CLINICAL GASTROENTEROLOGY AND HEPATOLOGY 2011;9:947–949
PRACTICE MANAGEMENT: OPPORTUNITIES
AND CHALLENGES
Activity-Based Costing and Management in a Hospital-Based GI Unit
MICHAEL J. GOLDBERG* and LAWRENCE KOSINSKI‡
*Department of Medicine, Northshore University Health System, Evanston; and ‡Illinois Gastroenterology Group, Elgin, Illinois
O ver the last 2 decades, a number of attempts have been
made to slow the rise in healthcare costs. Among them
were Health Maintenance Organizations, which lowered costs
through capitation. In most cases, this resulted in quality being
sacrificed for cost and ultimately, many patients rejected the
Health Maintenance Organization concept due to the lack of
choice and access.1–3 The economic downturn and the passage
of the Affordable Care Act have again focused scrutiny on rising
healthcare costs. In the next several years, the healthcare indus-
try will be challenged to provide more care to more people with
fewer resources.
No matter which solutions are pursued, ie, bundled pay-
ments, episodes of care, accountable care organizations, or a
return to capitation, it is important that quality not be sacri-
ficed for cost. Most importantly, value must be provided to all
stakeholders—patients, providers, and purchasers of care. In
order to provide value, there must be a better understanding of
costs. Importantly, decreases in costs must come from increases
in efficiency and not decreases in quality.
Activity-based costing (ABC) is a tool that was developed in
the manufacturing sector in the 1970s and 1980s in an effort to
improve efficiency and control cost.4,5 This technique is based
on the concept that the production of a product or the perfor-
mance of a service consumes activities which then consume
resources. ABC attempts to assign costs to each of these activ-
ities and/or resources so that total costs can be better under-
stood and managed. It differs from traditional accounting in
that it is based on the activities that drive costs. This allows one
to manage processes by having a clearer understanding of what
drives costs and how increases in efficiency affect costs. Many
quality improvement techniques also break processes into dis-
crete units. This is done to standardize processes, improve
them, and eliminate unnecessary variability.
Activity-based costing and process improvement techniques
can be utilized together. This allows outcomes, ie, cost and
quality, to then be simultaneously evaluated. Activity-based
costing and management can be applied to the GI unit.4,6 –9 This
report describes how this can be accomplished.
Resources for Practical Application
To view additional online resources about this topic and to
access our Coding Corner, visit www.cghjournal.org/content/
practice_management.
The Activity Map
The ABC process starts by developing an activity map,
which outlines the sequence of activities that are involved in the
performance of a procedure.6,7,10 Figure 1 is an example of an
activity map developed for an endoscopic procedure.
Activity Analysis
Next, an activity analysis is performed to identify the
resources used for each activity and then which cost pools are
drawn from for each resource (Figure 2).6,7
Assigning Cost Categories
Once one has identified the resources utilized, we must
then assign each resource to a cost category, ie, labor, materials,
or general overhead. These categories will then be assigned
further to either direct or indirect cost categories. The direct
costs are those that are “directly” related to the performance of
the service (nursing) as opposed to indirect costs (accounting)
which have to be allocated to multiple services.
These categories are shown in Table 1 (Cost Categories).
Cost Drivers
Next the cost drivers for each resource and the number
of resources utilized need to be determined. The annual quan-
tity of the cost driver is estimated according to the nature of the
cost driver. This may best be shown through some examples.
Examples
1. Employee cost drivers: time
2. Material costs: number of items used
After this, the cost allocation rate which is the quotient of
annual cost of a resource and the number of times the resource
is used over the time period (annual quantity of cost driver) can
be calculated. From the cost allocation rate, one can accurately
determine the allocated activity cost by multiplying the cost
allocation rate by the actual quantity of allocation base for that
activity.10,11 This is shown in Supplementary Table 1.
Abbreviations used in this paper: ABC, activity-based costing; GI,
gastroenterology.
© 2011 by the AGA Institute
1542-3565/$36.00
doi:10.1016/j.cgh.2011.08.010
948 GOLDBERG AND KOSINSKI CLINICAL GASTROENTEROLOGY AND HEPATOLOGY Vol. 9, No. 11

Figure 1. An activity map for an endoscopic procedure. This figure outlines the series of activities that are involved in the performance of an
endoscopic procedure.

