Cost Centers from Hospital Units. Study Case

DOI 10.1515/vjes-2017-0008 Cost Centers from Hospital Units. Study Case Alina PUȚAN Oana Raluca IVAN Attila TAMAS 1 Decembrie 1918 University of Alba Iulia, Romania alina.putan@yahoo.com Abstract Current status of the hospital units is worrying: insufficient funding, increasing the number of cases considered / treated, providing quality services at public hospital unit. In this research we have undergone an empirical research carried out in the hospital units of category III and IV, from Alba County, this sample selection aims to identify an optimal solution to exercise management control which should serve to management decisionmaking. Responsibility centers, at the level of hospital unit, establish the liability for each segment of expenditure, expenditure tracking and proper grounding even their places of training, delimitation expenditure which does not strictly dependent on the production activities that are related strictly by the process; establishing the deviations of preset expenses levels; establishing a system of rules allowing highlighting the responsibilities of each performer, introducing a system of resource allocation and tracking of the use of their by developing specific cost budget for each responsibility center. The disadvantages of decentralization based on activity centers consists in increase the consumption of resources in certain activities, unclear delimitation of cause-effect relationships that create difficulties in adopting the relevant decisions by management, etc. Keywords: cost centers, hospital costs, decentralization JEL Classification: I18, M41 Introduction Romanian health system is a sector of the economy with difficulties; inadequate funding, poor health of the population, the situation of doctors working simultaneously in the public and private sectors, the alarming situation of the cost medicines, fight against corruption intrasystem, and quality of service care are the main problems of this system. Pursuing operational costs achieved through decentralization activity is one aspect of process optimization. 1. Research methodology Our study has two parts: a theoretical part achieved by literature review and a part 67

empirical - case study on the existence of cost centers in the Romanian public hospital units. Our empirical research carried out in the hospital units of category III and IV, from Alba County, this sample selection aims to identify an optimal solution to exercise management control which should serve to management decision-making. We identified hospital units that follow closely cost calculation on each responsibility center; unfortunately, only a unit of the sample we found to do this. Hospital units that are subject to our case study is a county hospital, a municipal hospital and a city hospital. The motivation for selecting these three public hospital units is supported by the following considerations: national weight is considerably significant as shown in Figure no.1, sicknesses treatable are part of typology most commonly treated, this type of hospitals are found in most counties of the country, as can be observed in the distribution of hospitals by county, shown in Figure no.2, we consider that this study is with impact at national level. Classification of public hospitals in Romania Figure no. 1 (Source: Own processing from data on the situation of public hospitals classified into categories, http://www.ms.gov.ro/ accessed online on 26 May 2014) Distribution of hospitals by counties Figure no. 2 (Source: Antunes, Mordelet, De Groote, 2011) 68

Units hospitals with beds are dispersed across the country to provide the best quality healthcare conditions. Typology of hospitals and territorial dispersion represents a starting point in developing our empirical study, identifying the main categories of units. This study focuses on public hospital units in Romania and aims at identifying an instrument to exercise management control which should serve to achieve an efficient management. The methods used in our study is case study, participatory observation as well as the non-participating and documentation. 2. Decentralization of activity on responsibility centers Management control is discussed in context of organizing pilotage of entity based on segmentation activity by centers of responsibility. A responsibility center is an organizational entity that holds a delegation of authority concerning the means (material, human, financial) and negotiating capacity on the objectives (Tabără N., 2004). Activity entity can be fractionated in terms of consistent accounting sections which allow effective and efficient management of available resources. Decentralization of responsibility centers activity entity can: Isolation the responsibilities of each manager; activation capacity to decentralize management tasks and delegate a part of his responsibilities; A manifestation of management's ability to master the conflicts between local and global interests, preserving own dynamics on decentralization. Decentralization of responsibility centers should be adapted to the degree of real autonomy units and current practices in the performance management; the essential point is consistency between the principles of leadership, on the one hand, and the assessment of responsibilities, content activities and their competences, on the other hand. The arguments for establishing the structure of the entity on responsibility centers are as following: the possibility of establishing of responsibility for expenditure effected, monitoring and correctly foundation for expenditure on their formative locations; delimitation expenditure which does not strictly dependent on the production activity that are strictly related to the process, setting spending deviations from predefined levels, establishing a system of rules which allows highlighting the responsibilities of each performer, introducing a system of resource allocation and tracking of the use of them by developing budgets of expenses specific to each responsibility center. Characteristics of a responsibility center are: it is placed under the authority of a charge; pursue one or more missions with objectives of quantity and value well defined; has a set of resources needed to achieve objectives; it has a certain relative autonomy within budget resources. Depending on the elements controlled by responsible and established financial performance measures in terms of cost, profit, financial flows, profitability, we following types of responsibility centers: Cost Centre; Revenue Centre; Profit Centers / cash flows; Investment Centre. Cost center is a responsibility center in which inputs are measured in monetary terms and outputs are not measured. Measuring the performances is made of financial cost in the form of standards which must be respected. It is delicate to treat discretionary costs namely not correlated with outputs by objective relationship. Budget costs are, in practice, inadequate performance evaluation tool of discretionary cost center. In order to meet 69

