INTRODUCTIONINTRODUCTION

This methodology enables calculation and analysis of inpatient care costs with the finalThis methodology enables calculation and analysis of inpatient care costs with the final goal of optimizing the medical, financial, and social outcomes of hospital activity. It cangoal of optimizing the medical, financial, and social outcomes of hospital activity. It can be applied to all other medical facilities and practices as well, regardless of the type ofbe applied to all other medical facilities and practices as well, regardless of the type of health services they provide.health services they provide.

The methodology was developed, programmed, and tested on real data at Tomsk OblastThe methodology was developed, programmed, and tested on real data at Tomsk Oblast Teaching Hospital (OTH). It represents the first tangible result within Tomsk Oblast ofTeaching Hospital (OTH). It represents the first tangible result within Tomsk Oblast of the work done under the Zdravthe work done under the ZdravReformReform Program. The program is sponsored by the U.S. Program. The program is sponsored by the U.S. Agency for International Development (USAID), with the U.S. consulting firm AbtAgency for International Development (USAID), with the U.S. consulting firm Abt Associates Inc. as the prime contractor. The goal of the program is to provide technicalAssociates Inc. as the prime contractor. The goal of the program is to provide technical assistance (transfer of experience and knowledge) in health sector financing andassistance (transfer of experience and knowledge) in health sector financing and organization reform in Russia, Central Asia, and Ukraine, Moldova, and Belarus, and,organization reform in Russia, Central Asia, and Ukraine, Moldova, and Belarus, and, subsequently, to disseminate the positive results of these activities to other countries ofsubsequently, to disseminate the positive results of these activities to other countries of the New Independent States.the New Independent States.

One of ZdravOne of ZdravReformReform’s mainstream activities is aimed at improving the methods of health’s mainstream activities is aimed at improving the methods of health care financing. These activities cover a broad variety of issues, including methods ofcare financing. These activities cover a broad variety of issues, including methods of allocating resources to the health care sector as an industry, and optimization of resourceallocating resources to the health care sector as an industry, and optimization of resource allocation among health care facilities and practices. Both aspects of the problem requireallocation among health care facilities and practices. Both aspects of the problem require an accurate perception of actual costs, since costs reflect the utilization of resources byan accurate perception of actual costs, since costs reflect the utilization of resources by (1) type of care, (2) line of service provided to specific population groups, (3) type of(1) type of care, (2) line of service provided to specific population groups, (3) type of provider, and (4) territory. All listed modules of the health sector budget consist ofprovider, and (4) territory. All listed modules of the health sector budget consist of primary elements, such as costs of specific health care facilities and medical practices.primary elements, such as costs of specific health care facilities and medical practices.

Cost accounting and analysis are extremely relevant on both the macro- andCost accounting and analysis are extremely relevant on both the macro- and microeconomic level. The logic of health care reform as an economic reform implies thatmicroeconomic level. The logic of health care reform as an economic reform implies that the economic autonomy of health care facilities and practices will be enhanced. In thethe economic autonomy of health care facilities and practices will be enhanced. In the hands of financial managers, cost accounting and analysis constitute a compass thathands of financial managers, cost accounting and analysis constitute a compass that guides them in evaluating the financial status of facilities and helps them navigateguides them in evaluating the financial status of facilities and helps them navigate through the stormy sea of economic incentives and risks, getting at the decisions thatthrough the stormy sea of economic incentives and risks, getting at the decisions that make it possible to escape running up on the rocks of bankruptcy and pass between themake it possible to escape running up on the rocks of bankruptcy and pass between the Scylla of cost-efficiency and the Charybdis of equitable provision of care to all who needScylla of cost-efficiency and the Charybdis of equitable provision of care to all who need it, regardless of whether there is funding to back up a particular patient.it, regardless of whether there is funding to back up a particular patient.

The December 1994 discussions the author had in Tomsk with the directors of the OblastThe December 1994 discussions the author had in Tomsk with the directors of the Oblast Health Administration, the Territorial Mandatory Health Insurance Fund, and leadingHealth Administration, the Territorial Mandatory Health Insurance Fund, and leading hospitals of the oblast revealed concurrence on the following issues:hospitals of the oblast revealed concurrence on the following issues:

·· Cost accounting and analysis must be made top priorities, regardless of which formCost accounting and analysis must be made top priorities, regardless of which form the reform takes.the reform takes.

·· Management accounting methodologies should be implemented without waiting untilManagement accounting methodologies should be implemented without waiting until financial and economic relationships among the stakeholders in the system takefinancial and economic relationships among the stakeholders in the system take

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their final shape and the legal and economic status of health care providers istheir final shape and the legal and economic status of health care providers is defined.defined.

·· Converting health care facilities to a more modern and uniform methodology of costConverting health care facilities to a more modern and uniform methodology of cost accounting and analysis will also help the purchasers of care, physicians, andaccounting and analysis will also help the purchasers of care, physicians, and consumers to realize their economic opportunities, rights, and interests in aconsumers to realize their economic opportunities, rights, and interests in a volatile setting of Russian health reform.volatile setting of Russian health reform.

This methodology represents the first stageThis methodology represents the first stage in overhauling the system of costin overhauling the system of cost reimbursement for providing health care in Tomsk Oblast. It can be used to generate andreimbursement for providing health care in Tomsk Oblast. It can be used to generate and analyze data on specialty-wide average costs (by clinical department). In the secondanalyze data on specialty-wide average costs (by clinical department). In the second stage of system reform, which began in February 1995, clinically and cost coherent casestage of system reform, which began in February 1995, clinically and cost coherent case groups were to be formed, and case-mix cost accounting and analysis were to begroups were to be formed, and case-mix cost accounting and analysis were to be developed. Also, the methodologies of procedure-level costing were to be tested. In thedeveloped. Also, the methodologies of procedure-level costing were to be tested. In the third stage, partial and comprehensive capitation rates will be calculated based onthird stage, partial and comprehensive capitation rates will be calculated based on revealed utilization and cost intensity patterns. Finally, mandatory health insurancerevealed utilization and cost intensity patterns. Finally, mandatory health insurance premium rates will be established.premium rates will be established.

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SECTIONSECTION II

STATUS OF THE HOSPITAL: A GLIMPSE INTO THE FUTURESTATUS OF THE HOSPITAL: A GLIMPSE INTO THE FUTURE

This methodology generates information needed for making management decisions. TheThis methodology generates information needed for making management decisions. The returns from applying the methodology—in particular, its analysis module—will bereturns from applying the methodology—in particular, its analysis module—will be maximized only if and after the hospital evolves into an economically autonomous entity.maximized only if and after the hospital evolves into an economically autonomous entity. The description below of the legal and business status of the hospital would ensure notThe description below of the legal and business status of the hospital would ensure not just cost accounting and analysis but also the implementation of management decisionsjust cost accounting and analysis but also the implementation of management decisions resulting from the analysis.resulting from the analysis.

Looking into the future, let us assume that the hospital—OTH in this case—has evolvedLooking into the future, let us assume that the hospital—OTH in this case—has evolved into a nonprofit entity. While remaining in public ownership, the hospital becomes a self-into a nonprofit entity. While remaining in public ownership, the hospital becomes a self-governing institution, enjoying operational autonomy extended to all the issues of bothgoverning institution, enjoying operational autonomy extended to all the issues of both long-range planning and current management. Health authorities regulate the hospital, yetlong-range planning and current management. Health authorities regulate the hospital, yet no longer claim administrative control over it in its long-established forms.no longer claim administrative control over it in its long-established forms.

1.11.1 Mission of the HospitalMission of the Hospital

The activity of OTH is directed toward accomplishment of its mission. The mission is aThe activity of OTH is directed toward accomplishment of its mission. The mission is a socially oriented programmatic goal of hospital activity. socially oriented programmatic goal of hospital activity.

Below is the hospital mission as proposed for OTH.Below is the hospital mission as proposed for OTH.

The mission of OTH is to meet the population’s need for highly complex planned andThe mission of OTH is to meet the population’s need for highly complex planned and emergency health care in a wide selection of clinical specialties and on a level of qualityemergency health care in a wide selection of clinical specialties and on a level of quality that confirms the flagship status of OTH in the territorial health system. Having access tothat confirms the flagship status of OTH in the territorial health system. Having access to the newest technology and highly qualified personnel, OTH strives to strengthen itself inthe newest technology and highly qualified personnel, OTH strives to strengthen itself in its capacity as the teaching and clinical base for medical training, and in conductingits capacity as the teaching and clinical base for medical training, and in conducting biomedical research. biomedical research.

OTH strives to increase its economic viability through the use of modern methods ofOTH strives to increase its economic viability through the use of modern methods of planning, management, and administration. The goal of the hospital for the next fewplanning, management, and administration. The goal of the hospital for the next few years is to integrate into its practice methods of financing and health care organizationyears is to integrate into its practice methods of financing and health care organization offered by health reform, and assume full financial risks while benefiting from theoffered by health reform, and assume full financial risks while benefiting from the economic incentives created in the context of regulated competition on the health careeconomic incentives created in the context of regulated competition on the health care market. To maintain its traditionally prominent role in the social development of Tomskmarket. To maintain its traditionally prominent role in the social development of Tomsk Oblast, OTH intends to enhance its clinical potential with economic efficiency. TheOblast, OTH intends to enhance its clinical potential with economic efficiency. The hospital will transform itself from a passive applicant for funding to a nonprofit entityhospital will transform itself from a passive applicant for funding to a nonprofit entity that is capable of earning revenue, and is prepared to do so to the benefit of its patients.that is capable of earning revenue, and is prepared to do so to the benefit of its patients.

