Pls see the attached file
Jebah Hospital Jebah Hospital This report doesn’t describe where our costs are generated. We’re applying one standard to all patients, regard- less of their level of care. What incentive is there to identify and account for the costs of each type of proce- dure? Unless I have better cost information, all our attempts to control costs will focus on decreasing the num- ber of days spent in the hospital. This limits our options. In fact, it’s not even an appropriate response to the ministry’s financial constraints. The speaker was Abdul Al-Bader, M.D., Chief of the Department of Obstetrics and Gynecol- ogy at Jebah Hospital, a medium-sized tertiary care facility, located in a Middle Eastern country. After reviewing the most recent cost report for his department, Dr. Al-Bader had some serious con- cerns, and was meeting with Tarek Hussain, the Director of Fiscal Affairs, whose department had generated the report. Dr. Al-Bader continued: Not only that, but over half the costs are outside my control. How am I supposed to exert any influence over dietary or housekeeping, for example? I also know from experience that the cost figure the hospital is using for a simple lab test, such as a CBC, is exorbitant. And it’s likely that some of the other clinical services shown on my report are too expensive as well. But I can’t do anything about it! BACKGROUND Two years ago, in an effort to control rising hospital costs, the Ministry of Health had estab- lished countrywide spending limits, and had made each hospital responsible for keeping its total costs at or below the limit determined during annual budget negotiations. Jebah, like many other tertiary care institutions, had felt the pinch. As one of the country’s largest institutions, it had been among the first to establish a departmental cost accounting system. In addition, and with support of its medical staff leadership, Jebah had required each service chief to become involved in the hospi- tal’s budgeting process, and to take responsibility for the costs associated with the care of patients in his or her department. By involving service chiefs in the budgeting and control process, Jebah’s senior management hoped to gain more control over its costs, and to improve the hospital’s overall financial performance. THE COST ACCOUNTING SYSTEM Jebah’s cost accounting system was based on three costing units that had been stipulated by the ministry: a bed-day for inpatient care, a visit for outpatient care, and a procedure (or operation) for operating rooms. Each hospital was required to compute its unit costs, such as a cost-per-bed-per- day for inpatient care, and report them to the ministry on a monthly basis. The ministry planned to use the information for cross-hospital cost comparisons, and it expected each hospital to make cross-department comparisons as part of its cost-control efforts. Under Mr. Hussain’s leadership, Jebah had taken an additional step. In addition to using the ministry’s standard costing units for its clinical care departments (such as Ob-Gyn), it had begun to use similar units for its clinical service departments, such as radiology, laboratory, radiotherapy, and the pharmacy. In radiology and radiotherapy, for example, the unit was a procedure, and Mr. Hussain’s staff computed an average cost per procedure each month. The monthly radiology and radiotherapy costs for each clinical care department then were computed by multiplying this average by the number of procedures its physicians had ordered that month. The same was true in the labo- ratory, where the unit was a test, and in the pharmacy, where it was a filled prescription. HBSP Product Number TCG157 TTHE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. _____________________________________________________________________________________________ This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illus- trate either effective or ineffective handling of an administrative situation. Copyright © 2014 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and interna- tional copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.thecrimsongroup.org) For the exclusive use of T. Nguyen, 2020. This document is authorized for use only by Thao Nguyen in Costs/Budgets - 2020 Spring taught by YONG GYO LEE, University of Houston from Dec 2019 to Jun 2020. To calculate the cost per bed-day for a clinical care department,, the fiscal affairs staff first com- puted that department’s direct costs. Then, using the above methodology, it added the costs of the tests, procedures, and prescriptions the department’s physicians had ordered from the clinical serv- ice departments. It called these purchased clinical services. Finally, it allocated the hospital service center costs, such as dietary, laundry, and housekeeping, to the department, using allocation bases (such as space, meals, and hours of service) that had been specified by the ministry. The result for Dr. Al-Bader’s department is shown in Exhibit 1. Exhibit 1 also shows the units used for the clini- cal service departments, and the bases used for allocating service center costs. After fiscal affairs had determined a clinical care department’s direct costs, added the costs, for clinical services, and allocated the service center costs, it calculated the average cost