Atiit Activity based costing. Discussion document May 2007
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1 Atiit Activity based costing Discussion document May 2007
2 Costing and why activity based costing? Knowing the total in a hospital as well as the total income is required to calculate the profit. It doesn t tell us, however, why there was a profit, or indeed how the profit could be changed The idea behind activity based costing is to understand the cost of each activity in a hospital. Done right, this can help us decide both why there was a profit, and how it could be improved. We can calculate the cost of individual an individual patient: it is the sum of all the of the activities associated with the patient, e.g., time spent in the operating theatre, time spent on the ward, lab tests performed. This tells us why there was a profit (or loss) We can calculate how much the cost would have been if e.g., the operation had been shorter, or the patient had stayed in hospital for a different length of time, or received different lab tests. This gives us a clue how to change the profit Doing perfect activity based costing can be incredibly time consuming and costly. This is because there are thousands of activities in a hospital that could all be recorded in detail. This stops many people p from doing activity based costing. However, there are fast, user friendly, flexible and modular ways of implementing activity based costing. This can make it very worthwhile in the short term, and allows the hospital to learn and refine accuracy over time, without buying new IT systems. In addition, there is now a requirement from AD Finance for all hospitals to do activity based budgeting from Source Health Statistics analysis 1
3 6 easy steps to calculate the cost of a specific patient simplified Determine Total Cost Define cost types Allocate to cost centers Define activity metrics Calculate unit cost Determine cost of single patient fing Total Total Unit Patient Patient Cost Activity cost activity cost ER 500 emergencies Ward 1000 bed days Operating theate 400 operating hours = = Lab 5000 lab tests Outpatient 1000 attendances Staf Drug gs rect Indi fing Staf Drug gs rect Indi fing Staf Drug gs rect Indi Do this once only Do this for every patient Source Health Statistics Analysis 2
4 A few principles make activity based costing more efficient and powerful Fast User friendly Flexible Modular Description Implication Create first version with Make pragmatic use of little effort rapidly judgments, e.g., in allocating Use results (almost) online cost types to cost centers Clinicians can understand and use it Works with small providers with very basic costing, as well as complex hospitals with sophisticated systems Is able to evolve and refine costing over time Is benchmark able across organisations (even if very different underlying costing systems) and over time (even if systems improve) Stable principles Keep it simple (low number of cost types and cost centers) Use guiding principles rather than exquisitely detailed rules, e.g. how to allocate indirect Provide for multiple levels of sophistication, e.g., which activity metrics to use Use a consistent cost matrix which doesn t change over time Stable principles 3
5 Define total cost Include Comments Operating cost Teaching Research & Development yes no no Include all operating to with clinical services should be included on an accrual basis In large teaching centers this can be challenging to do accurately. A pragmatic and transparent solution could be to identify individual staff members who are involved in teaching and estimate the percentage of time spent on teaching. For overheads a simple overhead percentage could be used Apply same principles as for teaching Capital no Capital, projects, end of service benefits should be excluded and treated on a cash basis Source Health Statistics Analysis 4
6 Define cost types Direct Indirect Cost Type Doctors Nurses staff Cost Behaviour Semivariable Semvariabl e Semvariable Drugs & Devices Consum ables Operating cost Indirect staff indirect Variable Variable Fixed Fixed Fixed It is important to keep the high level cost types simple and limited to a small number Each main cost type may be broken into more detail, but this detail may be very different for different providers. The main thing is that the cost ledger can be aggregated to these cost types Source: Health Statistics analysis 5
7 Allocate cost types to cost centers Cost Center\Cost type Doctors Nurses staff Drugs & Devices Consum ables Operating cost Indirect staff indirect Emergency Room Outpatient Ward ICU/CCU Operating theatre Delivery room Physiotherapy Renal Dialysis Endoscopy Cardiology Radiology Laboratory Often, there will be no hard data available to make this allocation. Expert judgement, may be a good start point These judgements can be validated by specific measurements in a second iteration This will become the most important part of the allocation (2/3 of cost!) Some providers may be able to allocate these directly to individual patients Allocating indirect to cost centers always involves judgement Afirst approximation might be to allocate according to the overall direct cost This should not be a major time sink Source: Health Statistics analysis 6
8 Define activity metrics Cost centers Ideally* If not available Fall back Emergency Room Severity of case Attendance Outpatient Consultation minutes First/FollowUp Stay Ward Weighted ward hours Days of stay ICU/CCU Weighted hours Hours Operating theatre Cutting minutes DRG reference Delivery room Minutes in delivery room Deliveries Physiotherapy Hours Sessions Yes/No Treatment Renal Dialysis Weighted Dialyses Sessions Endoscopy Procedure minutes Weighted procedures Yes/No Cardiology Procedure minutes Weighted procedures Yes/No Radiology Weighted procedures Yes/No Diagnosis Laboratory Weighted procedures Yes/No Source * For cost type Drugs & Devices within each cost center, ideally use actual not activity loading Health Statistics analysis 7
9 Prioritise activity metrics to get accurately Cost centers Relative importance rationale of high quality activity measurement Emergency Room Low High volume activity Outpatient Low High volume activity Ward Medium Intermediate cost, nursing intensity varies by patient ICU/CCU High High cost, big differences by patient Operating theatre High High cost, big differences by patient Delivery room Medium Intermediate cost, which varies by patient Physiotherapy Low High volume low cost Renal Dialysis Low Generally small cost base within hospital Endoscopy Medium Intermediate cost, which varies by patient Cardiology Medium Intermediate cost, which varies by patient Radiology Low Standardised high volume low cost Laboratory Low Standardised high volume low cost Source * For cost type Drugs & Devices within each cost center, ideally use actual not activity loading Health Statistics analysis 8
10 Cost matrix with activity metrics Cost Center\Cost Doctor Nurses type s staff Operatin g cost Emergency Room Severity of case Attendance Outpatient ti t Consultation minutes Ward ICU/CCU Operating theatre Delivery room Physiotherapy Renal Dialysis Endoscopy Cardiology Radiology First vs FollowUp Weighted ward hours Days of stay Weighted hours Hours Cutting minutes DRG reference Delivery room minutes Number of deliveries Physio hours Number of Sessions (YesNo) Weighted Dialyses Number of sessions Procedure minutes Weighted procedures (YesNo) Procedure minutes Weighted procedures (YesNo) Weighted procedures Drug & Consum Indirect Devices ables staff Use actual, if available, otherwise as all other Cost Types indirect Laboratory Weighted procedures Source: Health Statistics analysis 9
11 What this looks like in practice Excel template Cost matrix, AED 000's Provider Hospital One Date 14 May 07 Responsible Mohammed Mohammedine Cost Center\Cost type Doctors Nurses staff Drugs & Devices Emergency Room Outpatient Ward ICU/CCU Operating theatre Delivery room Physiotherapy Renal Dialysis Endoscopy Cardiology Radiology Laboratory Consumabl es Operating cost Indirect staff indirect Activity 10
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