70 budget costs, responsibility may, for example, to reduce the work or to just guide the responsibility assigned, which is not in any way aim searched. Therefore must appeal to other instruments outside the financial performance evaluation. Cropping the responsibility centers is related to the technical organization of the business, under which thinking and identifies "Account section" which fall within the area of management accounting are objects of calculation. Sectorisation of cost center must meet the requirements of the technical and economic interests. For this purpose, cooperation between specialists in production and those in the economic field is irreplaceable. Interweaving of the two specialties lead to cutting up the center, depending on the particular production techniques, in conjunction with the criteria for identifying and measuring inputs and with final objective, the assessment of economic performance, by drawing lines of their optimization. It is stands to reason that fractionation of an enterprise of responsibility centers facilitate the management, empowering managers at all levels. Empowerment is on both its sides: domination and employment. A manager, regardless of where they are, is responsible to a specific goal, but his actions in responding to the leadership at the top level. 3. Cost centers from hospital units Following the analysis the organizational structures of the three hospital units, identify next cost centers: crt. Table no. 1. Synthesis cost centers of the public hospital units Cost centers County Municipal hospital hospital 1. The emergency X X - 2. Sections / compartments with beds X X X 3. Speciality ambulatory X X X 4. Paraclinical laboratory X X X 5. Pharmacy X X X 6 Other functional structures sterilizing, the operating room, transfusion point, etc. X X X City hospital 7. Supply, transport and public acquisitions X X X 8. Technical and administrative X X X 9. Accounting X X X 10. Financial X X 11. RUNOS, Statistics and Medical Informatics, Legal proceedings, nosocomial infections, X X X public relations, audit. 12. Management - general manager, Deputy general manager, Head of nurse, X X X Administrative director, Head Accountant (Source: Own realization) We mention that we have presented only the cost centers of the centers of responsibility because they are the subject of our study. We believe that the net difference between the 3 is number of hospital beds, medical staff and number of patients treated.

Delimitation of cost centers allowed us establishing the elements of the cost for each patient; it is calculated in view of the direct costs, indirect and general. A. Direct costs incorporated into cost for each patient are identified in the following cost centers: 1. Emergency; 2. Section/ compartments with beds; 3. Specialty ambulatory Direct costs are composed of: - Personnel expenses of the cost center - Material costs of the center a) Identifiable from each patient (light, heat, water, laundry, inventory, etc.). b) Identifiable patient level - Medicines - Food allowance - Analysis and investigations as appropriate The direct costs shall be inserted at the level of hospital unit the patient at the section in which it is treated. Establishing direct expenses is the first step in determining tariff / day hospital / department as well as the cost of medicines and sanitary materials / department. B. Indirect expenses are identified in the following cost centers: 1. Paraclinical laboratory 2. Pharmacy 3. Sterilization 4. Transfusion point 5. Block operator Indirect costs are allocated through distribution keys on the cost of patient based on documents issued by cost centers mentioned include: - Personnel costs - Expenses for medical services performed related material structures not identified at the patient level and rates / benefit medical / patient. The result of the indirect costs are reflected in the tariff calculation / performance / laboratory paraclinical, pharmacy, sterilization, point transfusion, surgical unit. C. General expenses that will be included in the total cost per patient were identified in the following cost centers: 1. Supply, transport and public acquisitions 2. Technical and administrative 3. Accounting 4. Financial 5. RUNOS, Statistics and Medical Informatics, Legal proceedings, nosocomial infections, public relations, audit 6. Management - general manager, deputy general manager, nurse head of, managing director, Head Accountant. General expenses are distributed based on distribution keys approved by the hospital management and include: a) Staff expenses b) Materials and services expenses related to structures that are not identified at the patient level. We appreciate that the allocation key can be used in our study because they are 71