1.21.2 Need for Developing Goals and ObjectivesNeed for Developing Goals and Objectives

Having formulated its mission (to provide health care and medical training, conductHaving formulated its mission (to provide health care and medical training, conduct research, and achieve economic sustainability), OTH must develop more concreteresearch, and achieve economic sustainability), OTH must develop more concrete

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operating goals and objectives. These may be linked to (1) the facility profile, (2)operating goals and objectives. These may be linked to (1) the facility profile, (2) peculiarities of the local socioeconomic and epidemiological environment, and (3) thepeculiarities of the local socioeconomic and epidemiological environment, and (3) the level of health care provided by other facilities in the local provider network (the latterlevel of health care provided by other facilities in the local provider network (the latter largely determines the niches in the local health care market that OTH will seek to fill).largely determines the niches in the local health care market that OTH will seek to fill).

1.31.3 Economic Autonomy Rights Economic Autonomy Rights

The socially responsible mode of behavior OTH has set in its mission should be backedThe socially responsible mode of behavior OTH has set in its mission should be backed up with the following rights of economic autonomy.up with the following rights of economic autonomy.

1.3.11.3.1 Reimbursement per Patient DischargeReimbursement per Patient Discharge

The hospital will convert to cost reimbursement per patient discharge, usingThe hospital will convert to cost reimbursement per patient discharge, using reimbursement rates defined by clinical-cost groups (CCGs). CCGs denote the limitreimbursement rates defined by clinical-cost groups (CCGs). CCGs denote the limit price based on resource intensity, length of stay, and prior operating costs, includingprice based on resource intensity, length of stay, and prior operating costs, including depreciation. Cost overruns vis-à-vis the CCG rates are not subject to reimbursement, butdepreciation. Cost overruns vis-à-vis the CCG rates are not subject to reimbursement, but neither are savings taken away, with the exception of specifically negotiated cases. Theneither are savings taken away, with the exception of specifically negotiated cases. The reimbursement rates from on-budget funding and within the framework of the Basereimbursement rates from on-budget funding and within the framework of the Base Program of the Mandatory Health Insurance (MHI) Fund are subject to annualProgram of the Mandatory Health Insurance (MHI) Fund are subject to annual negotiations between the hospital and the major purchasers of health care.negotiations between the hospital and the major purchasers of health care.

1.3.21.3.2 Net RevenueNet Revenue

The hospital is authorized to generate and retain net revenue—excess of revenue overThe hospital is authorized to generate and retain net revenue—excess of revenue over costs. Net revenue should be generated without affecting quality and should comply withcosts. Net revenue should be generated without affecting quality and should comply with the established mechanism of health care cost reimbursement. Moreover, it should bethe established mechanism of health care cost reimbursement. Moreover, it should be entirely reinvested in the mainstream of hospital clinical activity. The hospital mayentirely reinvested in the mainstream of hospital clinical activity. The hospital may expect to be exempt from taxes on net revenue generated from clinical activity.expect to be exempt from taxes on net revenue generated from clinical activity.

1.3.31.3.3 Loss-generating ActivityLoss-generating Activity

The hospital must not refuse to provide services that are socially important and inThe hospital must not refuse to provide services that are socially important and in demand, even if such services result in losses. In its business plan the hospital has thedemand, even if such services result in losses. In its business plan the hospital has the right to minimize losses by means of (1) reducing unit costs of loss-generating servicesright to minimize losses by means of (1) reducing unit costs of loss-generating services without affecting quality, and (2) developing and/or expanding profitable services so thatwithout affecting quality, and (2) developing and/or expanding profitable services so that profits can offset and exceed losses. Over the longer term, the hospital is entitled to (1)profits can offset and exceed losses. Over the longer term, the hospital is entitled to (1) insist that socially relevant yet loss-generating services are included in the MHI baseinsist that socially relevant yet loss-generating services are included in the MHI base program (basic benefit package); (2) seek special-purpose programs to be set up as part ofprogram (basic benefit package); (2) seek special-purpose programs to be set up as part of the territorial health budget to cover those services; and (3) compete for grants (special-the territorial health budget to cover those services; and (3) compete for grants (special-purpose, nonrepayable subsidies) from charitable foundations and other prospectivepurpose, nonrepayable subsidies) from charitable foundations and other prospective sponsors.sponsors.

1.3.41.3.4 The Right of ReorganizationThe Right of Reorganization

The hospital is vested with broad rights in reorganizing its internal structure both in theThe hospital is vested with broad rights in reorganizing its internal structure both in the area of clinical and administrative activities. Reorganization implies that hospitalarea of clinical and administrative activities. Reorganization implies that hospital

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operation may be overhauled in one of the following forms: (1) downsizing and/oroperation may be overhauled in one of the following forms: (1) downsizing and/or restructuring bed capacity and patient flow across clinical departments; (2)restructuring bed capacity and patient flow across clinical departments; (2) divesting/creating, merging/splitting structural departments and services; and (3) hiringdivesting/creating, merging/splitting structural departments and services; and (3) hiring and laying off personnel and liquidating assets.and laying off personnel and liquidating assets.

1.3.51.3.5 Nonclinical ActivityNonclinical Activity

The hospital is entitled to develop revenue-generating activities in the nonclinical areasThe hospital is entitled to develop revenue-generating activities in the nonclinical areas employing hospital resources as long as it does not harm clinical outcomes; for example,employing hospital resources as long as it does not harm clinical outcomes; for example, the hospital could choose to rent out excess space and sell personal and professionalthe hospital could choose to rent out excess space and sell personal and professional services (laundry, kitchen, transportation, data processing, and so on) to the generalservices (laundry, kitchen, transportation, data processing, and so on) to the general population and organizations.population and organizations.

1.3.6 1.3.6 Investment ActivityInvestment Activity

The hospital is authorized to invest in the financial assets markets in order to generateThe hospital is authorized to invest in the financial assets markets in order to generate additional income and hedge its financial resources from inflation. Financial instrumentsadditional income and hedge its financial resources from inflation. Financial instruments authorized for investments must be reliable and liquid, and mainly be limited to federalauthorized for investments must be reliable and liquid, and mainly be limited to federal and local government bonds. OTH, along with other social service sector institutions, hasand local government bonds. OTH, along with other social service sector institutions, has the right to expect preferential treatment as purchaser of government bonds andthe right to expect preferential treatment as purchaser of government bonds and exemption from tax on investment incomes.exemption from tax on investment incomes.

1.3.71.3.7 CooperationCooperation

OTH is entitled to contract health care services out to and otherwise develop cooperationOTH is entitled to contract health care services out to and otherwise develop cooperation with health care facilities and practices. Thus, the hospital has the right to contract healthwith health care facilities and practices. Thus, the hospital has the right to contract health care services out to other providers in extension and support of its own services in ordercare services out to other providers in extension and support of its own services in order to reduce patient lengths of stay. This would include such services as preadmissionto reduce patient lengths of stay. This would include such services as preadmission diagnostics within 48 hours before hospitalization, complex outpatient surgery, post-diagnostics within 48 hours before hospitalization, complex outpatient surgery, post-hospital nursing care, and outreach home care in cases of reduced length of stay. In thehospital nursing care, and outreach home care in cases of reduced length of stay. In the above cases, OTH has the right to be reimbursed by purchaser of care at full CCG rate asabove cases, OTH has the right to be reimbursed by purchaser of care at full CCG rate as if all the listed services were provided inpatient. OTH would then share its revenue fromif all the listed services were provided inpatient. OTH would then share its revenue from CCG-based reimbursement with its subcontractors, such as outpatient diagnostic centers,CCG-based reimbursement with its subcontractors, such as outpatient diagnostic centers, general practitioners, and specialists, who contributed to shifting part of the hospital caregeneral practitioners, and specialists, who contributed to shifting part of the hospital care outpatient load. In order to assure and maintain quality of care along all the stages of careoutpatient load. In order to assure and maintain quality of care along all the stages of care provision, the hospital will invest in the operation and development of its subcontractors,provision, the hospital will invest in the operation and development of its subcontractors, drawing to that end upon its own clinical resources and organizational anddrawing to that end upon its own clinical resources and organizational and methodological expertise. methodological expertise.

1.3.81.3.8 Merger with Other Health Care ProvidersMerger with Other Health Care Providers

When mutually beneficial, OTH and its subcontractors may upgrade their relationshipsWhen mutually beneficial, OTH and its subcontractors may upgrade their relationships from from ad hocad hoc contracting to an ongoing partnership based on comprehensive integration contracting to an ongoing partnership based on comprehensive integration up to the merger. The latter would result in the formation of an integrated deliveryup to the merger. The latter would result in the formation of an integrated delivery system. Such a system could differ in its technological configuration depending on whichsystem. Such a system could differ in its technological configuration depending on which types of health care providers integrate with OTH. The main axis of the partnershiptypes of health care providers integrate with OTH. The main axis of the partnership

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would be drawn along one or both of two lines: (1) between OTH and the outpatientwould be drawn along one or both of two lines: (1) between OTH and the outpatient provider network, prospectively composed of solo and group physicians’ practices,provider network, prospectively composed of solo and group physicians’ practices, multispecialty and specialized consultation and diagnostic centers, post-hospital nursingmultispecialty and specialized consultation and diagnostic centers, post-hospital nursing care facilities, and others; and (2) between OTH and rural health care providers. Thecare facilities, and others; and (2) between OTH and rural health care providers. The scope, degree, and legal terms of the partnerships would be selected by the partners andscope, degree, and legal terms of the partnerships would be selected by the partners and regulated by the Oblast Health Administration and Territorial MHI Fund to optimize theregulated by the Oblast Health Administration and Territorial MHI Fund to optimize the trade-off between effectiveness and efficiency (that is, to ensure equitable provision oftrade-off between effectiveness and efficiency (that is, to ensure equitable provision of accessible and quality care at the lowest cost to the territorial health care system).accessible and quality care at the lowest cost to the territorial health care system).

