A New Cost Accounting Model and New Indicators for Hospital Management Based on Personnel Cost

A New Cost Accounting Model and New Indicators for Hospital Management Based on Personnel Cost

Yoshiaki Nakagawa (Kyoto University, Japan), Hiroyuki Yoshihara (Kyoto University, Japan) and Yoshinobu Nakagawa (Kagawa National Children’s Hospital, Japan)
DOI: 10.4018/978-1-60960-872-9.ch020
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Abstract

New financial indicators were developed based on personnel costs which were calculated using this new cost accounting system. Indicator 1: The ratio of the marginal profit after personnel cost per personnel cost (RMP). Indicator 2: The ratio of investment (=indirect cost) per personnel cost (RIP). Operation profit per one dollar of personnel cost (OPP) was demonstrated to be the difference between the RMP and RIP. The break-even point (BEP) and break-even ratio (BER) could be determined by combining the indicators. RMP demonstrates not only the medical efficiency, but also the medical productivity in the case of DPC/DRG groups. OPP can be utilized to compare the medical efficiency of each department in either one hospital or multiple hospitals. It also makes it possible to evaluate the management efficiency of multiple hospitals.
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Background

To remain solvent, it is necessary to streamline hospital administration, and it is essential to conduct evaluations at the clinical-department or division level (which can be referred to as evaluations for each sales department) in order to identify areas needing changes. Unfortunately, there are currently no simple and standard evaluation methods that can be used for this purpose (Makie, 2002; Tanaka, 2004). The average length of stay (ALOS) or cost per patient etc. are good benchmarks for a hospital manager to compare his hospital to another hospital, or to compare individual clinical departments within the same hospital. However, there are few indicators that can be used to determine the relationship between the investment and medical productivity or management efficiency of a hospital.

As a cost accounting method, the ratio-cost-to charge (RCC) method and the relative value unit (RVU) method have been widely used (West, 1996). However, the methods were developed primarily in industry and imported into the medical field. The costs in industry are usually divided into two categories; fixed costs and variable costs. The fixed costs, which include the personnel cost, depreciation cost and maintenance cost, were allocated in accordance with machine time and occupancy space. This provides an accurate estimate of efficiency because most of the products are made by a simple production line or process in industry. However, a patient treated in a hospital receives various medical services from different medical sections. One of the major problems preventing the use of these industry-derived methods is how to allocate the depreciation cost and maintenance cost of a hospital to an individual patient (Nakagawa, 2007).

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