well established and provide a rational allocation of expenditure on each item cost. Determining the level general expenses is the last step in setting the tariff/day of hospitalization/supply, transport and public acquisitions, technical and administrative, accounting, financial, RUNOS, Statistics and medical Legal proceedings, nosocomial infections, public relations, audit, management - general manager, medical director, director of financial accounting, treatment director. We selected for analysis the surgery section of each hospital to observe the implications of each hospital types. The motivation for selecting this type of section consists of: high number of cases considered in these sections; partial reimbursement of the full costs / patient of the funds allocated by the Health Insurance Alba; high costs of activity performed under these sections. Following an analysis of the business department of surgery three public hospital units, as a cost center, we have seen a number of developments / involution of the main indicators as well as the expenditure section. The analyzed period extends over three calendar years 2012, 2013 and 2014, we had as unit calendar month and up used is a period of 6 months. Therefore we studied the evolution of the main indicators of section from March 2012 to September 2014. Evolution of nonfinancial indicators from the surgery section the hospital units selected Number of patients Evolution of the number of patients in the surgery section Figure no. 3 72 As we have presented the chart above, Department of Surgery county hospital provides medical services to an increasing number of patients. This is due primarily to the fact that the county hospital is equipped with modern equipment, offering patients a wide spectrum of treatments. The decreasing trend in the number of patients treated in the municipal hospital as well as the city hospital much better due to hospital emergency facilities, which also has regional hospital and rank, as a result, emergency hospital

patients who take cases with a high degree of complexity that other hospitals in the county do not have material, financial to solve. Number of beds Figure no. 4 Evolution of the number of beds in the surgery section Number of beds in the emergency section of the hospital surgery increase since September 2013, due to a decision of the hospital management for additional reception capacity. This is due to the increase in the number of cases solved, by increasing the number of beds, the hospital meets the needs of citizens. The situation is, however, exactly opposite the city hospital. The decrease is due in beds and hospital classification of IV category hospital units with beds, but compliance plan. Should be considered and appearance hospital funding. High costs / bed is not justified, since a large part of the patients were / are treated in other hospitals, such being the county hospital. Number of hospitalization days Evolution of hospitalization days in the surgery section Figure no. 5 73

Following the analysis history of solved cases, county hospital management decided to supplement the number of beds. As a result, we observe increased the capacity of receiving and treatment of patients. Indicator that compares the treatment of patients in the wards is the number of days of hospitalization. As we can see, the other two hospitals analyzed have a net activity decreased, but an activity that provides necessary medical services locally. hosp. days Use of beds = beds The use of bed in the surgery section Figure no. 6 Use indicator beds presents a slight downward trajectory in the case the county hospital, which means that for the moment, increasing the number of beds is off. This is the effect of increasing the number of beds in relation to the days of hospitalization. Using municipal hospital beds is very high as compared to the number of beds required hospitalization days treating patients is significantly reduced. City Hospital is experiencing a significant increase in the use of beds, it is the direct effect of providing medical care that requires continuing treatment hospital patients. hosp. days The average of hospitalization = patients Figure no. 7 Evolution of average of hospitalization in the surgery section 74

The average hospitalization indicator is the basis for expenditure calculation of days of hospitalization / patient. Following the analysis carried out during the three financial years, we see that this indicator known significant oscillations in September- November 2013. When the the average hospitalization in the city hospital decreases increase the average hospitalization in the hospital county. The direct cause of these fluctuations is the transfer of patients from the first to the second hospital. Indicators's financial activity of surgery department from hospital units selected Evolution of directs costs Evolution of direct costs in the surgery section Figure no.8 In the surgery section, we see an increasing trend in the period of expenditure relating directly to patients. One reason for this growth is the increasing number of patients hospitalized. These costs are allocated in proportion to the number of patients treated in each hospital section of surgery. We appreciate the increased attention to the management of hospital units, issues about the cost / patient, with the future directions reduction of those, especially given the funding by the County Health is achieved by caseload respectively solved. Evolution of indirect costs Evolution of indirect costs in the surgery section Figure no. 9 75

