Need of Cost & Management Accounting & How it plays a vital role in providing healthcare services at affordable prices and qualitative healthcare to all
(Glimpses)
In both developing and developed countries, hospitals are seen important community resource that is and should be managed for the benefits of the community. With a GDP of $2.7 trillion, India has emerged as the world’s sixth largest economy while being classified as a developing nation.
Right to Health is a part and parcel of Right to Life and therefore right to health is a fundamental right guaranteed to every citizen of India under Article 21 of the Constitution of India.
And According to our Constitution, it is the primary duty of the government to ensure the welfare of the people and provide health care facilities to all. The government must safeguard the Right to Life of every person.
As per Article 21, the Constitution of India states that every Indian person has the right to free health and care but in fact, the private health industry takes charge of India’s significant portion of healthcare services.
There is an urgent need for reform in the healthcare sector. The government has to focus on each and every segment of society. Government has to provide and monitor that healthcare services can be useful in any way to provide affordable and qualitative healthcare to all.
So citizen of India are entitled to the right to health at no cost or affordable prices. The amount of cash which is spent to get the services is huge, unaffordable and sufficient enough to discourage the patient and his/her family.
In current scenario priority for India is ensuring equitable and cost-effective healthcare and to meet these priorities, present government has launched the world’s largest publicly funded health insurance scheme (ABPM-JAY), which includes a greater role for India’s large and growing private healthcare sector.
In case of corporate hospitals, huge amount of capital is invested and continuous up-gradation of technology along with expensive resources makes the pricing of treatment in private sector unaffordable for the masses.
To provide affordable services while maintaining the quality and financial viability, effective cost management and optimum utilization of resources is the only way to provide services to a larger section of society, thereby increasing volumes and further save on costs.
As per my knowledge most of the hospitals in our country have not adopted cost accounting systems because characteristics of the hospital industry make the costs of doing so high and the benefits of service-level cost information relatively low.
However, frequent changes in insurance benefit design are creating incentives for patients to compare hospital prices. If these changes continue, hospitals’ patient volumes and revenues may increasingly be dictated by the decisions of individual patients shopping for low-cost services and as a result of this, health care service providers could face increasing pressure to set prices at levels that reflect the costs of providing care and if any how these changes happens or take place, cost accounting information will become a much more important part of hospital management.
The objective behind is that price and quality will become the basis of competition, and hospitals will be incentivized to reduce their prices by cutting their underlying costs. The pricing of services must be done on the basis of costing. Only then can the hospital provide the most competitive price to the patient as well as maintain its financial sustainability.
Price and quality competition can motivate and force the management of the hospitals to reduce their operating costs and consequently the hospital pricing practices must change. Hospitals will have to set prices that relate to the cost of providing individual services.
Keeping in mind the population of India and other factors discussed above, success and objective to provide health care facilities to all government and other players has to ensure cost-effectiveness within such a large scheme which is highly dependent upon having detailed and robust costing information within the health system.
Effective procedure of costing and cost management techniques can play very large and vital roles in changing the dynamics of the healthcare industry. Efficient cost management is beneficial for both – the service provider as well as those who avail of the services.
For patients, accurate costing of procedures and services will lead to competitive pricing, which will make high-end and quality healthcare services affordable to large sections of the masses. This is more relevant in India due to low but not very low piercing of medical insurance.
Efficient cost management tools and its implementation and analysis can change the scope and dynamics of the healthcare industry for all the stakeholders. The new era of the industry will be data driven, and cost management will work like anything to the industry.
What happening is that most of the healthcare organization are using traditional costing methods i.e. extracting the data from different sources and these sources usually breakdowns expenses into various categories, which are used in determining the total cost of health care services. In my view traditional costing technique are easy to understand and apply coz it requires minimal financial and/or managerial investment which helps explain its wide use and acceptance. However, these costing methods have been criticized for failing to account for differences in product/service lines and marketing channels and for producing inaccurate and unrealistic representations of a product or service’s true cost
Services in health care set ups is quite complex and it consist of so many activities either for out patient or for in patient for example:
If a patient or patient along with the attendant visited the hospital the first what they have to do is: –
First Case
1. Get the patient registered
2. If opted for OPD – Consult the doctor in OPD
3. Doctor’s prescription without test
4. Billing and then patient and attendant walks out from hospital
5. If in doctor’s prescription test are recommended then go for tests
6. Billing with test and then patient and attendant walks out from hospital
Second Case
1. In case patient condition is very critical (Emergency & Trauma Care)/ Direct Admission of patient
2. Get the patient registered (IP admission)
3. If patient is in very critical condition then patient is transfer to ICCU or ICU
4. Or patient is admitted to ward
5. Then to operation theatre
6. Post operation back to ward
7. Depending on post operation condition shifted to ICU or ICCU
8. After treatment billing process
9. Patient get discharged and walks out of the hospital
So it means if one patients gets registered for his/her treatment number of activities takes place which were entirely different from other patient whether both are suffering from same disease and getting the treatment in same ward but they both have different responsive body, so treatment and use of medicine and their care will be entirely different.