1.3.91.3.9 The Multiplicity of Financing SourcesThe Multiplicity of Financing Sources

The hospital has the right to market its health care services directly to employers andThe hospital has the right to market its health care services directly to employers and individual consumers, entering contractual relationships with both and accepting userindividual consumers, entering contractual relationships with both and accepting user charges. The provision of paid services should not affect the mainstream of clinicalcharges. The provision of paid services should not affect the mainstream of clinical activity as contracted under the MHI base program. Thus, the hospital is not allowed toactivity as contracted under the MHI base program. Thus, the hospital is not allowed to reduce MHI-funded clinical volumes for the purpose of transferring resources to paidreduce MHI-funded clinical volumes for the purpose of transferring resources to paid service provision. The services that make up part of the MHI basic benefit package mayservice provision. The services that make up part of the MHI basic benefit package may be marketed as paid services over and beyond the volumes negotiated with the Territorialbe marketed as paid services over and beyond the volumes negotiated with the Territorial MHI Fund and at rates not exceeding the level of reimbursement in the MHI program.MHI Fund and at rates not exceeding the level of reimbursement in the MHI program. Services not included in the MHI program may be sold at the market price. The profitServices not included in the MHI program may be sold at the market price. The profit margin from providing such services must be reinvested in the hospital’s main activity.margin from providing such services must be reinvested in the hospital’s main activity.

1.3.101.3.10 The Multiplicity of Reimbursement MethodsThe Multiplicity of Reimbursement Methods

OTH is prepared to work under different cost reimbursement schemes. In particular, itOTH is prepared to work under different cost reimbursement schemes. In particular, it offers two substantially different types of arrangements: (1) retrospective reimbursementoffers two substantially different types of arrangements: (1) retrospective reimbursement from the Territorial MHI Fund, Oblast Health Administration, fundholding generalfrom the Territorial MHI Fund, Oblast Health Administration, fundholding general practices, and/or other purchasers of care per patient discharge, episode of care, andpractices, and/or other purchasers of care per patient discharge, episode of care, and service according to the standard or negotiated fee/rate schedule; and (2) prospectiveservice according to the standard or negotiated fee/rate schedule; and (2) prospective payment based on an annual comprehensive (covering all types of services) capitated rate.payment based on an annual comprehensive (covering all types of services) capitated rate. In the latter case the price gets close to the health insurance premium. Such a rate is basedIn the latter case the price gets close to the health insurance premium. Such a rate is based on, along with historic costs of care, morbidity and referral rates and resource utilizationon, along with historic costs of care, morbidity and referral rates and resource utilization patterns. It will be applied largely as an integrated reimbursement rate; that is, one thatpatterns. It will be applied largely as an integrated reimbursement rate; that is, one that covers the prospective costs of both inpatient and outpatient care. Correspondingly, it willcovers the prospective costs of both inpatient and outpatient care. Correspondingly, it will apply to comprehensively enrolled populations, (individuals for whom the hospitalapply to comprehensively enrolled populations, (individuals for whom the hospital undertakes provision of all types of health care).undertakes provision of all types of health care).

1.3.111.3.11 Combining the Functions of Insurance and Care ProvisionCombining the Functions of Insurance and Care Provision

Under the first arrangement of the two listed above, OTH performs as care providerUnder the first arrangement of the two listed above, OTH performs as care provider only; the external purchaser of care reimburses hospital costs of provided care. In theonly; the external purchaser of care reimburses hospital costs of provided care. In the second approach, the hospital is prepared to become both purchaser and provider of care.second approach, the hospital is prepared to become both purchaser and provider of care. OTH can take over insurance premium collection and the provision of care to itsOTH can take over insurance premium collection and the provision of care to its comprehensively enrolled customers both in-house and by contracting care out to itscomprehensively enrolled customers both in-house and by contracting care out to its partner providers. The mixed insurance carrier/care providerpartner providers. The mixed insurance carrier/care provider status of OTH implies thatstatus of OTH implies that the hospital will enhance the in-house resources of outpatient care, as well as refer itsthe hospital will enhance the in-house resources of outpatient care, as well as refer its

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enrollees to specialized outpatient care facilities and practices with which the hospitalenrollees to specialized outpatient care facilities and practices with which the hospital establishes contractual relationships. With respect to the latter, OTH will perform asestablishes contractual relationships. With respect to the latter, OTH will perform as purchaser of care.purchaser of care.

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SECTION IISECTION II

GOALS, OBJECTIVES, AND CAPABILITIES GOALS, OBJECTIVES, AND CAPABILITIES OF OF MANAGEMENT MANAGEMENT ACCOUNTING ACCOUNTING

Improving the methods of health care cost accounting and analysis matches the interestsImproving the methods of health care cost accounting and analysis matches the interests of both providers and purchasers of care.of both providers and purchasers of care.

2.1 2.1 Goals and Objectives from the Provider’s PerspectiveGoals and Objectives from the Provider’s Perspective

2.1.12.1.1 GoalsGoals

The health care provider’s goal is to strengthen the financial performance of health careThe health care provider’s goal is to strengthen the financial performance of health care facilities in an environment of new economic opportunities on the one hand and increasedfacilities in an environment of new economic opportunities on the one hand and increased business risks on the other. Both the opportunities and the risks stem from the followingbusiness risks on the other. Both the opportunities and the risks stem from the following phenomena and circumstances:phenomena and circumstances:

·· Resource constraints: Economic decline hampers the ability of budgetResource constraints: Economic decline hampers the ability of budget administrators, employers, and consumers to finance medical care. Health careadministrators, employers, and consumers to finance medical care. Health care providers are threatened with a reduction in real financing.providers are threatened with a reduction in real financing.

·· Diversification of funding sources: The possibility exists of obtaining funds andDiversification of funding sources: The possibility exists of obtaining funds and resources through multiple channels such as central and local health authorities,resources through multiple channels such as central and local health authorities, federal and Territorial MHI Funds, private insurance companies, businesses,federal and Territorial MHI Funds, private insurance companies, businesses, consumers, and domestic and foreign donors.consumers, and domestic and foreign donors.

·· Diversification of cost recovery methods: This involves a gradual departure fromDiversification of cost recovery methods: This involves a gradual departure from operating financing geared to prior cost-based annual global budgeting and theoperating financing geared to prior cost-based annual global budgeting and the introduction of performance-based methods of provider payment.introduction of performance-based methods of provider payment.

·· Emergence of competition: Development of contractual relationships withEmergence of competition: Development of contractual relationships with purchasers of care puts providers of similar types of care at competition with onepurchasers of care puts providers of similar types of care at competition with one another.another.

·· Organizational and administrative autonomy: Health care providers interested inOrganizational and administrative autonomy: Health care providers interested in operating autonomy assume full responsibility for the financial outcomes ofoperating autonomy assume full responsibility for the financial outcomes of their activities.their activities.

2.1.22.1.2 Objectives and CapabilitiesObjectives and Capabilities

2.1.2.12.1.2.1 Optimizing Business PlansOptimizing Business Plans

An integrated costing system (ICS) would help optimize a hospital’s business plan inAn integrated costing system (ICS) would help optimize a hospital’s business plan in order to ensure that its volume and composition of clinical activity match the demand fororder to ensure that its volume and composition of clinical activity match the demand for health care. A detailed cost accounting and analysis would provide insights into thehealth care. A detailed cost accounting and analysis would provide insights into the impact that alternative scenarios of internal restructuring would have on a hospital’simpact that alternative scenarios of internal restructuring would have on a hospital’s

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financial performance. In particular, an ICS makes it possible to project the costfinancial performance. In particular, an ICS makes it possible to project the cost implications of shifting patient flows along the following lines:implications of shifting patient flows along the following lines:

·· across clinical specialties,across clinical specialties,·· within each specialty by severity categories and case-mix groups,within each specialty by severity categories and case-mix groups,·· across lines of services (by epidemiologically relevant diseases, classes ofacross lines of services (by epidemiologically relevant diseases, classes of

diseases, and age/sex population groups), anddiseases, and age/sex population groups), and·· by individual physicians and physician/nurse teams.by individual physicians and physician/nurse teams.