When utilizing activity-based costing it is important to iden-
tify the activities that generate significant costs. The triggers of
these activities are the cost drivers. In designing this type of
system one should try to keep things simple. The most impor-
tant activities need to be picked up— but not each and every
activity needs to be detailed, especially when those activities do
not have a major impact on costs. Making the system too
complex leads to ignoring the data generated by it. Too much
detail leads to excessive expense in designing and maintaining
the system.4,6 In using activity-based costing in the GI unit, cost
drivers can be different depending on the unit. A unit that
leases its equipment and does not own it, can use the per
procedure endoscopy company charge as a cost driver. For a
unit that purchases its equipment, depreciation of that equip-
ment divided by the number of procedures done is the cost
driver.
Examples of how activity-based costing can help in manag-
ing a GI unit are easily found.
1. Poor preparations can lengthen procedures.12 If a poor
preparation lengthens a procedure by 30 minutes then
the cost of the procedure goes up by $30.90. For a unit
performing 10,000 procedures per year, this adds over
$300,000 in cost. An education program for patients
would be much less expensive to implement.
2. Inadequate recovery bays. If bottlenecks caused by inad-
equate recovery bays lead to a 15-minute delay per pa-
tient, procedure costs would rise by $12.90 per procedure.
In a unit that performs 10,000 procedures a year, this
would amount to $129,000 a year. Depending on what it

Table 1. Cost Categories

Component activity Category

Referral and scheduling

Scheduling pod Indirect labor
Office secretary Direct labor
Patient education—preprocedure Direct labor
Day of procedure processing
Patient registration—RN Direct labor
IV insertions Direct material
IV tubing Direct material
Nasal cannula Direct material
ECG leads Direct material
Procedure
Nurse Direct labor
Technician Direct labor
Medication—demeral Direct material
Medications—versed Direct material
Medical malpractice Indirect cost
Equipment depreciation Indirect cost
GI laboratory depreciation Indirect cost
Laboratory supervisor Direct labor
Hospital overhead Indirect cost
Ancillary equipment Indirect material
Recovery
Food services Indirect labor
Nurse Direct labor
Scope cleaning
Technician Direct labor
Materials Indirect material
Overhead costs
Figure 2. An activity analysis identifying resources that are necessary Billing Indirect labor
for an endoscopic procedure. This process assists in determining what
cost pools will be used for each resource. ECG, electrocardiogram; IV, intravenous; RN, registered nurse.
November 2011
costs to rent more space and build more recovery bays,
eliminating this constraint could result in reduction of
costs. In units where bays cannot be added due to phys-
ical constraints, the use of an anesthesiologist and propo-
fol to decrease recovery times can be assessed. Does the
extra cost of the drug and addition of a CRNA or anes-
thesiologist result in gains in quality, efficiency, and cost?
Most likely not, however, ABC allows one to assess this.
In the early 1900s, Frederick Taylor pioneered scientific man-
agement in an attempt to improve productivity.5 His work
spawned several methodologies for productivity and quality
improvement including lean, 6 sigma, DMIAC, etc. Activity-
based costing can help facilitate these techniques. Process im-
provements that increase efficiency and quality can be linked to
cost and in this way provide managers (or physicians) a pow-
erful tool.
Why then is ABC not being used more commonly? A study
in 20055 reflected a decrease in the percentage of health care
organizations using activity-based costing. This is actually not
surprising as the demise of managed care removed the push for
accurate costing and a return to the status quo is therefore not
unexpected. ABC does require some changes to be made and
also requires accurate information which must be updated and
maintained. However, in the current milieu for cost contain-
ment and potential declines in reimbursement, the need for
much tighter cost controls will intensify the need for tech-
niques like ABC that allow for accurate determination of costs
as well as how those costs are affected by process control. It can
help control costs in the GI unit. One can also link changes in
process to costs and quality, giving an ideal mechanism of
assessing value. This will be essential for the continued success
of gastroenterology and ambulatory endoscopy in the future.
Supplementary Material
Note: To access the supplementary material accompa-
nying this article, visit the online version of Clinical Gastroenter-
PRACTICE MANAGEMENT: OPPORTUNITIES AND CHALLENGES 949
ology and Hepatology at www.cghjournal.org, and at doi:10.1016/
j.cgh.2011.08.010.
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Reprint requests
Address requests for reprints to: Michael J. Goldberg, MD, MBA,
Division of Gastroenterology, Department of Medicine, Northshore
University Health System, University of Chicago, Pritzker School of
Medicine, Evanston, Illinois 60201. e-mail: mgoldberg@northshore.
org; fax: (847) 733-5041.
Conflicts of interest
The authors disclose no conflicts.
November 2011 PRACTICE MANAGEMENT: OPPORTUNITIES AND CHALLENGES 949.e1

