Lean accounting in hospital

On December 18, 2017, Posted by , In Lean Healthcare in Poland, With Comments Off on Lean accounting in hospital

Effective methods of cost management in a medical institution using lean accounting.

Running a business involves great responsibility and responsibilities. Both the knowledge of legal requirements and expectations of other interested parties and the most important clients, have great importance in the success of the project. The type of industry in which the company operates and financial management are factors that affect the level of expenses and profits of the organization. The goal of every financial management company is to get and use the right amount of funds to increase the value of the company. The measure of efficiency and business proficiency is profitability. Profitability is defined as a higher level of revenues over expenses. In order to gain a competitive advantage, an institution should achieve better economic results by choosing appropriate methods of cost management.

One of the discussed methods will be the ABC – Activity Based Costing method. The ABC method activity costs account allows you to accurately determine indirect costs, which fall on the offered service and product. According to this method, indirect costs are billed to products. Due to the large number of processes that occur in the company, they lead to the creation of a product at the exit of the process.

The stages of the ABC method are based on four basic steps:

  1. Defining resources
  2. Identification of activities
  3. Defining the costs of activities
  4. Settlement of the costs of activities on products

Assumptions on which the ABC method is based relate to:

  • Costs that express expenses incurred to obtain materials and resources for the organization’s services (input data to processes)
  • Various activities which can lead to the consumption of the same resources
  • Actions that are expressed in the appropriate unit
  • The costs are settled in the chapter for individual products or services. Another method of financial management that could be the most effective for the described company is time-driven ABC which is a time-controlled cost account. Improper management, including time, ineffective communication, problems with service providers (delivery of lunches, external service of washing bedlinen) and technical errors that may affect the economic results. It is important to look for solutions that will eliminate bottlenecks and will streamline hospital processes which will improve its profitability. The TDABC method allows company to adjust the cost account to seasonality and above all, uneven demand for services provided by the organization. Both methods require from management of clinical processes a process approach, which includes all main and auxiliary processes as well as their interrelationships and resources as well as output data (SIPOC). The method requires horizontal management by main management.

In the discussed case, two methods of cost management for a medical institution will be presented. Each hospital, clinic, doctor’s office are entities that provide medical services. The main purpose of the activity is to provide medical services. Depending on the business profile, the main process may be a clinical process, e.g. basic health care, hemodialysis process and outpatient specialist care. On the implementation of health services consist, depending on the expectations and needs of the patient, such sub-processes as:

  • analysis of the requirements of the payer and other interested parties
  • designing of clinical processes
  • registration of patients
  • implementation of medical advices
  • implementation of specialist advices
  • wykonanie diagnostyki laboratoryjnej
  • management of medicine administration
  • training of medical staff and other specialists
  • solving problems occurring in processes
  • implementation of the proposed solutions, e.g. 5S- orderly workplace, ANDON, visual management
  • monitoring results of processes and implementing improvement actions

Part of the processes depends not only on the profile of the medical institution (whether it is a public, multi-specialized hospital, private medical center, clinic, laboratory, other private unit providing for example magnetic resonance services), also depends on size and structure (e.g. number of hospital departments, complexity of hospitalization processes and procedures, type of management – silo or horizontal, process awareness and quality management systems). Another factor influencing the scope of services is the impact of the main management approach to the knowledge of the lean healthcare method and the awareness of the occurrence of problems and the level of process maturity. The higher the level of maturity, the more criteria and information on the basis of which the process can be controlled and planned. The implementation of lean healthcare projects may concern:

  • Implementation of a quality management system in a multi-specialist public hospital with lean tools to analyze clinical risks
  • process optimization in a specialist hospital (Kanban cards, 5S, visual management, FMEA risk management, 5why problem solving, A3)
  • design of the laboratory space for more efficient work with usage of the spaghetti diagram and other lean healthcare tools
  • conducting training for the medical staff on the topics of: communication with a difficult patient, keeping medical records, solving problems using the Ishikawa diagram, A3, 8D, 5why

Referring to the processes occurring in a medical institution, it can generate costs due to:

  • Reporting demands of patients for non-standard services because each medical service is unique
  • Occurrence of downtime and other waste (8 types of muda)
  • Inefficient use of machinery and medical equipment
  • Occurrence of errors: medical incidents, adverse events, complaints, reoperations

Based on the ABC, it is very easy to identify activities that exist in the organization.

For example, it is possible to analyze the patient’s treatment process. Table 1 shows the path of the patient from registration to discharged from the hospital ward.


Table 1, Identified actions, source: own work

After identifying the activities, it is possible to determine the volume measurement unit of each measure. The proposals are presented in the table No. 2.