So, what is suggested in that case is, calculation of cost of treatment for individual patient or we can say a separate cost sheet is required to be prepared for each and every patient. It is quite difficult or you can say it a very herculean task for the hospital management to calculate separate cost for each patient and if there is foot fall of 3000 patient in a month then it becomes almost impossible.
This type of costing requires detailed knowledge of the treatment and services provided to individual patients. All of the actual costs of the individual’s treatment and services are assigned to that one case. For example, calculating the micro-costs for an intensive care unit (ICU) stay requires identifying values for medicine and services rendered in treating the patient, identification and calculation of the nursing costs involved, cost of physician services provided, cost of equipment, and any other costs that can be contributed to the individual ICU stay. In this approach, the cost of similar cases may vary because of a small difference in the treatment and/or services provided. Hence, it may not be practicable to prepare patient-wise actual cost sheets.
To come up with the difficulties of the above discussed method of calculating the cost, it is advisable to develop a standard costing system to calculate the cost for each activity which is to be performed for a patients from registration process till the discharge activity and which can be very well established, based on data available and the same can be compared to the billing price to arrive at estimated cost for a bill. Therefore, it is suggested that the costing system should be developed leading to calculation of procedure-wise & ward-wise, activity wise cost. Therefore, Accounting of Resources used and computing costs plays a key role in cost management in a health care industry
“The National Council for Clinical Establishments has approved a list of medical treatment procedures and a standard template of costing of procedures and services. State/UT Governments have been advised to use these for determining the standard cost of any procedure taking into consideration all pertinent factors.”
Before moving forward, first we have to understand the heads of expenses, types of departments, activities or services rendered or performed, depending on the source data and the specific objectives of the health care industry, different types of expenditure data can be included in the total cost of providing health services and this cost is incurred in three different categories of department i.e. Medical Service Department, Medical Support Services Department & Non-Medical Services Department. Costs incurred in these departments, if we add them up is also known as total cost but in layman’s language but this total cost is of no use to answer this question “How much cost is incurred on individual patient keeping in mind his disease & treatment facility”
This department wise total cost is further classified as Direct Cost and Indirect Cost (Overhead Costs).
- Direct Costs – are costs that are directly attributable to patient care. Examples of direct costs include: nursing services, drugs, medical supplies, diagnostic imaging, rehabilitation and food services.
- Indirect Costs – are costs that are not directly related to patient care. Examples of indirect costs include: general administration, health records, information technology, physical plant and maintenance, human resources, volunteer services, capital expenses, and other regional services.
The patients are billed on the basis of treatment, activities performed, medical facilities used, procedures followed etc. but this bill which is created is not correct until we have proper costing system i.e. hospital industry must have proper cost of each activities performed on the patient. So, it is therefore very important to identify the cost of eachactivity/ procedure to reach at exact cost of treatment of every patient and for this one has to develop aefficient cost accounting and profitability analysis systemsin a hospital.
Public & Private Healthcare Sector
> The health care sector in India comprises both of private sector and public sector.
> The private health care sector comprises organizations with ‘non profit motive’ and also others with ‘profit motive.
> ‘The “not for- profit “health sector consists of various health care service providers such as “Non-Government Organizations (NGO’s), charitable institutions, trusts, etc.
> The public health sector also known as publicly-funded government hospitals are run by central government, state government, municipal & local or peripherals. Providing good and health is a State & Union subject but the central government contributes substantially through grants and centrally sponsored health programs/ schemes
Steps of Costing process to start
1. Disintegrate the revenue on the basis of services or activities performed
2. Disintegrate the costs on the basis major department wise, cost centres & service centre
3. Classify the department wise costs into direct, indirect costs
4. Identify the cost activity wise or services rendered
5. Identify non cost items and non-operating revenues
6. Identify Cost drivers in each cost centre
7. Create cost pools
8. Use scientific allocation and apportionment basis
9. Compare service wise revenue and cost
10. Classify the cost into fixed and variable content
Some of the Examples of Sources of Revenue in Hospital Sector
- Direct medical services
- Medical support services
- Further classified as, from outpatient channel or serving inpatient channel
| Revenue Source from Out Patient | Revenue Source from In Patient |
| Medical Services | Medical Services |
| Consultation Fee | Doctor’s Fee |
| Cardiology Services | Surgeon Fee’s |
| Injection & Immunization Charges | Neurology Services |
| Neurology | Surgeon Charges |
| Day Care | Operation Theatre Charges |
