Case 4.63 Activity-based costing in health care

Insurance companies and the federal government are restricting reimbursements to health care facilities and causing these facilities to seek cost reductions and more accurate tracing of costs without reducing the quality of care. Lisa Whelan, the administrator of Community Hospital, is exploring whether ABC can be applied to her hospital's operations. She is meeting with your consulting team to seek your advice and to determine whether to hire you to lead an ABC pilot project that, if successful, could be extended to the rest of the hospital.

Whelan: I'm not too sure whether ABC is right for our situation, but I believe I should explore it at least. I think ABC is primarily for manufacturing companies, bu t there might be legitimate parallels between a hospital and a factory.
You: (Provide a brief response to these concerns that might encourage Whelan to hi re you.)
Whelan: That seems reasonable, though I'm not sure that we want to tell our board of directors and the general public t ha t Comm unity Hospital will be run like a factory. That's not the image we want to project. Nonetheless, I think we should proceed. I suggest that you analyze a typical nursing station and show me what analyses you can produce from a n ABC perspective.

You work with nursing staff and the administrator 's office to gather the following information:

Nursing Activity Providing supervision Delivering nursing care
Cleaning, changing linens and garments

Personnel
1
5
3

Annual
Cost
$ 70,000
250,000
60,000

Total annual costs $380,000
Total patient days (one patient in the hospital for one full day) 2,000
Average nursing cost per patient day $190
All patients receive approximately the same level of cleaning and changing linens and garments, but the level of nursing care varies. Nursing staff suggested that patient days should be weigh ted by the level of care required. Usi ng this inpu t, you categorized the patients served by this nursing station in the past year as follows. Weights approximate the intensity of care needed.

Number of
Patient Weighted
Patient
Nursing Care Level Patients Days Weight Days
Level 1 (needs typical nursing care) 300 600 1 600
Level 2 (needs more than typical nursing
care but not intensive care) 300 900 2 1,800
Level3 (needs most intensive nursing care) 100 500 4 2,000
Totals 700 2,000 4.400

Required
Prepare a report in memorandum form that explains the following:

a. The objective of your ABC analysis.
b. The reason that the average cost per patient day is misleading.
c. The sources of your data and the feasibility of collecting them in the future.
d. The confidence you have in t hat data to support you r analysis and conclusions.
e. The method of tracing operating costs of the nursing station to its activities.
f. The calculations of activity costs per unit and examples of nursing station costs of different patients.
g. The implications of you r analysis for managing Community Hospital's nursing stations.