Costing In The National Health Service – Report By CIMA | UHW Board Paper

The major findings of the report

University Hospital Westhampton NHS Foundation Trust (UHW) are facing major challenges regarding transforming themselves into the patient-centred organization and to save more than £20 billion at the same time. To accept and fulfil the challenge, it is very crucial to manage the care service more effectively and efficiently. The department of health (DH) suggested the National Health Service (NHS) to implement patient-level information and costing system (PLICS). On the other hand, the monitor suggested implementing the service line reporting (SLR) that is mainly supported by the data from the patient level. A recent survey carried out by CIMA found out that greater than 70% of the NHS are using the PICS or the SLR. This essay will firstly state the key findings from the report that are to be proposed to the board, secondly, the concept of ABC and its advantages to the organization will be stated and finally, a critical appraisal to the board will be suggested based on the findings of the UHW (Costing in the National Health Service: from reporting to managing, 2017.  pp 1-12).  

The key findings from the report that can be proposed to the board are:

Set out the underlying philosophy more clearly for managing and analysing the cost in the official documents of the DH – Since 1998, the department of health started collecting and publishing the information related to the unit cost, that is the reference cost. These costs were established to calculate the national tariff for the purpose of central control.  It implies the collection of data annually at the trust level. Generally reference cost is based on the top-down approach of calculation (Roski, Bo-Linn and Andrews 2014. pp.1115-1122). To make the cost related information more transparent and assist the organization to get better idea about PBR setting for tariff and to inform the national cost collection department, the DH suggested PLICS approach. PLICS measures the cost at the patient episode level and therefore, presents the clinical data linked with the cost more clearly (Roehrich, Lewis and George 2014. Pp 110-119)

Develop a training programme for the staff of NHS for the potentials and roles of the constructed information related to cost – The effective execution of SLR and PLICS needs a primary shift in the assessment of the behaviour of cost. Rather than the top-down basis of allocation, costs are traced to be managed actively. On the other hand, visualizing the overheads is an unmanageable and predictable burden for everyone as the overheads for the transformation procedure can be questioned by the activity analysis (Öker and Ad?güzel 2016. Pp 39-56). To apply the ABC in effective way, it is crucial to understand the number of activities that are carried out by the members of the individual organization. To understand the ABS method clearly and shift from the existing SLR and PLICS approach, the staffs of NHS must be trained appropriately, so that they have a clear idea about the costing system and their roles and responsibilities (Phillips and Phillips 2016).

Concept of Activity-based costing (ABC)

To develop a base for the evidence of the effectiveness and potentiality of PLICS and SLR – In a recent survey conducted by the CIMA, it is evidenced that about 70% of the trusts already introduced the SLR or PLICS approach. They carry out their reviews for costing quarterly or in some cases even monthly as against the annual review under the traditional approach and engage more managers and clinicians at the operation level. This involvement is required to ensure the regulators or shareholders that the systems are carried out properly and in timely manner (Kaplan and Anderson 2013).

ABC is an approach of costing that recognizes all the activities of an organization and allocates the cost with resources of each activity to all the services and products as per their actual consumption. It allocates the overheads to each product in more logical way as compared to the traditional approach of assigning cost based ob simply the machine hours. Under the ABC approach, costs are first allocated to the activities that are the actual source of overhead. Then, the costs are allocated to the products that are requiring the activities. However, few costs like salaries of office staffs and management are difficult to allocate to a particular product (Kaplan and Atkinson 2015). Therefore, this method is widely used in manufacturing businesses as it improved the consistency of the data related to cost and therefore, revels the true cost as much as possible and at the same time classifies the cost that are incurred by the company throughout the production procedure. This method is applied in product costing, target costing, analysis of customer’s profitability, service pricing and in the profitability analysis of the product line (Saunders and Cornett 2014).