During the three financial years, the county hospital known significant fluctuations in indirect costs. At the end of the period, we observe a significant decrease in indirect costs that will be assigned to cost / patient, which derives from a better management of resources, and the use of modern equipment, such as the city hospital. Evolution of general expenses Evolution general expenses from the surgery section Figure no. 10 General expenses are increasing. This is mainly due to the complexity of the leadership and organizational structure of the hospital unit. Evolution of section expenditure Evolution of surgery section expenses Figure no. 11 Total expenditure of the surgery section from the county hospital experienced substantial growth in 2013. Nonfinancial indicators as well as the financial indicators listed 76

above are closely interrelated. The total expenditure complies with the direction of the department direct costs mainly. Total.exp enditure.sec tion Evolution of the average cost / patient= patients Evolution of average cost / patient Figure nr.12 The average cost / patient fluctuate substantially in the situation of the county hospital. However, at the end of the reporting period decreased significantly just because of modernizing medical equipment used. Modern equipment has reduced some costs for certain medical services, some of which were externalized and this significantly increases medical costs. An alarming situation is the municipal hospital, as costs per patient are growing. We consider that a detailed cost analysis could lead to the identification of growth factors such costs. Total.exp enditure.sec tion Evolution of the average cost/day hospitalization = hospitaliz ation. days Evolution of average cost / day hospitalization Figure no. 13 77

The average cost / day of hospitalization presents a situation similar to indicator Average cost / patient. As can see, the average cost from the surgery section of the city hospital increase significantly. Total.exp enditure.sec tion Evolution of the average cost / bed= beds Figure no. 14 Evolution of average cost / bed 78 The average cost / bed is a constant indicator during the analyzed period. We observe even a slight decrease, the only exception being September 2013. We believe that the analysis of the municipal hospital allows us to establish cause-effect relationships that underlie the adoption of future decisions. Including this indicator, spending saw an upward trend. Consequently, there is need to examine in detail the situation, especially cause-effect relationship within this section. In our study, we can identify the advantages of hospital activity decentralization in responsibility centers, respectively cost centers: Facilitating "General" of current management problems by channeling attention to strategic issues. Following diachronic study conducted in the 3 sections of the 3 hospitals we notice delimitation of expenditure: direct costs, indirect and total general administration departments, this division helps identify problems of the section of hospital unit based on the history of the activity, to identify subjective and objective factors of influence in the section also serves to foundation some medium and long term strategies. Through cost centers, identify centers that generate the largest amount of expenditure, these centers are the main targets of the strategy adopted by hospital unit management: identifying ways to reduce costs optimize resource consumption, finding alternative insurance quality health services. Approximation decision makers by clients / patients (allowing better targeting the supply of medical services to the needs of patients). Management of hospital units, according to the activities that provide the best quality service, but to generate the smallest deficit at the level of hospital unit the station, is oriented towards the development of those sections. The public hospital units in the last 10 years, there has been no surplus end of the period, if any sections, at least in Alba county. Improving the speed of reaction of reducing public hospital decision circuit.