| Master Health Check-up | Anesthesia Charges |
| Diabetology | Implants Charges |
| Ambulatory Care | ICU Charges |
| Dialysis | Room rent charges |
| ENT Services | Special Nursing Charges |
| Endoscopy | Nursing Charges |
| Many more ….. | Many more ….. |
| Medical Support Services | Medical Support Services |
| OP Registration Charges | Admission & Documentation – |
| Radiology Services | Lab Services – |
| Blood Bank services | Radiology Services – |
| Physiotherapy | Medical Counseling – |
| Ambulance Services | Medical legal Charges – |
| Lab Services | Blood Bank Charge – |
| Many more ….. | Many more ….. |
| Pharmacy Income | Other Operational Income |
| Out-Patient (O.P.) Pharmacy | Admission charges |
| In-Patient (I.P) Pharmacy | Outsourced Pharmacy |
| Trauma Center Pharmacy | Outsourced Lab |
| Rehabilitation Center Pharmacy | Infrastructure (IFS) Charges |
| Etc. | Telemedicine Consultancy |
| R&D income on assignment basis |
Some of the examples of Heads of Expenditure in Healthcare Sector
| Operational Expenditure | Non-Operational Expenditure |
| Medical Department Expenses | Administrative |
| Doctor’s Fees | Staff Salaries |
| Surgeon’s Fees | Travelling Expenses |
| Clinical Expenses | Transportation Expenses |
| Operation Theatre Expenses | Periodicals Expenses |
| Nursing Expenses | Sales Promotion Expenses |
| Emergency Expenses | Advertisement Expenses |
| Casualty Expenses | Rent (if any) |
| Medical Support Services Expenses | Finance Expenses |
| Pharmacy Expenses | Legal Expenses |
| General Lab Expenses | Insurance Commission |
| Blood Bank Charges | Audit Fees |
| Radiology Expenses | Consultancy Charges |
| Ambulance Service Charges | Many more…… |
| Mortuary Expenses | |
| Many more…. | Oxygen & Gas Expenses |
| Bio Medical waste disposal Expenses | |
| Service Department Expenditure | Power & Fuel Expenses |
| Help Desk Services | |
| Food & Beverages | |
| House keeping | |
| Medical Records Expenses | |
| Equipment Maintenance Expenses | |
To reach at the scientific cost we have to implement the following cost models which are used depending on the size, foot falls, types of services, etc.
1. Variable Cost Approach
2. Total Cost Approach
3. Health Care package Approach
4. Activity Based Cost Approach
In variable cost approach, we have to take only variable cost which is incurred on the treatment of the patient such as Consultation fees, Medicine provided from the hospital, nursing staff deputed separately for his care and other variable overheads. Accordingly, one can ascertain a price by simply adding the profit margin to the variable cost.
In case of total cost approach, we have to reach or calculate total direct cost and indirect costs along with total fixed cost. Accordingly, one can ascertain a price by simply adding the profit margin to the total cost.
In case of health care packages, we have to ascertain direct cost of medicines and consumables, nursing staff deputed separately for his care (if any), variable overheads and also the portion of fixed overheads. Accordingly, one can ascertain a price by simply adding the profit margin to the total cost.
ABC method would be the most appropriate method of identifying the cost to respective departments. We have to calculate the cost of each and every activity involved based on cost drivers and cost pools. Cost of each activity is accumulated according to the cost drivers
For implementing or calculating the cost, the management of the hospital has to monitor whether the following records are being maintained by the hospital or not.
Few are the following cost records which are essentially required to be maintained
1. Register of pharmacy supply department wise
2. Register of surgical items supply department wise
3. Register of pharmacy consumption department wise
4. Register of surgical items consumption department wise
5. Register to record number of hours of Doctor’s, Consultant doctors, Resident medical officer etc.
6. Register of fixed assets such as medical equipment etc. department wise, specialty wise
7. Register of utilities and number of hours utility used
8. Register of in and out of patients
9. Register of bed occupancy (private room & general ward and class wise)
10. Register of surgeries done
11. Register of test done (different tests)
12. Register of general manpower
13. Many others register
Applicability of Cost Audit & Cost Records in Health Care Sector
As per Companies (Cost Records and Audit) Rules, 2014 & Amendment thereto:
- Any company engaged in “Health services, namely functioning as or running hospitals, diagnostic centers, clinical centers or test laboratories” are required to maintain cost records: &
- having an overall turnover from all its products and services of rupees thirty- five crore or more during the immediately preceding financial year Needs to maintain prescribe cost records in accordance with Form CRA 1 of the Rules to the extent applicable
- companies running hospitals exclusively for its own employees are excluded from the ambit of these Rules, provided however, if such hospitals are providing health services to outsiders also in addition to its own employees on chargeable basis, then such hospitals are covered within the ambit of these Rules.
- Check out the Turnover* of Company in Immediate preceding Financial Year
| Applicability for Maintenance of Cost Records | Applicability for Cost Audit |
| If the turnover of company which engaged in above mentioned activities, having a turnover Rupees 35 Crore or more in Immediate preceding financial year, has to comply with maintenance of Cost Records (as per CRA-1) | If the turnover of company which engaged in above mentioned activities, having a turnover Rupees 100 Crore or more in Immediate preceding financial year, then Cost Audit is applicable on it. |
In my next article we will discussed in detail about the cost analysis, cost control, cost reduction etc.
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