Supplementary Table 1. Cost Drivers

Annual Cost Actual quantity Allocated
Annual quantity of allocation of allocation activity
Component activity Category cost Cost driver cost driver rate base cost
Referral and scheduling
Scheduling pod Indirect labor $84,588 Number of patients 11,000 $7.69 1 $7.69
Office secretary Direct labor $40,000 Minutes used 120,000 $0.33 30 $10.00
Patient education— Direct labor $52,500 Minutes used 90,000 $0.58 20 $11.67
preprocedure
Day of procedure processing
Patient registration—RN Direct labor $70,000 Minutes used 120,000 $0.58 30 $18.00
IV insertions Direct material $4730 Number of patients 11,000 $0.43 1 $0.43
IV tubing Direct material $55,000 Number of patients 11,000 $5.00 1 $5.00
Nasal cannula Direct material $3520 Number of patients 11,000 $0.32 1 $0.32
ECG leads Direct material $440,000 Number of patients 11,000 $40.00 1 $40.00
Procedure
Nurse Direct labor $70,000 Minutes used 120,000 $0.58 45 $26.25
Technician Direct labor $33,000 Minutes used 120,000 $0.28 30 $8.25
Medication—demeral Direct material $9350 Number of patients 11,000 $0.85 1 $0.85
Medications—versed Direct material $20,350 Number of patients 11,000 $1.85 1 $1.85
Medical malpractice Indirect cost $259,816 Number of patients 11,000 $23.62 1 $23.62
Equipment depreciation Indirect cost $323,820 Number of patients 11,000 $29.44 1 $29.44
GI laboratory depreciation Indirect cost $323,820 Number of patients 11,000 $29.44 1 $29.44
Laboratory supervisor Direct labor $100,000 Number of patients 11,000 $9.09 1 $9.09
Hospital overhead Indirect cost $650,524 Number of patients 11,000 $59.14 1 $59.14
Ancillary equipment Indirect material $382,280 Number of patients 11,000 $34.75 1 $34.75
Recovery
Food services Indirect labor $130,808 Number of patients 11,000 $11.89 1 $11.89
Nurse Direct labor $70,000 Minutes used 120,000 $0.58 10 $5.83
Scope cleaning
Technician Direct labor $33,000 Minutes used 120,000 $0.28 20 $5.50
Materials Indirect material $13,146 Number of patients 11,000 $1.20 1 $1.20
Overhead costs
Billing Indirect labor $200,504 Number of patients 11,000 $18.23 1 $18.23

ECG, electrocardiogram; IV, intravenous; RN, registered nurse.