A good costing system should enable generation of this very valuable information on an on-going basis. Managements can take corrective steps using this data. It enables fixation of responsibilities and monitoring them. Coupled with a budgeting system, hospital management will have full control over the working of the hospital.

Fixation of doctors’ honorarium
This is a very touchy subject for most hospital management. The honorarium systems can be very complex, with some hospitals adopting honorarium calculations, for each individual consultant. With a costing system, they can negotiate a fair rate for the doctors for each service rendered. The doctors also will be assured of a reasonable and scientific basis for their remuneration.

Fixing Schedule of Charges
This document also called the Rate card can make or break a hospital. The costing system should provide inputs to fix the charges for the various services rendered for each class of patient.
For purchases of new equipment or infrastructure, the costing system should enable the managements to arrive at the feasibility of the project, based on hard data. More importantly, the system should keep track of the status of the projects after they are commissioned. Generally, at the time of feasibility stage, certain estimates & assumptions are made. But almost never are they monitored after commissioning.

Monitoring of factors affecting pricing
The costing system will keep a tab on all factors affecting pricing. For example, material costs directly affect prices. Any major variation in material costs should be highlighted and price changes effected immediately after ascertaining the impact of the variation on margins.

Whatever be the philosophy of the Management, they need to ensure efficient utilization of costly resources and they should take informed decisions on pricing. A scientific Costing system is a very important tool for Managements to fulfill these needs and hence, is imperative for the successful running of a Hospital.

About the Author:

Mr Ravi Mani is the CEO of 21st Century Health Management Solutions and has over two decades of experience in designing robust solutions in the Healthcare vertical. Mr Ravi Mani has a Bachelor’s degree in Engineering and is a qualified Cost Accountant.

The EHR Story in NHS

An analysis of NHS doctors of Indian origin using EHR
The practice of medicine is inextricably entwined with the management of information—Shortliffe
Dr Mithun Barik

Practicing medicine can be unforgiving, dangerous and unrewarding. Life is often a nightmare if it comes to treating patients in a completely new and advanced set-up like National Health Service (NHS), UK. Especially doctors from developing countries can find it quite hard to adjust to a setting governed by strict protocols designed to maintain its high standards. The fact that bothers them most is that the amount of detailed documentation to be done for each patient and that too in a 'computer-based medical record system' which is totally unique to them. So, do computer-based patient records help these young doctors to cope with the challenges or does it make their life more dreadful?

To find out the effects of Electronic Heath Records (EHR) on the practicing life of Indian doctors in the UK, several informal interviews were conducted with NHS doctors of Indian origin. The synopsis is that EHR is indeed a boon and it actually has helped to dramatically improve the outcomes of their treatment process.
Experiences Galore As Dr Nitin, SHO, General Medicine recalls, "When I first saw nurses carrying laptops in ward rounds, I thought that it was a complete waste of time and money. But soon I realised that these were more than just gadgets, they are actually the backbone of the whole patient medication system."

According to Nitin, the laptops are used to maintain patient medication charts and the nurses fill up a checklist for every patient after giving them medicine. "This way, I can see the exact amount of medicine a patient has received during his inpatient days and accordingly calculate the doses required after his discharge." Nitin also feels that computer-based patient records significantly decrease human errors through alerts and contraindications of drugs. It is also a great learning experience for her, as the system contains detailed information about drugs: indication, dosages, pharmacokinetics, pharmacodynamics etc.

Dr Nrupaditya, SHO, Geriatric Medicine, feels that EHR boost team working. "An integrated computer-based patient record improves the communication between different axes of clinical care team. The supervising and referral consultants, radiologists, pharmacists and nurses can interact within the system which enhances team work as well as saves valuable time." For example, the prescriptions by the SHOs are regularly validated by pharmacists and views about the appropriate medicine are often exchanged between them in the form of notes.

the name of medicines from the drop down menus. Also, it makes doctors forget the doses of medicines as it comes automatically in the system." According to him,
doctors become too dependent on the system over a period of time and in turn become less efficient. Despite this, he is in the favour of the system as ultimately it leads to totally computerised patient records, which is of immense importance to medical researchers.

On the other hand, PACS as a part of computerisation of patient records has revolutionised the concept of medical imaging, feels Dr Nimbalkar who is attached to the Department of Radiology in a leading NHS hospital. "PACS helps me to focus on the specific image showing disease pathology and thus helps to reach diagnosis faster. It also gives me the opportunity to report quickly by providing disease specific templates which describes the common diagnoses." The possibility to select and enhance specific slides containing disease pathology has helped the surgeons to focus better on the exact site of the disease. "The system includes complete pre-surgical protocols for common operations which saves lot of time as they are very lengthy to write," comments Dr Vaidya, SHO,General Surgery.