ABC approach improves the costing procedure in three ways. Firstly, it enlarges the number of cost pools that are used to accumulate the overhead cost. It pools the cost based on the activity rather than assembling the cost in the single pool of the organization. It also generates new methods for allocating overhead to the products rather than simply allocating the cost based on the machine hour rate. Finally, ABC approach changes the characteristics of various indirect costs like power cost, inspection cost and depreciation, which are now allocated based on certain activities (Chartier 2014). A cost pool under the ABC system is the group of costs that are incurred after the performance of certain activities in the organization. Through accounting all the costs that are incurred in a particular activity pool, it is simpler and easier to allocate costs to the particular product and calculate the accurate cost for production.  Activity cost pool is the total of all costs that are require completing a task, for example, production of a product. However, the ABC shifts the overhead cost from the high-volume items to low-volume items, which in turn, increases the low-volume item’s unit cost (Stabile et al., 2013. Pp 643-652).

Where ABC approach is not implemented and the costs are allocated based on any other system, they mainly use the following approaches:

• Reference cost approach – Under this, the average cost derived from the HRG treatments are used for setting up the tariff base.
• PLICS – Under this, the cost of treatment and other information related to the clinical data and operational data for particular patient is taken into consideration. This data may inform about both the SLR and reference cost (Vogl 2013. Pp 290-300).
• SLR – Under this, a statement of costs and revenues from the clinical activities are used to monitor and manage the performance at the level of service line.

Critical findings at UHW, where they currently do not have ABC

The design of the above mentioned costs are mainly influenced by the purposes of the central control. The limited involvement of the clinicians under this approach is attributed to the assessment of cost behaviour that is, assigning the indirect costs and overheads obtained from the activities or clinical units (Llewellyn et al., 2016).  Under the traditional model, the calculations starts from the general ledger and the overheads are allocated over the growing numbers of HRGs. In addition, the method is very complex in nature and link to the relevant categories of clinics are not clear. Therefore, the clinicians are not able to understand the cause-effect relationship for their decisions, consumption of resources and clinical results. Moreover, the complex method of allocation for indirect costs and overheads are the approaches used for the SLR and PLICS data. However, through the to-down approach the data can be little bit more usable and transparent. As the clinicians are not able to relate the cost with their activities, it has a great impact on drawing the conclusions regarding operational activities. Thus, the threat exists that the SLR and PLICS are decreased to a costly exercise for reporting and producing the numbers while having less influence on the clinical decision taking (Chen et al., 2015. Pp 640-645).

Conclusion and recommendation:

From the above discussion, it is concluded that the hospital costing is a major concern to the government since the construction of NHS in the year 1948. The government was concerned regarding the speciality costing, departmental costing, resource management and budget management. Under the traditional approaches like SLR, PLICS and reference cost, the overhead cost and indirect cost are allocated based in general and the activity pool from which the overheads are actually generated are not taken into account. However, under the ABC approach, the cost pools are shifted from the general ledger to a defined structure where costs are allocated based on the activity pool. It provides great potential to assess the efficiencies and effectiveness with regard to the overall business procedure and patient care. Therefore, the health system, where ABC is not yet adopted, they must shift to ABC system to make their costing more transparent and allocate the cost in more structured way.

Reference:

Chartier, Y. ed., 2014. Safe management of wastes from health-care activities. World Health Organization.

Chen, A., Sabharwal, S., Akhtar, K., Makaram, N. and Gupte, C.M., 2015. Time-driven activity based costing of total knee replacement surgery at a London teaching hospital. The Knee, 22(6), pp.640-645.

Costing in the National Health Service: from reporting to managing. (2017). 1st ed. [ebook] London: cimaglobal.com, pp.1 – 12. Available at: https://www.cimaglobal.com/Documents/Thought_leadership_docs/R226%20Costing%20in%20the%20National%20UPDATED%20%20(PDF).pdf [Accessed 26 Mar. 2017].

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Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Llewellyn, S., Chambers, N., Ellwood, S., Begkos, C. and Wood, C., 2016. Patient-level information and costing systems (PLICSs): a mixed-methods study of current practice and future potential for the NHS health economy.

Öker, F. and Ad?güzel, H., 2016. Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.

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Stabile, M., Thomson, S., Allin, S., Boyle, S., Busse, R., Chevreul, K., Marchildon, G. and Mossialos, E., 2013. Health care cost containment strategies used in four other high-income countries hold lessons for the United States. Health Affairs, 32(4), pp.643-652.

Vogl, M., 2013. Improving patient-level costing in the English and the German ‘DRG’system. Health Policy, 109(3), pp.290-300.