Through the centers of responsibility, satisfying and medical staff leadership positions in the section, division or unit level, identify problems in each responsibility center: excess energy consumption, excess water consumption, medical staff overtime should remunerated, absenteeism from work, expenses exceeded the stock of medicines, etc.. After identifying the difficulties, we appreciate that managers can take short-term decisions aimed at improving the situation. Increased motivation of medical staff, giving them more autonomy of decision. We appreciate that achieving management control through cost centers shall monitor operational costs, so monthly each section, department know the situation expenditures and performance level achieved by calculating the financial and non-financial indicators: average cost / day hospital stay, average cost / bed average cost / patient, indicating the use of beds, the average hospitalization, etc.. In each responsibility center, we believe that decisions may be made in the short term to improve the situation. We note that at the end of the financial year, there may not be fully reimbursed the cases treated. Taking into account this, the medical staff of each section follows efficient spending of financial resources. Contributions to qualified managers at the intermediate level (section, department, service) wide field skills. Every responsible cost center follows judicious use of available resources within them. As we mentioned previously, future financing depends on activity history section, department, and hospital unit. Into disadvantages of decentralization activity area of public hospital units, in cost centers we mention: Could lead to local decision making, inadequate at a general level. Identifying problems cost center at the level of hospital unit and decision-making to resolve difficulties arising, may create discrepancies in general strategy of hospital unit. In this regard, consider the following situation within surgery section of the 3 hospitals, where direct spending an increasing trend in this case the head of the department decides to cut the cost of materials identified in the patient, the hospital unit because it is against policy, the reduction could lead to failure of the quality standard ISO 9001: 2008. Lead to increased resource consumption as a result of certain activities. Lack of correlation between decisions in each responsibility center we appreciate that will lead to wastage of material and financial resources. For example, in City Hospital surgery section are 3 rooms of, in winter, in each room are beds unused, maintenance and heating costs each room would increase considerably if the facilities are not managed effectively and the resources made available. Increase the need for coordination. Individual adoption of decisions at the level of cost center without these decisions to be connected to the overall strategy of the hospital unit, leads to wastage of financial, material and human. At the same time, reduce the surplus of hospitalization at the level of cost center affects the entire hospital: reducing the number of beds leads to the reduction of the reception and treatment of patients, namely to reduce the costs incurred with providing medical services under this funding is allocated based on the history of activity, mainly. Cannot be clearly identifiable cause-effect relationships, the adoption of relevant decisions on cost reduction. After the diachronically study achieved, we conclude the impossibility to determine the exact cause-effect relationships at the level of cost center. 79

Conclusions Management controls evaluate the performance of decentralized institutions and analyzing the causes of deviations between objectives and results. However, management control must identify the real responsibility of a center where it has not achieved its objectives. Latter should be justified to the hierarchically superior bodies to take measures such as dangers reduction, dismissing persons responsible; closure of the facility. References Antunes, Mordelet, De Groote, (2011), Elaborarea unei strategii pentru dezvoltarea infrastructurii spitaliceşti în România, Anexa 1 publicată în Monitorul Oficial, Partea I nr. 223 din 31.03.2011. Alazard C., Separi S., (2001), Controle de gestion, Editura Dunod, Paris. Albu, N., Albu, (2003), C., Instrumente de management performant, Editura Economică, Bucureşti. Aslău, T., (2001), Controlul de gestiune dincolo de aparenţe, Editura Economică, Bucureşti. Boisselier P., (1999), Contrôle de gestion, Edition Vuibert, Paris, France. Briciu S., (2007), Responsibility center's role in practicing a performing management, Annales Universitatis Apulensis, Series Oeconomica, no. 9 Capps, C., Dranove, D., Lindrooth, R.C., (2012), Hospital closure and economic efficiency, Journal of Health Economics, vol. 29, pp. 87-109 Tabără N., (2004), Contabilitate şi control de gestiune, Editura Tipo Moldova, Iaşi. Ştefănescu A., Dobrin C., Calu A., Ţurlea E., (2012), Controverse privind măsurarea performanţei entităţilor administraţiei publice în România, Revista Transilvană de Ştiinţe Administrative, nr. 1, p. 225-242 Vlădescu, C., Astărăstoae, V., Scîntee, S.G, (2012), Un sistem sanitar centrat pe nevoile cetăţeanului. România. Serviciile spitaliceşti, asistenţa primară şi resursele umane. Soluţii (III), Revista Română de Bioetică, vol. 8, nr. 4, Octombrie- Decembrie 2012 *** Costurile acoperite, accesed online site-ulhttp://ec.europa.eu/social/main.jsp? catid=570&langid=ro la data de 15.10.2016. ***, G. Solle, (2011), Evolution of management control, accesed online ***, Şcoala Naţională de Sănătate Publică şi Management Sanitar, (2006), Managementul spitalului, Editura Public H Press, Bucureşti. ***, Guineea F., (2009), Analiza comparativă a obiectivelor şi instrumentelor controlului de gestiune la nivel internaţional, modalitate de proiectare a unui program de reformă a contabilităţii manageriale în ţara noastră, PhD Thesis, ASE Bucureşti. ***, Gheonea V., (2014), Instrumente ale contabilităţii manageriale utilizate în instituţii publice din sistemul sanitar românesc, PhD Thesis, Universitatea Al.I.Cuza Iaşi. www.casalba.ro http://www.who.int/en/, accessed 01.09.2016 www.ms.gov.ro, accessed 14.09.2016. 80