2.1.2.22.1.2.2 Streamlining the Organizational StructureStreamlining the Organizational Structure

The clinical volume and its composition as dictated by demand may be achieved underThe clinical volume and its composition as dictated by demand may be achieved under alternative approaches to a hospital’s internal organization. Under the proposedalternative approaches to a hospital’s internal organization. Under the proposed methodology, it is possible to calculate the full costs of maintaining each organizationalmethodology, it is possible to calculate the full costs of maintaining each organizational unit and hospital function. This information is relevant for evaluating the feasibility ofunit and hospital function. This information is relevant for evaluating the feasibility of alternative ways of hospital restructuring, and for revealing the alternative least burdenedalternative ways of hospital restructuring, and for revealing the alternative least burdened with general hospital and departmental overhead. The best option would implywith general hospital and departmental overhead. The best option would imply streamlining a hospital’s internal organization by means of merging or splittingstreamlining a hospital’s internal organization by means of merging or splitting departments and services, eliminating duplication of functions, and discontinuingdepartments and services, eliminating duplication of functions, and discontinuing provision of services that may be more efficient if contracted out. The highest potentialprovision of services that may be more efficient if contracted out. The highest potential for improving a hospital’s internal organization would usually originate in more efficientfor improving a hospital’s internal organization would usually originate in more efficient organization of nonmedical departments and services. It is important, therefore, that theorganization of nonmedical departments and services. It is important, therefore, that the method under consideration generates precise information about the volume andmethod under consideration generates precise information about the volume and composition of nonmedical costs.composition of nonmedical costs.

2.1.2.32.1.2.3 Optimizing OccupancyOptimizing Occupancy

Systematic analysis of unit costs will shed light over time on unit cost behavior inSystematic analysis of unit costs will shed light over time on unit cost behavior in response to changes in aggregate clinical volume, thus allowing the latter to be broughtresponse to changes in aggregate clinical volume, thus allowing the latter to be brought closer to its optimal level. Efficiency in this context must not affect equity, however. Thecloser to its optimal level. Efficiency in this context must not affect equity, however. The hospital may not arbitrarily reduce the volume of clinical activity at the expense ofhospital may not arbitrarily reduce the volume of clinical activity at the expense of access to care. At the same time, there is a clear economic benefit of getting rid ofaccess to care. At the same time, there is a clear economic benefit of getting rid of persistently unutilized resources, as well as resources that become redundant as a result ofpersistently unutilized resources, as well as resources that become redundant as a result of changes in the hospital’s business plan. Cost accounting and analysis make it possible tochanges in the hospital’s business plan. Cost accounting and analysis make it possible to project and measure the economic losses that result from keeping excessive fixed assets,project and measure the economic losses that result from keeping excessive fixed assets, as well as the economic gains from liquidating or renting them out.as well as the economic gains from liquidating or renting them out.

2.1.2.42.1.2.4 Improving a Hospital’s Bargaining Position in Improving a Hospital’s Bargaining Position in

Negotiations with a Purchaser of CareNegotiations with a Purchaser of Care

Traditionally, applications for funding have had to comply with the unit norms ofTraditionally, applications for funding have had to comply with the unit norms of financing as mandated by chapter of the operating budget. Under the transition tofinancing as mandated by chapter of the operating budget. Under the transition to performance-based reimbursement (that is, per patient discharge) and growingperformance-based reimbursement (that is, per patient discharge) and growing competition in the health care market, however, the standards for chapter-by-chaptercompetition in the health care market, however, the standards for chapter-by-chapter financing are doomed to die out. With them will disappear the only system that hasfinancing are doomed to die out. With them will disappear the only system that has

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existed for assessing the demand for resources. As a result, it is essential to reassess theexisted for assessing the demand for resources. As a result, it is essential to reassess the adequacy of both prior and currently needed levels of financing, this time from aadequacy of both prior and currently needed levels of financing, this time from a perspective of outcome rather than traditional process-based reimbursement. The startingperspective of outcome rather than traditional process-based reimbursement. The starting point should be actual costs. Calculating and projecting costs in compliance with thepoint should be actual costs. Calculating and projecting costs in compliance with the proposed methodology would raise in the eyes of the payer the justification andproposed methodology would raise in the eyes of the payer the justification and legitimacy of the hospital’s financial request. Therefore, other things being equal, thelegitimacy of the hospital’s financial request. Therefore, other things being equal, the hospital may count on a favorable response to its application.hospital may count on a favorable response to its application.

2.1.2.52.1.2.5 Improving Pricing TechniquesImproving Pricing Techniques

Knowing the exact costs of a patient, bed-day, hospital bed, specific service, andKnowing the exact costs of a patient, bed-day, hospital bed, specific service, and procedure, the hospital may assess the actual costs in terms of savings or overspendingprocedure, the hospital may assess the actual costs in terms of savings or overspending against established rates of reimbursement by clinical specialty, diagnostic group, and soagainst established rates of reimbursement by clinical specialty, diagnostic group, and so on. If efficiency gains result in savings, the hospital may expand its market share byon. If efficiency gains result in savings, the hospital may expand its market share by offering services to alternative payers (employers and consumers) at discounted costs.offering services to alternative payers (employers and consumers) at discounted costs. The additional volume of activity would generate additional revenue and, therefore,The additional volume of activity would generate additional revenue and, therefore, would benefit the hospital. In order not to lose on discounts, however, it is essential towould benefit the hospital. In order not to lose on discounts, however, it is essential to use the proposed methodology for cost accounting and analysis by source of revenue anduse the proposed methodology for cost accounting and analysis by source of revenue and method of payment.method of payment.

2.1.2.62.1.2.6 Internal Distribution of RevenueInternal Distribution of Revenue

An intensification of hospital activity that increases patient flow while keeping resourcesAn intensification of hospital activity that increases patient flow while keeping resources unchanged results in additional revenues. Part of these can be made available forunchanged results in additional revenues. Part of these can be made available for increases in wages and salaries. Two pots of additional money may be considered: (1)increases in wages and salaries. Two pots of additional money may be considered: (1) paycheck additions from the reimbursement for additional patients, and (2) savings onpaycheck additions from the reimbursement for additional patients, and (2) savings on fixed costs. Fixed costs by definition do not increase with growth in clinical volume.fixed costs. Fixed costs by definition do not increase with growth in clinical volume. Therefore, fixed costs per patient treated above and beyond the negotiated plannedTherefore, fixed costs per patient treated above and beyond the negotiated planned number are recovered (as a component part of price), but not incurred. The proposednumber are recovered (as a component part of price), but not incurred. The proposed methodology shows how a given clinical department owes much of the overall fixedmethodology shows how a given clinical department owes much of the overall fixed costs savings it achieves to each of the nonclinical departments and services. costs savings it achieves to each of the nonclinical departments and services.

2.22.2 Goals and Objectives from the Purchaser of Care’s PerspectiveGoals and Objectives from the Purchaser of Care’s Perspective

2.2.12.2.1 GoalsGoals

The final goal in using cost accounting and analysis in operating health care facilities is toThe final goal in using cost accounting and analysis in operating health care facilities is to create a health care market that is backed by regulated competition mechanisms and thatcreate a health care market that is backed by regulated competition mechanisms and that ensures the increased supply and quality of, and equitable access to, care in the territorialensures the increased supply and quality of, and equitable access to, care in the territorial health system.health system.

As the most important element of the marketplace, competition puts efficient health careAs the most important element of the marketplace, competition puts efficient health care facilities and practices at an advantage. An efficient facility either spends less to providefacilities and practices at an advantage. An efficient facility either spends less to provide comparable care than a less efficient facility, or achieves higher quality for the samecomparable care than a less efficient facility, or achieves higher quality for the same costs. In both cases, cost performance is inherent in evaluating the competitiveness of acosts. In both cases, cost performance is inherent in evaluating the competitiveness of a provider.provider.

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Comparative evaluation of providers’ efficiency largely rests with the purchaser of care.Comparative evaluation of providers’ efficiency largely rests with the purchaser of care. The Territorial MHI Fund will rely on health insurance funds to purchase care under theThe Territorial MHI Fund will rely on health insurance funds to purchase care under the MHI program, the Oblast Health Administration will use local budget resources to carryMHI program, the Oblast Health Administration will use local budget resources to carry out public health programs of social priority, employers will allocate funds from theirout public health programs of social priority, employers will allocate funds from their profit margin to provide additional insurance coverage to their workers or to buy servicesprofit margin to provide additional insurance coverage to their workers or to buy services directly from providers, and consumers will use their personal income to obtain services.directly from providers, and consumers will use their personal income to obtain services. In all cases, the purchaser of care will be shopping for care at the most efficient providerIn all cases, the purchaser of care will be shopping for care at the most efficient provider facilities and practices, looking for the best trade-off between quality and price. facilities and practices, looking for the best trade-off between quality and price.

Any purchaser of care will strive for exercising an informed choice—that is, selectionAny purchaser of care will strive for exercising an informed choice—that is, selection based on comparative evaluation of the cost and quality of health care from all availablebased on comparative evaluation of the cost and quality of health care from all available sources. The objective of health authorities is to provide for themselves, as well as forsources. The objective of health authorities is to provide for themselves, as well as for the purchasers and consumers of care, the appropriate information.the purchasers and consumers of care, the appropriate information.

2.2.22.2.2 Objectives and CapabilitiesObjectives and Capabilities

The financing party, when contracting health services and allocating resources, comparesThe financing party, when contracting health services and allocating resources, compares health care facilities and practices for their cost level and structure. It is therefore in thehealth care facilities and practices for their cost level and structure. It is therefore in the interests of the purchaser of care to disseminate the proposed methodology across theinterests of the purchaser of care to disseminate the proposed methodology across the entire provider network, thus making it standard. All health care facilities and practicesentire provider network, thus making it standard. All health care facilities and practices will then calculate their costs by the same method, thereby ensuring a consistent base forwill then calculate their costs by the same method, thereby ensuring a consistent base for comparison. In our view, conversion to this methodology should be considered as one ofcomparison. In our view, conversion to this methodology should be considered as one of the prerequisites for health care facility accreditation under the MHI program of carethe prerequisites for health care facility accreditation under the MHI program of care provision.provision.

