Hospital

Costing for Hospitals.
Presented by Parama HealthCare P Ltd
8/23/2019 Defining Standards 2

What is costing ?
8/23/2019 Perfecting your process 3

Common sense made
Complicated !!

Costing Certain Concepts
Absorption Costing
Marginal Costing
Activity Based Costing

Absorption Costing

Absorption Costing
• Job Order or Batch Costing
• Process Costing

Marginal Costing
Marginal Costing differentiates costs in to fixed
and variable costs. Decisions are made based on
the variable costs. It is used in analysis of cost of
additional unit of service. It is useful deciding
outsourcing of an acitivity.

Marginal Costing……

• Activity Based Costing

Activity based costing is a method by which cost of
each activity is allocated according to the
consumption of resources by the activity.

Activity Based Costing…..

The objectives.
Assessment and Development of Hospital Tariff.

Monitoring of Performance and Service Delivery.
Identify the degree of Usage of
materials/Consumables.

The objectives.
Capacity Utilization of wards and medical service

departments.
Development and pricing of packages/specific
products.
Frame a long term strategy and decision making.
8/23/2019 Defining standards 13

Objectives expanded
• Assessment and Development of Hospital Tariff.

• Feasibility of Tariff- comparison with competition.
• Package setting.
8/23/2019 Defining Standards 14

Objectives expanded
Monitoring of Performance and Service Delivery.

Department Performance and incentive system.
Availability of manpower and additional requirements.
Nurse Days to patient days, under utilization of nursing
staff/shortage of nursing staff.

Objectives expanded
Degree of Usage of Materials/ consumables.

Comparing Material consumption with no of
procedures / patient inflow with earlier year
comparisons.
Reconciliation process to ensure recovery of all
material costs.
Control of abnormal loss and control of materials not
billable to the patients.

Objectives expanded
Capacity Utilization of wards and medical service
department.
Occupancy of IP Services/Departments.
Analysis of LOS, std.LOS and excess bed days available.
Capacity utilization of medical services departments-
std. no of tests vs the actual
Capacity utilization of revenue generating equipments.

Objectives expanded
• Long Term Strategy and decision making.
• Decision of outsourcing of certain departments.
• Setting up or starting new services/departments.
• Arrangements with local medical community for better
utilization of existing facilities.
• Capacity utilization of revenue generating equipments.

Approach and Technique
Top Down Method/ Case Mix approach

Bottom Up approach or Micro Costing
The technique.
Absorption costing
Marginal Costing
Activity based costing.
Mixed Approach

Absorption Costing: certain principles and
observations.
This is much closer to Case Mix Group
developed by the American DRG and Canadian
institute of Health Information
The classification of departments especially the

medical department should be based on good
clinical sense
The number of departments should be kept to a

manageable level.

Absorption Costing: certain principles and
observations.
• They had to be based on routinely collected

data probably over a period of 9 to 12
months.
• The ALOS within the departments have to be

as far as possible homogeneous.

Absorption Costing: the process- the steps
involved
Identify the total number of departments. The
total costs at the organization level are allocated
to various departments.
Here some of the departments act the primary cost
centers. These are the depts. Which are direct
revenue centers
Classify the departments in to medical, medical
support and service departments.

involved
• The costs within department are allocated to
sub-cost centers and cost drivers are identified
to accumulate the costs- to the various units of
services or products.
• Ex: while OT will be considered as a cost center or a
department, the OT hour is a cost driver.

involved
Identifying the costs of various departments in

to direct costs and indirect cost.
Part of medical support dept. and whole of
service dept. serve the other departments
The portion of such costs are indirect and are to be
allocated or apportioned.

The classification of departments
• Medical Departments.
• Medical Support.
• Service Departments,

classification of departments….
Medical Departments- These are classified in to
OP and IP. Of course, day care procedures are
considered as separate departments.
Generally these generate income directly as well
contribute to the revenue of other departments under
packages.
Casualty and Emergency departments are considered
as separate cost centers.

classification of departments…..
Medical Support Departments-
Generating revenue
Lab, O.T., Radiology, Blood Bank, Physiotherapy: These
generate direct income as well contribute to the revenue of
other departments under packages.
Not Generating Revenue. Some departments like CSSD,
Front Office comprising A/D/T are support
departments not generating direct revenue.

classification of departments…..
• Service Departments-
• These are indirect cost centers
• Stores, Engineering Dept., Bio-Medical, House Keeping, ITD,
Laundry, Kitchen, Telephone and Transport.
• The costs of these departments have to be absorbed
among the medical service and medical departments
based on certain criterion.

Absorption Costing: the process-unit of costing.
Which one to recommend?
• The units of service or the unit of cost

decided by the management. Broadly a
combination of the following are followed.
• Cost per patient.
• Cost per bed.
• Cost per treatment/intervention/package

• Specialty wise OPD cost is arrived at on per patient

basis.
• Generally OPDs are more of referral centers
and incur cost.
• The cost per patient will also depend upon the
extent of free revisits and chargeable re visits
• Consultation packages are now being
developed.

