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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
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!
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. . . .
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?