2.2.2.12.2.2.1 Contracting Services out to the Most Efficient Health Contracting Services out to the Most Efficient Health Care ProvidersCare Providers

With respect to many routine types of inpatient care, a purchaser ideally would have aWith respect to many routine types of inpatient care, a purchaser ideally would have a variety of hospitals to which to refer its enrollees. The proposed methodology facilitatesvariety of hospitals to which to refer its enrollees. The proposed methodology facilitates comparisons of the cost level and composition to determine (1) what types of costs makecomparisons of the cost level and composition to determine (1) what types of costs make care cheaper in some hospitals than others, and (2) to what extent the cost savings are notcare cheaper in some hospitals than others, and (2) to what extent the cost savings are not detrimental to quality. Excessive burdening of the facility with general hospital overheaddetrimental to quality. Excessive burdening of the facility with general hospital overhead resulting in overspending cannot be justified by the interests of quality. Such a hospitalresulting in overspending cannot be justified by the interests of quality. Such a hospital may be at a disadvantage in contractual relations with purchasers of care, with themay be at a disadvantage in contractual relations with purchasers of care, with the funding for particular case-groups flowing to competitors.funding for particular case-groups flowing to competitors.

2.2.2.22.2.2.2 Antitrust RegulationsAntitrust Regulations

Whenever the hospital is the only source of care in the local territory, there is a danger ofWhenever the hospital is the only source of care in the local territory, there is a danger of monopolistic behavior via (1) inefficient use of the hospital’s resources in the convictionmonopolistic behavior via (1) inefficient use of the hospital’s resources in the conviction that excessive costs can be recovered by raising prices; (2) attitudes that are unfriendly tothat excessive costs can be recovered by raising prices; (2) attitudes that are unfriendly to consumers; (3) price- and nonprice-dictated dealings with the financing party andconsumers; (3) price- and nonprice-dictated dealings with the financing party and regulatory bodies; and (4) the impeding of market entry by independent competitors.regulatory bodies; and (4) the impeding of market entry by independent competitors.

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The methodology’s capacity to compare the costs of a given facility over time should beThe methodology’s capacity to compare the costs of a given facility over time should be applied by the purchaser of care to monitor cost increases for types of care where there isapplied by the purchaser of care to monitor cost increases for types of care where there is no alternative provider. If such a tendency is revealed, the local market should open up tono alternative provider. If such a tendency is revealed, the local market should open up to competition. The possibilities are (1) downsizing monopolistic providers by splittingcompetition. The possibilities are (1) downsizing monopolistic providers by splitting them into several independent facilities or practices; (2) establishing a price cap onthem into several independent facilities or practices; (2) establishing a price cap on monopolistically provided services; (3) directly investing in outsiders (other potentialmonopolistically provided services; (3) directly investing in outsiders (other potential providers) to upgrade them to a level at which they can be licensed to provide services onproviders) to upgrade them to a level at which they can be licensed to provide services on a competitive basis; (4) indirectly supporting outsiders with tax subsidies and regulatorya competitive basis; (4) indirectly supporting outsiders with tax subsidies and regulatory preferences that would relieve the burden of operating costs and enable them to savepreferences that would relieve the burden of operating costs and enable them to save some additional funds to invest in their own development; and (5) expanding thesome additional funds to invest in their own development; and (5) expanding the boundaries of the local market by investing in medical transportation, thereby increasingboundaries of the local market by investing in medical transportation, thereby increasing the willingness of both health personnel and patients to travel greater distances to obtainthe willingness of both health personnel and patients to travel greater distances to obtain care.care.

2.2.2.32.2.2.3 Downsizing the NetworkDownsizing the Network

In comparing costs across specific hospitals, the health authorities can always identify theIn comparing costs across specific hospitals, the health authorities can always identify the least efficient facilities, which are the first targets in downsizing the provider network. Ifleast efficient facilities, which are the first targets in downsizing the provider network. If hospital closure does not imply a reduction in admission rates, shifting the patient flowhospital closure does not imply a reduction in admission rates, shifting the patient flow becomes an issue. To this end, the proposed methodology makes it possible to (1) selectbecomes an issue. To this end, the proposed methodology makes it possible to (1) select the most efficient facilities able to absorb the surplus patient flow resulting from hospitalthe most efficient facilities able to absorb the surplus patient flow resulting from hospital closure; and (2) analyze the potential for efficiency gains that may result from increasedclosure; and (2) analyze the potential for efficiency gains that may result from increased occupancy of formerly underutilized hospitals due to patient inflow from the catchmentoccupancy of formerly underutilized hospitals due to patient inflow from the catchment area of the closed hospitals. area of the closed hospitals.

The first approach is designed to enhance the role of efficient hospitals; the second, toThe first approach is designed to enhance the role of efficient hospitals; the second, to increase the efficiency of currently inefficient hospitals. Clearly, both approaches areincrease the efficiency of currently inefficient hospitals. Clearly, both approaches are essentially the opposite sides of the same coin, and are directed toward increasing theessentially the opposite sides of the same coin, and are directed toward increasing the overall efficiency of the remaining hospital network.overall efficiency of the remaining hospital network.

2.2.2.42.2.2.4 Restructuring the NetworkRestructuring the Network

A reduction in the number of hospitals most likely would be accompanied by lowerA reduction in the number of hospitals most likely would be accompanied by lower admission rates due to shifting care to outpatient facilities such as polyclinics, outreachadmission rates due to shifting care to outpatient facilities such as polyclinics, outreach care centers, specialized nursing care facilities for reconvalescents and the chronically ill,care centers, specialized nursing care facilities for reconvalescents and the chronically ill, hospices, and so on.hospices, and so on.

The proposed methodology, if extended to outpatient care providers, would provide costThe proposed methodology, if extended to outpatient care providers, would provide cost comparisons of inpatient and outpatient care. To make such comparisons instrumental,comparisons of inpatient and outpatient care. To make such comparisons instrumental, costs would have to be disaggregated down to procedure and service level. This wouldcosts would have to be disaggregated down to procedure and service level. This would enable the purchaser of care to simulate the impact on costs of specific scenarios ofenable the purchaser of care to simulate the impact on costs of specific scenarios of shifting care to the outpatient sector. When costs for the same services as providedshifting care to the outpatient sector. When costs for the same services as provided inpatient versus outpatient are separated into specific component parts, it becomes clearinpatient versus outpatient are separated into specific component parts, it becomes clear exactly which components yield savings as services are moved outpatient.exactly which components yield savings as services are moved outpatient.

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SECTION IIISECTION III

COST ACCOUNTING METHODOLOGYCOST ACCOUNTING METHODOLOGY

This section will present a preparatory algorithm that precedes the calculation of costs, asThis section will present a preparatory algorithm that precedes the calculation of costs, as well as the algorithm of cost calculation proper. Each step in the algorithms will bewell as the algorithm of cost calculation proper. Each step in the algorithms will be illustrated in detail using examples from the Tomsk OTH.illustrated in detail using examples from the Tomsk OTH.

3.1 3.1 Step 1: Identification of Cost CentersStep 1: Identification of Cost Centers

Cost accounting and analysis in the methodology under discussion is arranged by costCost accounting and analysis in the methodology under discussion is arranged by cost centers.centers.

Cost centers are defined as functionally, technologically, and organizationallyCost centers are defined as functionally, technologically, and organizationally autonomous structural units of the hospital. Because of their threefold autonomy, costautonomous structural units of the hospital. Because of their threefold autonomy, cost centers become convenient objects for cost mapping, accounting, and planning. In othercenters become convenient objects for cost mapping, accounting, and planning. In other words, the cost flows match in a natural way the internal organization of the hospital aswords, the cost flows match in a natural way the internal organization of the hospital as structured by cost centers. The cost center would identify costs as its own and assumestructured by cost centers. The cost center would identify costs as its own and assume responsibility over specific segments of costs sooner than a functionally heterogeneousresponsibility over specific segments of costs sooner than a functionally heterogeneous unit would. Therefore, a concept of the organizational structure of the hospital as a set ofunit would. Therefore, a concept of the organizational structure of the hospital as a set of cost centers emphasizes the interrelationship between flows of functional responsibilities,cost centers emphasizes the interrelationship between flows of functional responsibilities, technologies, and costs. The function of hospital activity becomes the target for bothtechnologies, and costs. The function of hospital activity becomes the target for both administration and financing.administration and financing.

The staffing schedule of a Russian/NIS hospital would not usually allow one to equateThe staffing schedule of a Russian/NIS hospital would not usually allow one to equate the existing structural units with cost centers. Ways may be proposed for the transitionthe existing structural units with cost centers. Ways may be proposed for the transition from the internal organizational structure as stipulated by the existing staffing schedule tofrom the internal organizational structure as stipulated by the existing staffing schedule to the organizational structure of the cost centers.the organizational structure of the cost centers.