• The In Patient Cost is arrived at for each specialty in

respect of the direct cost like manpower and
material where ever possible..
• The costs of medical services departments like OT,
wards and diagnostics are accumulated and allocated
or apportioned to departments/specialties suitably.

• The costs of service departments are apportioned

based on various parameters depending upon the
expenditure.
• Different Units of Health Services are suggested

Certain Key issues involved.
• Arriving at the cost per patient.

• Is it practicable
• the medical service departments have
different units of cost
• deriving the cost per patient depends on
the availability of Data and data integrity.

• Resource Intensity involved where the costs are not

directly allocable.
• For Ex: The patient service days allocates
common costs based on number of days spent.
• This may ignore cases where the costs are
more due to complexity involved.
• This calls for RIW to be built on the lines of
Canadian Institute of Health Information

• When the total costs accumulated over various services

under a department are allocated to all the patients in
equal measure
• it ignores the cost difference due to the
intensity of the treatment.
• Hence it is viable to group all the costs under various case
mix or products we may call and provide further insight in
to costing and pricing

• This also has issues when multiple

procedures are done for a patient but the
case would be recognized by the major
procedure.
• A sample list of case mix groups can be
seen

• Identification of case mix groups specialty

wise
• Each in patient case is classified under
respective case mix group.
Here patient
Service Days
• Under each Case Mix Group accumulate all
act as the direct costs.
Weights for • Allocate the costs based on patient service
consumption
of resources days to each and every In Patient.

• The In Patient Cost of Medical Service is

arrived at for each specialty/Case Mix
Group.
• This is done by estimating the costs in
medical service departments like wards,
OTs, Diagnostics.

• And allocating to specialties based on patient service

days, number of surgeries, no of tests/interventions
etc.
• Identification of drivers of cost especially for medical
service departments.
• This calls for considerable time and energy in converting

the cost per procedure or intervention or cost per hour as
the case may be to per patient cost.

• The total inpatient cost under each case in a

department/specialty is divided by the patient
service days.
• This gives the cost per patient day.
• The standard cost per case mix group is reached for
in patient cost by taking the ALOS.

• The additional cost per day of stay has to be

calculated once you arrive at the cost per patient
day.
• The excess bed days will be the cost per day over and
above the ALOS and to be trimmed.

Application of Marginal Costing and capacity
utilization
Costing of OTs. Apart from allocating the cost,
OT by itself is reviewed as profit center.
Costing of Wards. The implications of wards
when not earmarked for a specialty.
Costing of a diagnostic Service. This study
helped in understanding utilisation.

Micro Costing – Key aspects and issues
• Micro costing is defined as capturing costs
of individual patient.
• Patient is taken as the unit of cost.
• The resources used by a patient have to be
identified.
• Costing of resources used by the patient is
the next step.

• The challenges are: (mostly in In Patients)
• Direct costs which are patient specific can be
captured.
• Materials- which are billable
• Pharmacy- except those issued to wards, OTs & ICUs
as common stock
• Diagnostic services where requisitions can be
captured. However these services have to be costed
and per unit or investigation or intervention cost
should have been arrived at already.

• The cost of service departments which are
common and indirect costs cannot be easily
allocated. Ex: House Keeping, laundry, blood bank,
front office, nursing cost
• This means we need to arrive at cost per patient
for all these departments or allocate the cost to
various departments on patient service days and
within each such department arrive at the per
patient cost.

• The cost of service departments which are
common and indirect cannot be easily allocated.
Ex: House Keeping, laundry, blood bank, front
office, nursing cost
• Apportion the cost between OP and IP
• For IP, this means we need to arrive at cost per
patient for all these departments
• or allocate the cost to various departments on the
basis of patient service days
• and within each such department arrive at the per
patient cost.

• So how do we go about?
• Divide services in to OP and IP
• Under each service ( which may be a treatment or procedure) determine the
unit of service. Example Physio-therapy- minutes per patient
• Patient specific consumption of such units of service to be traced.
• Patient specific directly identifiable cost to be traced.

This is highly useful in designing packages.
However has several limitations in costing patient specific services
since huge indirect cost is involved.
Time consuming since the units of service under each
service/department has to be identified.
Hence data collection and collating the data takes lot of time.

• Accurate in capturing patient specific This is highly useful in designing
packages.
• However does not capture the behavior of the cost – fixed costs and
variable cost or controllable costs and uncontrollable costs.
• Example of surgeries – laparoscopic under gastroenterology costed
based on this method is shown here.

What is the right approach?
Mixed Approach will be ideal under any conditions.
Use top down approach or absorption costing with case mix groups
when you want to ascertain the profitability of the services and arrive
at the cost each procedure under a specialty
Use marginal costing on strategy to increase patient load or
outsourcing.

