Statistical Inference to Develop Budgets From Activity-Based Funding Costing Data

Statistical Inference to Develop Budgets From Activity-Based Funding Costing Data

Harry Chiam
DOI: 10.4018/978-1-5225-5082-2.ch005
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Activity-based funding (ABF) is a way of funding hospitals whereby they get paid for the number and mix of patients they treat. In order for governments to fund hospitals using ABF, hospitals use costing to inform the development of classification systems which provide valuable information for pricing purposes. Hospital patient costing is essential for understanding the total costs involved in treating a patient including the services or products used. This chapter outlines a methodology using simple statistics to prepare a budget for an inpatient ward using costing data. This method can be extended to other clinical areas (e.g., residential aged care or non-admitted).
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Background To Hospital Costing

In many jurisdictions across the world where activity-based funding is used to inform healthcare funding, hospital product costing is the process of identifying the inputs used in a hospital and attributing the costs of those inputs to the production of products (patient and non-patient). It should be understated that this process is not simple and requires expertise in identifying inputs and outputs, guidance for allocating the costs, and considerable complex numerical processing, which can only realistically be done using purpose-built product costing software.

Broadly, the process of costing products consists of four steps (IHPA, 2014). “The first step is to manipulate the costs recorded in the general ledger to reflect the products that are being costed (this manipulation is best done inside the costing system, not the general ledger). This process involves identifying those costs incurred in the hospital, as well as those costs generated by the hospital that are necessary for producing the products to be costed. It then requires the alignment of the timing of incurring the costs and producing the products. Once all in-scope costs have been identified, the costs reported in all cost centres are mapped to the standard line items, and the cost centres are partitioned into overhead and final cost centres.”

“The second step involves apportioning all costs in overhead cost centres to final costs centres. In performing this function it is important to ensure that the cost centres or parts of cost centres that are associated with non-patient products are allocated their fair share of overheads (if necessary, non-patient product costs centres may then be terminated, and only patient products costed to end-classes, typically individual patient service events).”

“The third step involves partitioning the final cost centres into product categories. Ideally, a final cost centre will fit entirely within a product category. In practice this is often not the case and the costs in some final cost centres need to be apportioned across more than one product category. As the focus is on costing patient products, it is important to clearly identify the costs associated with non-patient products. Ideally these costs should be carried in the costing process all the way through to producing final costs for non-patient products. Great care must be taken in this process, as errors here have significant impact on the final product costs.”

“The fourth step involves, within each product category, allocating the costs in final cost centres to end-classes within that category. Ideally for the patient products the end-classes are individual patient services events (i.e. an admitted patient episode, an outpatient service event, or an Emergency Department service event, reflecting patient level costing). The allocation processes are complex, and good allocation requires advanced knowledge of hospital operations.”

Figure 1.

Hospital costing process



The outputs of clinical costing are usually national hospital costing studies. For example, in Australia, the National Hospital Cost Data Collection (NHCDC) is the annual collection of public hospital cost data from a range of public hospital facilities nationally. The objective of the NHCDC is to provide all Australian federal and state/territorial governments and the health care industry with a robust dataset developed using nationally consistent methods of costing hospital activity. The dataset is used for benchmarking, funding and planning hospital services and is the primary data set used to develop the National Efficient Price (NEP) and the National Efficient Cost (NEC).

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