3.1.13.1.1 Splitting a Department into Several Cost CentersSplitting a Department into Several Cost Centers

Not infrequently, several functions are mixed up within one structural unit. ThisNot infrequently, several functions are mixed up within one structural unit. This primarily is the case with the administrative and ancillary departments and services.primarily is the case with the administrative and ancillary departments and services. Thus, the building and maintenance department and the housekeeping department mayThus, the building and maintenance department and the housekeeping department may employ a few hundred personnel, carrying out substantially different tasks. Analyzingemploy a few hundred personnel, carrying out substantially different tasks. Analyzing their performance efficiency at the structural unit level is impossible, since there is notheir performance efficiency at the structural unit level is impossible, since there is no common function. It is essential, therefore, to split such structural units into severalcommon function. It is essential, therefore, to split such structural units into several functionally homogeneous cost centers.functionally homogeneous cost centers.

3.1.23.1.2 Regrouping Existing DepartmentsRegrouping Existing Departments

Singling out a particular function from several units of the current organizationalSingling out a particular function from several units of the current organizational structure is essential when the corresponding function is dispersed. For example, the coststructure is essential when the corresponding function is dispersed. For example, the cost center kitchen emphasizes the function of feeding the patients and must consist ofcenter kitchen emphasizes the function of feeding the patients and must consist of elements of general hospital personnel such as physician dietitians and nurse dietitians, aselements of general hospital personnel such as physician dietitians and nurse dietitians, as well as the kitchen staff itself. The cost center general administration emphasizes thewell as the kitchen staff itself. The cost center general administration emphasizes the

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function of general hospital management and is made up of elements of thefunction of general hospital management and is made up of elements of the administrative and general hospital personnel. The cost center planning and financialadministrative and general hospital personnel. The cost center planning and financial department, its name self-explanatory as regards the department’s functions, is composeddepartment, its name self-explanatory as regards the department’s functions, is composed of economists from both the planning and accounting departments, and also from generalof economists from both the planning and accounting departments, and also from general hospital personnel (deputy medical director for economics and deputy medical directorhospital personnel (deputy medical director for economics and deputy medical director for marketing).for marketing).

3.1.33.1.3 Aggregating Several Departments into Cost CentersAggregating Several Departments into Cost Centers

Several technologically and/or functionally identical units may be aggregated into oneSeveral technologically and/or functionally identical units may be aggregated into one cost center. Thus, several autonomously operating outpatient physician’s offices cancost center. Thus, several autonomously operating outpatient physician’s offices can justifiably be considered as one cost center, such as the outpatient department. The bedsjustifiably be considered as one cost center, such as the outpatient department. The beds of the day clinic and hospital beds proper in the same clinical specialty may beof the day clinic and hospital beds proper in the same clinical specialty may be consolidated into one cost center.consolidated into one cost center.

3.1.43.1.4 Practical Approaches to Cost Center FormationPractical Approaches to Cost Center Formation

Formation of cost centers presupposes a qualitative analysis of the active hospital staff, Formation of cost centers presupposes a qualitative analysis of the active hospital staff, often even to the point of identifying job requirements of specific employees. Thisoften even to the point of identifying job requirements of specific employees. This type of analysis is carried out in a dialogue with the chief economist and othertype of analysis is carried out in a dialogue with the chief economist and other experienced managers of the facility who have a good knowledge of hospitalexperienced managers of the facility who have a good knowledge of hospital technologies, personnel disposition, and employee job descriptions. The followingtechnologies, personnel disposition, and employee job descriptions. The following questions are important in making decisions about merging, splitting, and regroupingquestions are important in making decisions about merging, splitting, and regrouping structural units:structural units:

1) Is the structural unit under analysis functionally homogeneous?1) Is the structural unit under analysis functionally homogeneous?

If yes, this unit is likely to be given the status of cost center. Here, however, it isIf yes, this unit is likely to be given the status of cost center. Here, however, it is important to clarify what this function actually entails. The accounting department,important to clarify what this function actually entails. The accounting department, for example, as suggested by its name, is a fairly homogeneous functional service.for example, as suggested by its name, is a fairly homogeneous functional service. However, the economist, if he or she is included in the staff of the accountingHowever, the economist, if he or she is included in the staff of the accounting department, would represent a different function, namely, planning or financialdepartment, would represent a different function, namely, planning or financial management. Therefore, he or she should most likely be considered part of amanagement. Therefore, he or she should most likely be considered part of a different cost center.different cost center.

If the structural unit under analysis is not functionally homogeneous, it is necessaryIf the structural unit under analysis is not functionally homogeneous, it is necessary to identify all functions performed by the respective structural units, and to examineto identify all functions performed by the respective structural units, and to examine how reasonable it would be to form an independent cost center matching each ofhow reasonable it would be to form an independent cost center matching each of them. Excessive fragmentation of the hospital organizational structure should bethem. Excessive fragmentation of the hospital organizational structure should be avoided; a function performed by one person should not be separated out as a costavoided; a function performed by one person should not be separated out as a cost center. Put differently, functions should be aggregated or desegregated into groupscenter. Put differently, functions should be aggregated or desegregated into groups sharing a common task and managed as an administratively integrated unit.sharing a common task and managed as an administratively integrated unit.

2)2) Do the structural units share work spaces? Do they maintain a common workDo the structural units share work spaces? Do they maintain a common work schedule? Do they jointly submit requests for office supplies and minor and capitalschedule? Do they jointly submit requests for office supplies and minor and capital equipment? Finally, Are they jointly administered?equipment? Finally, Are they jointly administered?

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If the answer to all these questions is yes, it is easy to aggregate the structural units intoIf the answer to all these questions is yes, it is easy to aggregate the structural units into one cost center, so long as they are functionally and technologically compatible.one cost center, so long as they are functionally and technologically compatible.

If the answer to the questions posed is no, and the accounting and planning of resources,If the answer to the questions posed is no, and the accounting and planning of resources, as well as management, are carried out separately, then merging the subdivisions wouldas well as management, are carried out separately, then merging the subdivisions would provide savings in administrative expenditures, yet might be fraught with problems. Theprovide savings in administrative expenditures, yet might be fraught with problems. The most important of these would be the reduction of administrative positions. Moreover, itmost important of these would be the reduction of administrative positions. Moreover, it would be necessary to overcome the psychological discomfort that might be felt bywould be necessary to overcome the psychological discomfort that might be felt by workers in the units who are "losing sovereignty." In this case, the decision to combineworkers in the units who are "losing sovereignty." In this case, the decision to combine several units into one cost center must be weighted against personnel management side-several units into one cost center must be weighted against personnel management side-effects. Merger is desirable in cases where the existing structural units clearly areeffects. Merger is desirable in cases where the existing structural units clearly are duplicating one another.duplicating one another.

3.1.53.1.5 The Case of the Tomsk Oblast Teaching HospitalThe Case of the Tomsk Oblast Teaching Hospital

Listed below are decisions taken in order to transform the organizational structure ofListed below are decisions taken in order to transform the organizational structure of OTH’s staffing schedule into an organizational structure based on cost centers. All in all,OTH’s staffing schedule into an organizational structure based on cost centers. All in all, these decisions imply reorganization of 40 percent of the currently existing units. (Of thethese decisions imply reorganization of 40 percent of the currently existing units. (Of the 62 newly formed cost centers, 24 do not coincide with units of the current organizational62 newly formed cost centers, 24 do not coincide with units of the current organizational structure.) Table 1 of Annex T (pages T1–T5) presents the full list of cost centers and thestructure.) Table 1 of Annex T (pages T1–T5) presents the full list of cost centers and the composition of each of them according to elements of the current organizational structurecomposition of each of them according to elements of the current organizational structure and staffing schedule.and staffing schedule.

Shifting of General Hospital PersonnelShifting of General Hospital Personnel

Internists from the list of general hospital personnel were transferred to the OutpatientInternists from the list of general hospital personnel were transferred to the Outpatient Department cost center. They provide outpatient care to the victims of the ChernobylDepartment cost center. They provide outpatient care to the victims of the Chernobyl catastrophe as well as hospital personnel. All costs for their activity are recovered fromcatastrophe as well as hospital personnel. All costs for their activity are recovered from the annual budget of the hospital.the annual budget of the hospital.

The neuropathologist, working exclusively at the Military Registration and EnlistmentThe neuropathologist, working exclusively at the Military Registration and Enlistment Office, was transferred to the General Administration cost center. This physician’sOffice, was transferred to the General Administration cost center. This physician’s activity goes way beyond the functional profile of the hospital yet is reimbursed from theactivity goes way beyond the functional profile of the hospital yet is reimbursed from the hospital budget. The Ministry of Defense would not pay him. For the hospital this is anhospital budget. The Ministry of Defense would not pay him. For the hospital this is an element of overhead costs in their most direct sense. The latter has been emphasized byelement of overhead costs in their most direct sense. The latter has been emphasized by transferring this physician to the General Administration cost center.transferring this physician to the General Administration cost center.

Psychiatrists are assigned to the Psychiatric Care Office as an independent cost center.Psychiatrists are assigned to the Psychiatric Care Office as an independent cost center. They are located in the Gastroenterology Department, but serve patients referred fromThey are located in the Gastroenterology Department, but serve patients referred from other hospital departments. Functionally, the office’s activity is completely autonomous.other hospital departments. Functionally, the office’s activity is completely autonomous. The epidemiologist monitors compliance with in-house hygiene and disease controlThe epidemiologist monitors compliance with in-house hygiene and disease control regulations. This is predominantly organizational work: monitoring conditions in theregulations. This is predominantly organizational work: monitoring conditions in the wards across all clinical departments, and interacting with departments’ senior nurses.wards across all clinical departments, and interacting with departments’ senior nurses.