per bed-day by dividing the department’s total costs by its number of bed-days. The average for inpatient surgery- gynecology is shown at the bottom of Exhibit 1. Exhibit 2 shows the average cost per unit for sev- eral other surgical specialty departments. After reviewing his department’s cost report, Dr. Al-Bader felt that the obstetrics service was fairly well-defined in terms of its costs. By contrast, surgical gynecology was problematic: Gynecological procedures are less amenable to assignment into cost categories. This is mainly because of the age range and diversity of the patients, but it’s also due to the distinctions among the surgical subspecialties in gynecology. Because of this, the present cost accounting system is of little use for gynecology cases. This is extremely frustrating, especially since the hospital is expecting me to use this information to manage the de- partment’s costs. The average figure simply does not account for the real use of clinical resources by gynecol- ogy patients. Mr. Hussain disagreed. Dr. Al-Bader just doesn’t understand. This system is ideal for comparative purposes. It allows me to quickly compare the costs among different departments within the hospital. It also helps me to compare the cost of a particular department at Jebah with a similar department at another hospital. Additionally, I can use the infor- mation to estimate the cost of treating an entire illness at Jebah. For example, with this system, I can easily determine the approximate cost of treating a patient having a total abdominal hysterectomy [TAH],1 and com- pare it to other hospitals. According to Mr. Hussain’s figures, the cost of a non-oncology TAH (which usually required four days in the hospital) was 3,708 (927 x 4). To this would be added the cost of a major opera- tion with general anesthesia, or 1,197. (The procedure might also be performed with epidural or spinal anesthesia at the discretion of the attending physician and the anesthesia staff, in which case the total cost of the procedure would be slightly less.) The inpatient operating room costs were based on a two-year study, and the figures were up- dated regularly by the fiscal affairs department. At present, Dr. Al-Bader was not held accountable for these costs, nor for the costs of anesthesia management. He was responsible only for the costs associated with the pre- and postoperative care of the patients in his department. These costs were the ones causing him difficulty. He continued: Some patients, especially those undergoing treatment for cancer, use more resources than others. This is mainly because the testing and therapeutic treatment of patients varies widely. Some patients require more or fewer diagnostic and therapeutic interventions, depending on their admitting diagnoses. For example, radiation therapy is used almost exclusively by oncology patients. Somehow, a good cost accounting system needs to recognize these differences. I also don’t want my depart- ment to appear overly costly simply because some patients don’t conform to the norm. The current cost ac- counting system just doesn’t account for the differences among patients. As a result, it doesn’t give me the data I need to manage costs, and it includes a variety of items that I can’t control. THE USE OF CLINICAL DISTINCTIONS After some discussion, Dr. Al-Bader convinced Mr. Hussain that the average unit cost calcula- tion could be revised to account for the differences among patients having different gynecology procedures. In an effort to address these clinical differences, The two decided that gynecology pa- tients could be divided into three categories according to clinical subspecialty: 1 This is a procedure in which the uterus, fallopian tubes, and ovaries are removed. If the procedure is done for rea- sons other than cancer, it is classified as a non-oncology procedure. TCG157 • Jebah Hospital 2 of 8 _____________________________________________________________________________________________ For the exclusive use of T. Nguyen, 2020. This document is authorized for use only by Thao Nguyen in Costs/Budgets - 2020 Spring taught by YONG GYO LEE, University of Houston from Dec 2019 to Jun 2020. 1. General gynecology/urogynecology (non-oncology) 2. Reproductive/invitro fertilization 3. Oncology With the help of Dr. Al-Bader, Mr. Hussain calculated time and material estimates for each type of patient stay. For example, he estimated that, in general, more medication was used on oncology patients than on general gynecology patients. Also, oncology patients were likely to need more of a variety of other resources, such as lab tests, drugs, and x-rays. Mr. Hussain conferred with his staff about the best method to apportion the department’s costs among the three subspecialties. After much discussion, they decided to apportion most of them ac- cording to the number of patient days per subspecialty. They made some adjustments, however, to reflect unusual circumstances. The results are shown in Exhibit 3. Dr. Al-Bader and Mr. Hussain performed some calculations and compared the differences be- tween the two systems. They first computed the cost of a non-oncology TAH using each system. Dr. Al-Bader noted that the procedure generally took place in the general gynecology category. They then compared the costs of patients