Advanced Management Accounting in Hospitals

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Introduction

Hospitals in the UK have adopted cost effective means of reducing wastage in hospital operations. These are means that monitor the performance of hospitals (performance management) and ensure efficient resource allocation. Therefore, this paper aims to analyze cost benchmarking in hospitals, how HRG is used to benchmark and the use of Payment by Results to allocate resources.

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Definitions

Performance management involves processes that ensure objectives are continuously being met efficiently and effectively while resource allocation is a strategy for assigning hospital resources effectively and efficiently (Measuring hospital performance 2003).

Relationship between variables

This paper analyzes performance management to understand the link between HRG and PbR (Performance by Results) and their relationship with cost efficiency (Llewellyn & Northcott 2005).

Discussion and examples

Cost benchmarking is necessary in ensuring efficient resource allocation in hospitals. However, it is associated with both advantages and disadvantages. Some of its advantages are:

It enables hospitals to know what to aim for. For example, benchmarks set the costs and performance targets. Therefore, hospitals can improve their performance and lower their costs to achieve efficient goals (Northcott & Llewellyn 2003).

The other advantage of cost benchmarking is that it enables the hospitals to know the standard structure or processes. This way the costs accompanied by various procedures or processes can be regulated. With defined processes in place, the hospitals can know the affordable ways of conducting an operation. Therefore, they will avoid other processes that are outside the defined targets (Maybin 2007).

However, cost benchmarking has its disadvantages. For instance, it erodes competitive advantage. This is because there is a set target of which hospitals are not supposed to exceed. Therefore, they cannot create procedures that go beyond the set costs. As a result, hospitals cannot become innovative and competitive with other hospitals (Maybin 2007).

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Cost benchmarking in hospitals has been implemented by use of the HRG strategy. Resources are currently allocated to hospitals based on their average HRG (Health Resource Group) times their activity. HRG is a measure of output. Several HRGs practice similar activities and consume similar levels of resources. For example, groups assemble different ways of primary hip replacement and consume similar resources or costs (Maybin 2007). HRG is calculated by coding patient treatment in HRG category.

The annual units of activity on HRG are then counted, and the annual costs of all the units of activity are calculated. The total costs are then divided with the total units of activity. Therefore, an average cost for a given HRG is obtained. After assessing all the HRGs that are relevant to the activity, a reasonable, accurate HRG cost is obtained. This cost is used for some time, and all new procedures are coded to it (Maybin 2007). An illustration of how HRG in primary hip replacement operates is shown below:

The average HRG cost= £4,000.

Range of HRG costs= £300 to £20,000

Percentage variation across range= (20,000-300/300)*100= 6,567%

By use of HRG, the Department of Health can rank hospitals depending on their relative cost efficiency. The index scale used is an average of costs of all the hospitals. If the average is a score of 100, hospitals’ figures are compared to this score (Maybin 2007). This way, hospitals ensure that their costs are moderated.

HRG can be seen as an incentive to hospitals to ensure that their costs are at an average and if the costs are continuously above average, the hospitals risk going out of business. By use of HRG, the government can know the cost efficient hospitals. These are the hospitals that have shown efficient use of resources at their disposal.

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For the government to reward the efficient hospitals, it uses a mechanism called PbR (Payment by Results). It does this by providing more efficient hospitals with more resources than the less efficient ones. This method tries to be more rewarding to hospitals that treat many patients. HRG gives evidence of the average costs per case that a hospital incurs. For example, according to Department of Health statistics, in 2007 and 2008, the cost of offering tests related to stomach illnesses was £407.

This is the money allocated to all hospitals for such an operation (Maybin 2007). This way, the government can know the average amount of money that every hospital requires. When the numbers of admissions are high, the government reward will also be high. Therefore, Payment by Results has helped to improve efficiency, activity and quality of medical services. However, it involves high costs, which may be, accompanied by low levels of demand for medical services. In addition, it has made it difficult to establish new technology in specialist health facilities.

Recommendations/ Conclusion

Some of the improvements that can be made to the problems facing performance management are:

The government can standardize the referral rates that are currently varying by as high as 200%. Additionally, health care tariffs for outpatients can be reduced. For instance, home chemotherapy charges can be reduced to a third of the current charges. Lastly, innovation should be improved. For instance, the mean time for UK’s NHS to adopt a new idea is 17 years. This should be revised because developments in existing and new diseases are often changing (Maybin 2007).

References

Llewellyn, S & Northcott, D 2005, ‘The Average Hospital’, Accounting, Organizations and Society, vol. 30 no. 6, pp. 555-583.

Maybin, J 2007, Briefing: Payment by Results. Web.

Measuring hospital performance 2003. Web.

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Northcott, D & Llewellyn, S 2003, ‘The “Ladder of Success” in Healthcare: The UK National Reference Costing Exercise’, Management Accounting Research, vol. 14 no.2, pp. 51-66.

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BusinessEssay. 2022. "Advanced Management Accounting in Hospitals." March 29, 2022. https://business-essay.com/advanced-management-accounting-in-hospitals/.

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