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The nurse practitioner in charge of hygiene was transferred to the GeneralThe nurse practitioner in charge of hygiene was transferred to the General Administration cost center and has a functional profile and mode of operation similar toAdministration cost center and has a functional profile and mode of operation similar to those of the epidemiologist.those of the epidemiologist.

The pediatrician works in the Ophthalmic Surgery and Pulmonology Departments, inThe pediatrician works in the Ophthalmic Surgery and Pulmonology Departments, in which there are pediatric beds. It was decided to assign this position to Ophthalmicwhich there are pediatric beds. It was decided to assign this position to Ophthalmic Surgery, since it accounts for a larger share of the patient mix served by this physician.Surgery, since it accounts for a larger share of the patient mix served by this physician.

The Temporary Housing Facility nurses perform some of the preparations of patients forThe Temporary Housing Facility nurses perform some of the preparations of patients for upcoming inpatient diagnostic testing. Nursing care is provided in the evening and nightupcoming inpatient diagnostic testing. Nursing care is provided in the evening and night hours, on weekends, and holidays. The patients remain in the Temporary Housinghours, on weekends, and holidays. The patients remain in the Temporary Housing Facility for up to three days during the diagnostic period or while awaiting admission.Facility for up to three days during the diagnostic period or while awaiting admission. The nurses were assigned to this facility as an independent cost center, since the facilityThe nurses were assigned to this facility as an independent cost center, since the facility represents a functionally, organizationally, and physically independent structural unitrepresents a functionally, organizationally, and physically independent structural unit (located in a separate building).(located in a separate building).

The nurses' aids and housekeeping manager of the Temporary Housing FacilityThe nurses' aids and housekeeping manager of the Temporary Housing Facility werewere assigned to this cost center on the same grounds as the nurses.assigned to this cost center on the same grounds as the nurses.

Shifting of Personnel of the Paraclinical and Clinical DepartmentsShifting of Personnel of the Paraclinical and Clinical Departments

The status of the Lithotripsy Office was examined. The arguments in favor of includingThe status of the Lithotripsy Office was examined. The arguments in favor of including it in the Urology Department are 1) it is located in Urology, 2) the physicians in charge ofit in the Urology Department are 1) it is located in Urology, 2) the physicians in charge of the patients referred to Lithotripsy also manage general urologic patients, and 3) thethe patients referred to Lithotripsy also manage general urologic patients, and 3) the office does not have an independent administrative component and is administered byoffice does not have an independent administrative component and is administered by managers of the Urology Department. The arguments against including it in the Urologymanagers of the Urology Department. The arguments against including it in the Urology Department are 1) the office is isolated from a technological standpoint and as regardsDepartment are 1) the office is isolated from a technological standpoint and as regards the professional skills of its staff, 2) the economics and management profile of thethe professional skills of its staff, 2) the economics and management profile of the Lithotripsy Office has nothing in common with the Urology Department, as the presenceLithotripsy Office has nothing in common with the Urology Department, as the presence of expensive equipment in the balance sheet of the office creates a peculiar cost pictureof expensive equipment in the balance sheet of the office creates a peculiar cost picture and requires special approaches to cost management. and requires special approaches to cost management.

It was decided to include Lithotripsy in the Urology DepartmentIt was decided to include Lithotripsy in the Urology Department cost center, sincecost center, since functionally it services the Urology Department exclusively. Correspondingly, costs offunctionally it services the Urology Department exclusively. Correspondingly, costs of the Lithotripsy Office are entirely reimbursed as part of the costs of urologic patients.the Lithotripsy Office are entirely reimbursed as part of the costs of urologic patients.

In compliance with the plans for reorganization of the clinical activity of the hospital forIn compliance with the plans for reorganization of the clinical activity of the hospital for 1995, the Center for Treatment of Spinal Pathology was transferred out of the1995, the Center for Treatment of Spinal Pathology was transferred out of the Traumatology Department. This corrected the imprecision that occurred when personnelTraumatology Department. This corrected the imprecision that occurred when personnel of the former Traumatology Department were divided between two newly formed units.of the former Traumatology Department were divided between two newly formed units. The ancillary medical personnel who originally were assigned to Traumatology now areThe ancillary medical personnel who originally were assigned to Traumatology now are split between the department and the center in proportion to bed capacity. Similarly, thesplit between the department and the center in proportion to bed capacity. Similarly, the nonsalary part of the operating budget, as reported for three quarters of 1994, wasnonsalary part of the operating budget, as reported for three quarters of 1994, was allocated between the Traumatology Department and the Center for Treatment of Spinalallocated between the Traumatology Department and the Center for Treatment of Spinal Pathology in proportion to bed capacity.Pathology in proportion to bed capacity.

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On-duty doctors (6.75 FTE's) are shared by all surgical departments. They performOn-duty doctors (6.75 FTE's) are shared by all surgical departments. They perform evening rounds, do examinations, assign patients for surgery, and operate on patients withevening rounds, do examinations, assign patients for surgery, and operate on patients with surgical diagnoses admitted during the evening. All on-duty doctors currently aresurgical diagnoses admitted during the evening. All on-duty doctors currently are assigned to the General Surgery Department. It was decided to distribute them among allassigned to the General Surgery Department. It was decided to distribute them among all the surgical departments in proportion to bed capacity.the surgical departments in proportion to bed capacity.

The Endocrinology Department was restored to its actual volume of activity: beds forThe Endocrinology Department was restored to its actual volume of activity: beds for patients with diabetes mellitus were assigned to the department. In the projections of thepatients with diabetes mellitus were assigned to the department. In the projections of the hospital Finance Department for the planned 1995 budget, these beds and the resourceshospital Finance Department for the planned 1995 budget, these beds and the resources that support them were shown as a separate item because they are financed outside thethat support them were shown as a separate item because they are financed outside the scope of the MHI, that is, on-budget. These beds function as technological andscope of the MHI, that is, on-budget. These beds function as technological and organizational components of the Endocrinology Department. Therefore, they constituteorganizational components of the Endocrinology Department. Therefore, they constitute an integrated Endocrinology Department cost center together with the department.an integrated Endocrinology Department cost center together with the department.

The Hydrotherapy Department and Acupuncture Office are included in the PhysiotherapyThe Hydrotherapy Department and Acupuncture Office are included in the Physiotherapy Department. They are located on the same premises, providing for integration of costDepartment. They are located on the same premises, providing for integration of cost flows under allocation Chapter 3. The specific case of Physiotherapy meets conditions 1flows under allocation Chapter 3. The specific case of Physiotherapy meets conditions 1 and 2 below.and 2 below.

The general criteria for merging listed paraclinical units are 1) functional similarity of theThe general criteria for merging listed paraclinical units are 1) functional similarity of the procedures/types of treatment performed, and 2) the possibility of saving onprocedures/types of treatment performed, and 2) the possibility of saving on administrative and managerial workload without hurting clinical output/outcome. Itadministrative and managerial workload without hurting clinical output/outcome. It makes no sense to single out in autonomous cost centers those organizational units thatmakes no sense to single out in autonomous cost centers those organizational units that under present conditions have already centralized the functions of managing materialunder present conditions have already centralized the functions of managing material resources and maintaining security, nor is it practical to place common requisitions forresources and maintaining security, nor is it practical to place common requisitions for materials and jointly process timesheets. materials and jointly process timesheets.

It was decided to consolidate the Clinical Immunology Laboratory and the AIDSIt was decided to consolidate the Clinical Immunology Laboratory and the AIDS Laboratory into one cost center, since the administration of their activity was integratedLaboratory into one cost center, since the administration of their activity was integrated to a considerable extent (joint requisitions for materials and supplies, joint timesheets,to a considerable extent (joint requisitions for materials and supplies, joint timesheets, one head administrator). However, the two units seriously differ technologically andone head administrator). However, the two units seriously differ technologically and economically. The bulk of the activity of the AIDS Laboratory does not imply hospitaleconomically. The bulk of the activity of the AIDS Laboratory does not imply hospital admissions. Only 41.6 percent of workload in RVUs (1 RVU = 10 minutes of serviceadmissions. Only 41.6 percent of workload in RVUs (1 RVU = 10 minutes of service time) is provided by the hospital, as reported for nine months of 1994. Since the patienttime) is provided by the hospital, as reported for nine months of 1994. Since the patient flow in two departments is structured differently, approaches to forming a business planflow in two departments is structured differently, approaches to forming a business plan and controlling costs will also noticeably differ. Admittedly, therefore, complete internaland controlling costs will also noticeably differ. Admittedly, therefore, complete internal integrity is not there in the composition of the newly formed cost center Laboratory ofintegrity is not there in the composition of the newly formed cost center Laboratory of Clinical Immunology. Clinical Immunology.

The Radiology Department and the Ultrasound Diagnostic Laboratory have been mergedThe Radiology Department and the Ultrasound Diagnostic Laboratory have been merged into a single Radiology Departmentinto a single Radiology Department cost center. Their clinical and administrative activitycost center. Their clinical and administrative activity is integrated is integrated de factode facto: there is a single administration (one department head), reporting is: there is a single administration (one department head), reporting is carried out by one person, and requisitions are made up by one and the same person.carried out by one person, and requisitions are made up by one and the same person. Timesheets are managed jointly, as well. A similarity of technology is another basis forTimesheets are managed jointly, as well. A similarity of technology is another basis for integration. The merging of two services into one organizational entity will comply withintegration. The merging of two services into one organizational entity will comply with modern practices in structuring hospital facilities in the West.modern practices in structuring hospital facilities in the West.