What is the right approach?
• Use micro costing when designing the packages.
• The combination of top down approach and the micro costing will
help us in establishment of cost per patient when the patient is
consuming multiple services.
• Micro costing is also useful in establishment of cost of day care
procedures.

Check list on quality of method and selection
of approach?
• Quality of costing method.

Certain use full observations in costing exercise: Outpatient
Departments.
Many non surgical specialties
When consultants are on fee sharing basis for super specialties.
Patient Load-New patients and Revisits.
Other support manpower costs
Consumables Cost especially stationery cost
Turn over of OPD
Consultants on pay roll- Other consultants.
Patient Load

Operation Theaters.
• Utilization of OT-Key factor scheduling of surgeries

and Idle time.
• Manpower Cost.
• OT Materials.
• Directly Billable
• Not Billable.
• Power consumption.

Labs
Material consumption.
Control over lab materials: over stocking and spoilages
Utilization of Kits where ever applicable
Retests done due to various reasons leading to higher
consumption of material & energy.
Equipment Utilization and Maintenance
Maintenance including reagents and power
consumption.

Wards.
• Ward Stock.
• Medicines
• Consumables.
• Ward Staff Cost.
• This depends on combination of different bed
categories in the same floor.
• Bed Side Procedures.
• Equipment and materials.

Maintenance Department
• Over Stocking of spares
• Control over outsourced jobs
• Stocking of insurance spares
• Diesel consumption.
• Manpower Cost.

Ambulance & other vehicle arrangements
• Cost of maintaining ambulances and other

transportation are always not cost effective.
• The better alternative will be to outsource them.

Other Activities for cost control
• Consultation packages similar to diabetic packages.
• Planned discharges for avoiding delay in discharges
• This helps in higher utilization of beds-Patients waiting for admission does not
arise
• Impact on room rent and food cost

Activities to be avoided for cost control and better margins
• Patients awaiting bed assignments

• In Patients waiting in Emergency departments.
• Patients awaiting discharge summary
• Doctors waiting for lab results
• Lab results waiting to be distributed

• More travel required for samples and analysis

• Dictation ready for transcription.
• Discharge summary waiting for doctors’ approval
and signature.

• Patients awaiting discharge summary

• Sharing of equipments if feasible
• Retesting to be avoided

Thank you
S.Manivannan,
smv@parmahealthcare.com
+919840976340

Hospital

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Hospital

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Costing for Hospitals.

Presented by Parama HealthCare P Ltd

8/23/2019 Defining Standards 2

8/23/2019 Perfecting your process 3

8/23/2019 Perfecting your process 4

Activity Based Costing

8/23/2019 Perfecting your process 5

8/23/2019 Perfecting your process 6

• Job Order or Batch Costing

8/23/2019 Perfecting your process 7

8/23/2019 Perfecting your process 8

8/23/2019 Perfecting your process 9

• Activity Based Costing

8/23/2019 Perfecting your process 10

8/23/2019 Perfecting your process 11

Assessment and Development of Hospital Tariff.

8/23/2019 Perfecting your process 12

Capacity Utilization of wards and medical service

8/23/2019 Defining standards 13

• Assessment and Development of Hospital Tariff.

8/23/2019 Defining Standards 14

Monitoring of Performance and Service Delivery.

8/23/2019 Perfecting your process 15

Degree of Usage of Materials/ consumables.

8/23/2019 Perfecting your process 16

8/23/2019 Perfecting your process 17

8/23/2019 Perfecting your process 18

Top Down Method/ Case Mix approach

8/23/2019 Perfecting your process 19

The classification of departments especially the

The number of departments should be kept to a

8/23/2019 Perfecting your process 20

• They had to be based on routinely collected

• The ALOS within the departments have to be

8/23/2019 Perfecting your process 21

8/23/2019 Perfecting your process 22

8/23/2019 Perfecting your process 23

Identifying the costs of various departments in

8/23/2019 Perfecting your process 24

8/23/2019 Perfecting your process 25

8/23/2019 Perfecting your process 26

8/23/2019 Perfecting your process 27

8/23/2019 Perfecting your process 28

• The units of service or the unit of cost

8/23/2019 Perfecting your process 29

• Specialty wise OPD cost is arrived at on per patient

8/23/2019 Perfecting your process 30

• The In Patient Cost is arrived at for each specialty in

8/23/2019 Perfecting your process 31

• The costs of service departments are apportioned

8/23/2019 Perfecting your process 32

• Arriving at the cost per patient.

8/23/2019 Perfecting your process 33

• Resource Intensity involved where the costs are not

8/23/2019 Perfecting your process 34

• When the total costs accumulated over various services

8/23/2019 Perfecting your process 35

• This also has issues when multiple

8/23/2019 Perfecting your process 36

• Identification of case mix groups specialty

8/23/2019 Perfecting your process 37

• The In Patient Cost of Medical Service is

8/23/2019 Perfecting your process 38