Linking Cost Control to Cost Management in Healthcare Services: An Analysis of Three Case Studies

Linking Cost Control to Cost Management in Healthcare Services: An Analysis of Three Case Studies

Michele Bertoni, Bruno De Rosa, Guido Grisi, Alessio Rebelli
Copyright: © 2015 |Pages: 37
DOI: 10.4018/978-1-4666-6551-4.ch021
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The issue of healthcare costs has become increasingly problematic over the years. This chapter summarizes the problems faced by hospitals when measuring the costs of healthcare treatments, explaining how an Activity-Based Costing (ABC) framework can be successfully adopted in healthcare settings. After describing the theoretical foundations of cost control and cost management, the chapter continues with the analysis of three real-life applications of ABC in a hospital, drawn from the process analysis and activity-based costing experience developed at the Azienda Ospedaliero-Universitaria “Ospedali Riuniti” (Joint Hospitals) of Trieste, Italy. In particular, the cases are about cost measurement in cardiology, odontostomatology, and radiology, and describe the technical solutions applied for computing the costs of selected therapeutic and diagnostic treatments. A particular emphasis is placed on how these measures have been subsequently used by hospital managers and medical personnel in order to gain insights and to improve the efficiency of the processes developed within the organization.
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Healthcare has experienced significant changes in competition and regulation over the last decades, with an ever prominent role played by market forces in shaping national policy debates regarding funding and cost containment (Cardinaels & Soderstrom, 2013). Considering that in many countries healthcare ranks among the largest economic sectors (Ditzel et al., 2006), it is not surprising that healthcare represents a significant portion of public spending. Moreover, most countries have experienced a rise in the percentage of Gross Domestic Product (GDP) devoted to national health systems over the past few decades (Reinhardt et al., 2004; Perotti, 2006; Pammolli & Salerno, 2006; WHO, 2000, 2010; McKinsey Global Institute, 2008; Armeni & Ferrè, 2013; Scheggi, 2012). In 2011, countries in the Organization of Economic Cooperation and Development (OECD) spent an average of 9.5% of their GDP in healthcare, up from an average total spending of 7.8% in 2000 (OECD Health Statistics, 2013). The reduced growth rates (or, in some cases, even recessions) that several European countries experienced between 2008 and 2013 put a strain on public spending, and forced some governments, where national health services are established, to introduce drastic measures for ensuring financial stability.

The compounded effect of aging populations and increases in health care costs prompted many governments to strive for betterments in the efficiency of the management of their national health services, often by means of tightened budget constraints and widespread cost cutting efforts. The gradual introduction, started in the 1980s, of Diagnosis-Related Groups (DRG) for funding healthcare providers is an example of such efforts. Under this mechanism, the payment to the providers (hospitals and physicians) depends on the nature of the patient’s illness, not on the amount of resources used to treat the payment. An increase of resources used to treat the illness, therefore, does not translate in an increase in hospital reimbursement, thus shifting the cost risk from the insurers (private or governmental) to the providers of healthcare (Cardinaels & Soderstrom, 2013). Hospitals have reacted by introducing cost containment measures, including governance models and cost accounting systems designed around corporate examples. However, simply transferring systems and methods from for-profit corporations to providers of healthcare services could lead to erroneous results (Alexander & Weiner, 1998), especially when decisions concerning the appropriateness of different medical treatments are based exclusively on cost information.

Key Terms in this Chapter

Activity Driver: A measure of frequency and intensity of cost object demands on an activity, used in ABC for tracing activity costs to cost objects.

Activity-Based Costing (ABC): A costing methodology that identifies activities performed within an organization and use them to assign the cost of resources to products or other cost object.

Resource Driver: A measure of quantity of resource consumed or required by an activity. It is used in order to trace an appropriate portion of cost to the activity.

Capacity: The ability to produce during a given time period, with an upper limit imposed by the level and quality of resources available.

Overhead: A group of costs that are necessary to the continued functioning of an organization but cannot be immediately associated with its output.

Cost Pool: An accounting term that refers to a group of associated costs that all relate to a specific cost object. It is usually used to correlate costs with a specified cost driver.

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