The Crimson Press Curriculum Center

First Page and the Assignment Questions:
This report doesn’t describe where our costs are generated. We’re applying one standard to all patients, regardless of their level of care. What incentive is there to identify and account for the costs of each type of procedure? Unless I have better cost information, all our attempts to control costs will focus on decreasing the number of days spent in the hospital. This limits our options. In fact, it’s not even an appropriate response to the ministry’s financial constraints.

   The speaker was Abdul Al-Bader, M.D., Chief of the Department of Obstetrics and Gynecology at Jebah Hospital, a medium-sized tertiary care facility, located in a country in the Middle East. After reviewing the most recent cost report for his department, Dr. Al-Bader had some serious concerns, and was meeting with Tarek Hussain, the Director of Fiscal Affairs, whose department had generated the report. Dr. Al-Bader continued:

Not only that, but over half the costs are not even within my control. How am I supposed to exert any influence over dietary or housekeeping, for example? I also know from experience that the cost figure the hospital is using for a simple lab test, such as a CBC, is exorbitant. And it’s likely that some of the other clinical services shown on my report are too expensive as well. But I can’t do anything about it!

BACKGROUND

   Two years ago, in an effort to control rising hospital costs, the Ministry of Health had established countrywide spending limits, and had made each hospital responsible for keeping its total costs at or below the limit determined during annual budget negotiations. Jebah, like many other tertiary care institutions, had felt the pinch. As one of the country’s largest institutions, it had been among the first to establish a departmental cost accounting system. In addition, and with support of its medical staff leadership, Jebah had required each service chief to become involved in the hospital’s budgeting process, and to take responsibility for the costs associated with the care of patients in his or her department. By involving service chiefs in the budgeting and control process, Jebah’s senior management hoped to gain more control over its costs, and to improve the hospital’s overall financial performance.

THE COST ACCOUNTING SYSTEM

   Jebah’s cost accounting system was based on three costing units that had been stipulated by the ministry: a bed/day for inpatient care, a visit for outpatient care, and a procedure (or operation) for operating rooms. Each hospital was required to compute its unit costs, such as a cost-per-bed-per-day for inpatient care, and report them to the ministry on a monthly basis. The ministry planned to use the information for cross-hospital cost comparisons, and it expected that each hospital would make cross-department comparisons as part of its cost-control efforts.

   Under Mr. Hussain’s leadership, Jebah had taken an additional step. In addition to using the ministry’s standard costing units for its clinical care departments (such as Ob-Gyn), it had begun to use similar units for its clinical service departments, such as radiology, laboratory, and the pharmacy. In radiology, for example, the unit was a procedure, and Mr. Hussain’s staff computed an average cost per procedure each month. The monthly radiology costs for each clinical care department then were computed by multiplying this average by the number of procedures its physicians had ordered that month. The same was true in the laboratory, where the unit was a test, and in the pharmacy, where it was a filled prescription. . . .

Assignment

1.   Focusing on only the inpatient care cost (i.e., ignoring operating room costs), what is the cost of a TAH (non-oncology) under each of the cost accounting systems? A tuboplasty? A TAH (oncology)? What accounts for the differences?

2.   Which of the three systems is the best? Why?

3.   From a managerial perspective, of what use is the information in the second and third systems? How, if at all, would this additional information improve Dr. Al-Bader’s ability to control costs? How might it help chiefs in non-surgical specialties?

4.   What should Dr. Al-Bader do next?