Table 2, Identified measures for actions, source: own work

The next step is to determine the costs of activities. They are determined individually. There also occur variables such as:

  • Type of provided service
  • The number of repetitions of a service
  • Type of specialist doctor
  • The type of medical equipment needed for survey (Ultrasound, artificial kidney, catheter)
  • Estimated time to provide the service
  • Effectiveness of the performed procedure

The estimated costs of each activity for the medical service delivery process are listed below. It consists of both variable and fixed costs. Fixed costs are:

  • maintenance of the hospital infrastructure
  • salaries for employees of the institution
  • depreciation of fixed assets

Variable costs apply to those activities that can be performed repeatedly, such as:

  • medical consultation
  • performing a diagnostic survey
  • the amount of used disposable equipment
  • usage of medicines

Each patient is unique, therefore the medical service is adapted to the type of process. (e.g. performing operations on the operating block), number of participants (doctors, nurses, instrumenter, ward nurse, duration of the process (non-invasive surgery – 3h, invasive surgery-7h).

Table 3, Data for costs of actions, source: own work

The last activity is the settlement of the costs of activities for particular services / treatments. Thanks to the process approach, it is possible to optimize the activities occurring in it, which may affect the costs of the process. The ABC method allows to customize the service that is offered by medical institutions to patients in a specific chapter on activities. Because of having information about the costs of the operation, the hospital or other medical entity has the possibility of real valuation of the service and offering a flexible offer to clients. Another method that will  allow to effectively manage available resources, mostly human resources and time is the Time Driven ABC method. In order to apply this innovative method, the main and auxiliary processes and their structure should be very well known. Each activity is closely related to the work of a individual person. Due to the complexity of the processes occurring in the hospital, their number and interrelationships, the employee’s time intended to the activities presented in Table 1 is different. At the beginning of the medical service, the time can be estimated.

In order to analyze business processes, service processes must be documented in detail and a set of skills necessary for their implementation must be specified. A tool that will help in understanding the process is VSM-value stream mapping, which indicate activities that add value in the process and bottlenecks. It is a detailed analysis of activities, their sequence and time of performing particular activities. Map of the value stream mapping for the operation process in the orthopedics ward is described below. Obtaining such a map by the hospital allows not only to evaluate each activity, but also to assess the duration of activity. The map indicates inefficient places (both in terms of waste of time and financial resources). In order to achieve lower costs of services, it would be necessary to eliminate these activities (orange marked), which generate unnecessary costs.

On the basis of detailed knowledge of service processes, it is possible to define the time frame necessary for the implementation of activities and then the costs of their implementation.

Diagram nr 1, Current state map, source: own work

Based on the information contained in Diagram 1 it is possible to:

  • Forecast the use of human resources, time resources and others.
  • Correct and improve the procedures for the implementation of individual services, e.g. the procedure of patient catheter placement
  • Reduce the costs of implementing individual activities – e.g. surgical treatment
  • Adjust the number of personnel and their time to specific medical services, e.g. number of medical caregivers in a ward
  • Monitor the process of provided services and if necessary, supplement them with missing resources (e.g. additional doctor or additional time for the implementation of the action).
  • Eliminate risks, relying on agile service delivery and respond In right time
  • Use the kaizen costing method, which strives to reduce the costs of service delivery because of continuous process optimization.

The TD ABC method is an opportunity for every medical institution, because of the ability to manage variable costs. Based on adjusting the time of work of medical staff to the needs of the client / patient, the company can achieve profits proportional to the used resources (working time of the medical staff, used medicaments, disposable materials). It is a method for business risk management, e.g. potential risk – lack of possibility to perform laparoscopy due to the shortage of disposable materials and medicines.

The type of activity of each medical institution allows to cost management through ABC and time driven ABC methods, which are a chance to improving the company’s operations and increasing financial efficiency. This choice increases the possibilities of gaining a competitive advantage. A detailed elaboration of the costs of the implementation of the main processes, including the necessary time for implementation, will allow to secure the services and their continuity, without the risk that the company has unqualified specialists, lack of needed staff or lack tools to perform the treatment.

Footnotes

Books

  1. Janusz Janczarski, MBA BCC 15, Financial accounting 09-11.06.2017, GFKM.

Internet sources

  1. https://mfiles.pl/pl/index.php/Rachunek_kosztów_działań, z dnia 10.10.2017, Encyclopedia website
  2. http://www.pracownicy.ue.poznan.pl/masztalerz/zrz.wyk.01.pdf z dnia 10.10.2017, University of Economics in Poznan
  3. http://procesy.ue.wroc.pl/index.php/materialy-dla-studentow/zarzadzanie-procesami/abc—rachunek-procesowy-kosztow.html z dnia 10.10.2017, University of Economics in Wroclaw
  4. http://www.egospodarka.pl/33953,Rachunek-kosztow-TDABC-metodyka-wdrazania,1,20,2.html z dnia 10.10.2017, Website for entrepreneurs