Better Auditing Systems
EHR is also of paramount importance in medical audits. According to Dr Bhattacharya,Endocrinologist and Clinical Research Fellow, computer-based patient records fasten up the data collection and analysis process of medical audits. "Whenever I need any information about any patient, I search the database by providing specific criteria and the data just appears in a flash. This saves time, especially in retrospective clinical studies." The results of drug trials can be closely monitored and accordingly the findings lead to foundation of new research activities. Overall, the doctors believe that EHR has helped them to serve their patients better and feel that this kind of system should be introduced to Indian hospitals as well. As expressed by Dr Arora, who is currently doing a clinical attachment in a NHS hospital: "It is really exciting to see that such a system exists and I am looking forward to use it." Oxford Handbook of Clinical Medicine states that the most elemental thing of clinical house job is 'survival' amongst adverse working conditions. It appears that electronic medical records have provided few more 'lives' to the combating medicos.

The writer is an EMR Consultant 21st Century Health Management Solutions UK

How to run your healthcare business better?

It does not matter whether you are a "for profit" organisation, a "not-for-profit organisation", a "charitable institution", or a "welfare organisation", your end goal remains the same. To be an affordable, accountable and efficient service delivery platform

Irrespective of being a small clinic, a laboratory, a diagnostic centre, a hospital or a pharmacy or for that matter anyone who needs to work with patients, your primary aim is to provide a service. The service is to resolve the problem for which your patient came to you. It is equally important that you make profits, not because it happens to be the reason for your existence in business, but because that's the only way your business can run. Address it as a service, a profession, a vocation or by any other name that pleases you. The bottom line is that your role is to provide an efficient service to the patient, at an affordable price that too in a manner, such that it ensures you can continue to provide the service better, as a profitable venture, keeping in mind your employees and associates enjoy what they do.

It does not matter whether you are a "for profit" organisation, a "not-for-profit organisation", a "charitable institution", or a "welfare organisation", your end goal remains the same. To be an affordable, accountable and efficient service delivery platform.

In this and the upcoming features slated to be published in the due course of time, we invite you on a journey towards improving the way your business can run. It is a journey without any ending, for improvement has no limits, except your own thought process.

Anyone who has been running a healthcare facility knows that the money comes in from the surgeries, diagnostics, pharmacy, bed charges and nursing charges. These are the services, for which the patient pays the most. The money comes from patients, insurance, corporate organisations who cover their employees and their dependents, and other financers like private and public trusts, government and good samaritans who donate generously.

Introspecting on your healthcare organisation inwards, you need to provide the services efficiently, maximise delivery at the lowest cost. Looking outwards, you need to be a good public relations organisation managing relationships with insurance, corporate organisations, government, trusts and the members of the society.

The single largest cost of running a healthcare organisation undoubtedly is the cost of manpower. This fact holds largely true for organisations that provide a service. At times, the cost of finance, the cost of materials and the cost of maintenance of the organisation may also compete with cost of manpower, often depending on the nature of the organisation, its age and location, its mode of financing, its policies and its efficiency.

That is where the money is spent though not intended. Where the money goes as ''waste'' may well be unpaid bills, loss of efficiency of the staff, pilferage, breakage and misuse of materials, losses due to delayed payments to vendors and delayed receipts from customers, Concessions and cancellation of wrongly billed services and materials for which the patient was never billed.

If you could quantify the money that you may be losing on account of the aforementioned parameters, it is indeed an indication to take a fresh look at your work style and approach. Here is a small check list of how much money you are losing which is not based on arithmetic calculations, but on the impact it has on your business:
How much money have you lost due to concessions, cancellations and write offs? All amounts to a dead loss.
How much money have you lost on account of delayed payments? For every Rs 1000 delayed by one week you lose Rs 3.50.
How much stock went unaccounted? How much did you lose because the physical stock was lower than the stocks as per your books of account?
Are you overstocked on inventories? Every Rs 100000 of additional inventory costs you Rs 15000 per annum.
Every time you delayed payment to your vendors by one week your effective cost of materials will be more by at least three per cent.
Are you losing money due to misuse of materials? Look at items that should not be consumed in such a high quantity. Often this figure may be of the order of two to 10 per cent depending on how good your systems may be.
How much money are you losing because your costly equipment is lying under-utilised? These figures are anywhere from bet ween five to 25 per cent or more.
Are you conducting diagnostic tests where the reagents are under-utilised? Are you getting only 10 tests done from a kit that can be used for 50 tests? That loss can well be 10 per cent of the total cost of kits or more.
It does not take a qualified college degree in financial management to know that if your total costs are 10 million you may be losing anywhere between three million rupees of the total costs due to such a waste. If you are losing under one million, we would like to learn from you, how you are managing your business.

Can we teach you how to run your business better? Yes, No or Maybe.
Yes, because that's what we are going to talk about in the rest of the series of these articles. We will guide you through these articles to help you run your business better.

No, because you know how to run your business. No one can do it for you.

Maybe because if you would like to run it better, help is always available.

The question is how? The forthcoming features will include articles that will give you an outline on how to set business objectives, understand your current state, and plan for the future. We will also help you to create a business process improvement project plan, select the right tool for change, facilitate you to put that plan into practice and finally prepare a road map to success.