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The Department of Medical Statistics cost center became a product of the merging of theThe Department of Medical Statistics cost center became a product of the merging of the Medical Statistics Department and the Data Processing Center. The basis for thisMedical Statistics Department and the Data Processing Center. The basis for this decision was the technological linkage of the two services: medical statisticians monitordecision was the technological linkage of the two services: medical statisticians monitor the coherence of decisions of Data Processing Center experts in terms of the clinicalthe coherence of decisions of Data Processing Center experts in terms of the clinical relevance of the information to be processed, while the Data Processing Center overseesrelevance of the information to be processed, while the Data Processing Center oversees statisticians for compliance with formats of data accounting and reporting.statisticians for compliance with formats of data accounting and reporting.

The Operations Department has been merged with the Dispatcher Group.The Operations Department has been merged with the Dispatcher Group. Technologically they are interlinked. The Operations Department collects requests forTechnologically they are interlinked. The Operations Department collects requests for consultations by external specialists, requisitions for blood, and housekeeping work andconsultations by external specialists, requisitions for blood, and housekeeping work and services. The medical personnel on the staff of the Operations Department review theservices. The medical personnel on the staff of the Operations Department review the accuracy of medical records in the hospital and issue permission for sick leave. Theaccuracy of medical records in the hospital and issue permission for sick leave. The Dispatcher Group arranges for transport of patients to other facilities for consultationDispatcher Group arranges for transport of patients to other facilities for consultation with outside specialists, and also delivers blood.with outside specialists, and also delivers blood.

In the composition of the Outpatient Department cost center, six elements of theIn the composition of the Outpatient Department cost center, six elements of the functioning organizational structure are included along with the actual Outpatientfunctioning organizational structure are included along with the actual Outpatient Department (see Table 1, Annex T). They all are located in the Outpatient DepartmentDepartment (see Table 1, Annex T). They all are located in the Outpatient Department building and provide outpatient services.building and provide outpatient services.

The Medical Genetics Office examines patients referred from the Medical GeneticsThe Medical Genetics Office examines patients referred from the Medical Genetics Research Institute. Prospectively, the office should be financed from the institute budgetResearch Institute. Prospectively, the office should be financed from the institute budget on a contractual basis. In this context it is important that the office is not linked (as iton a contractual basis. In this context it is important that the office is not linked (as it logically would be) to the Center for Family Planning and, therefore, should not belogically would be) to the Center for Family Planning and, therefore, should not be integrated with it.integrated with it.

The possibility of merging the Department of Planned and Emergency Care and theThe possibility of merging the Department of Planned and Emergency Care and the Outreach Specialized Consultative and Diagnostic Service of OTH was considered. ItOutreach Specialized Consultative and Diagnostic Service of OTH was considered. It was decided not to combine them. Despite the functional similarity that may be deducedwas decided not to combine them. Despite the functional similarity that may be deduced from their names, their operating profiles differ significantly. The Department offrom their names, their operating profiles differ significantly. The Department of Planned and Emergency Care is a mobile team of hospital physicians who reach out whenPlanned and Emergency Care is a mobile team of hospital physicians who reach out when requested to examine patients in rural areas for, as a rule, subsequent hospitalization. Therequested to examine patients in rural areas for, as a rule, subsequent hospitalization. The Outreach Specialized Consultative and Diagnostic Service of OTH is a team ofOutreach Specialized Consultative and Diagnostic Service of OTH is a team of physicians of the Outpatient Department whose task is to perform prophylactic on-sitephysicians of the Outpatient Department whose task is to perform prophylactic on-site examinations at enterprises through direct contracts with and payment from employers.examinations at enterprises through direct contracts with and payment from employers. In all, this department became part of the Outpatient Department cost center.In all, this department became part of the Outpatient Department cost center.

The Radiological Safety Control Department monitors implementation of radiologicalThe Radiological Safety Control Department monitors implementation of radiological safety standards all around the oblast. This centralized service was established by an oldsafety standards all around the oblast. This centralized service was established by an old regulation, which stipulates that such a service must operate from the facilities of OTH.regulation, which stipulates that such a service must operate from the facilities of OTH. Currently, OTH staff radiologists and x-ray technicians work in this service. However,Currently, OTH staff radiologists and x-ray technicians work in this service. However, the activity of the service is not part of the inpatient clinical work and may not bethe activity of the service is not part of the inpatient clinical work and may not be reimbursed in the mainstream of hospital financing, (that is, per patient discharge). Itreimbursed in the mainstream of hospital financing, (that is, per patient discharge). It must be financed by the Oblast Health Administration as part of a disease-preventionmust be financed by the Oblast Health Administration as part of a disease-prevention program. Costs of the Radiological Safety Control Department appear as an addendum inprogram. Costs of the Radiological Safety Control Department appear as an addendum in

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OTH’s annual financial report that is beyond the balancing line item. From now on, theOTH’s annual financial report that is beyond the balancing line item. From now on, the corresponding sector will be regarded as a final service and revenue-producing costcorresponding sector will be regarded as a final service and revenue-producing cost center. At this point, it is classified into paraclinical, or intermediary, cost centers.center. At this point, it is classified into paraclinical, or intermediary, cost centers.

Shifting of Administrative PersonnelShifting of Administrative Personnel

The Procurement and Housekeeping Department was split into several functional servicesThe Procurement and Housekeeping Department was split into several functional services and, correspondingly, cost centers:and, correspondingly, cost centers:

·· The Procurement Department cost center accumulates other departments’The Procurement Department cost center accumulates other departments’ requisitions and prepares contracts for purchase of both medical andrequisitions and prepares contracts for purchase of both medical and nonmedical supplies, and provides storage, preservation, and inventory ofnonmedical supplies, and provides storage, preservation, and inventory of supplies.supplies.

···· The Housekeeping Department cost center provides cleaning, routineThe Housekeeping Department cost center provides cleaning, routine

maintenance, and capital repairs of buildings, equipment, furniture, andmaintenance, and capital repairs of buildings, equipment, furniture, and fixtures (except maintenance of utility and medical equipment, which is takenfixtures (except maintenance of utility and medical equipment, which is taken care of by the Building Maintenance Department), and some othercare of by the Building Maintenance Department), and some other housekeeping functions.housekeeping functions.

·· Security.Security.···· Laundry.Laundry.··

3.23.2 Step 2: Classification of Cost CentersStep 2: Classification of Cost Centers

The identified cost centers are classified into two categories—revenue generating andThe identified cost centers are classified into two categories—revenue generating and intermediate. The former mainly include, but are not limited to, clinical departments.intermediate. The former mainly include, but are not limited to, clinical departments. The latter cover administrative departments and services and the paraclinical departments.The latter cover administrative departments and services and the paraclinical departments. Specific approaches to classifying cost centers into listed categories are displayed below.Specific approaches to classifying cost centers into listed categories are displayed below.

3.2.13.2.1 Revenue-generating Cost CentersRevenue-generating Cost Centers

The cost centers of this category generate income for the hospital. Their activity results inThe cost centers of this category generate income for the hospital. Their activity results in the creation of the hospital’s end product. Thus the activities of the revenue-generatingthe creation of the hospital’s end product. Thus the activities of the revenue-generating cost centers integrate the effort of all other hospital cost centers. The hospital billscost centers integrate the effort of all other hospital cost centers. The hospital bills purchasers of care for the output of revenue-generating departments.purchasers of care for the output of revenue-generating departments.

Let us consider what the outputs of the inpatient care, and, correspondingly, types ofLet us consider what the outputs of the inpatient care, and, correspondingly, types of revenue-generating cost centers may be. revenue-generating cost centers may be.

3.2.1.13.2.1.1 Clinical DepartmentsClinical Departments

The basic output of hospital activity under performance-based reimbursement will beThe basic output of hospital activity under performance-based reimbursement will be patient discharge. Therefore, the revenue-generating cost centers will consist primarily ofpatient discharge. Therefore, the revenue-generating cost centers will consist primarily of

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clinical departments.clinical departments.

3.2.1.23.2.1.2 Day Inpatient CareDay Inpatient Care

In addition to the inpatient services provided to the hospitalized patients, a growingIn addition to the inpatient services provided to the hospitalized patients, a growing contribution to hospital output would come from day inpatient care. The patients of thecontribution to hospital output would come from day inpatient care. The patients of the day clinic would be reimbursed to the hospital for (1) the case treated, if the patient hasday clinic would be reimbursed to the hospital for (1) the case treated, if the patient has received a comprehensive set of clinically appropriate services; (2) patient-day; or (3)received a comprehensive set of clinically appropriate services; (2) patient-day; or (3) specific service, if the patient underwent a specific diagnostic, medical, or surgicalspecific service, if the patient underwent a specific diagnostic, medical, or surgical procedure at the day clinic. The preferred choice of the reimbursement method wouldprocedure at the day clinic. The preferred choice of the reimbursement method would depend on how comprehensive the day inpatient care is in a particular hospital. The moredepend on how comprehensive the day inpatient care is in a particular hospital. The more comprehensive the day inpatient care, the more appropriate it would be to claim costcomprehensive the day inpatient care, the more appropriate it would be to claim cost reimbursement per case treated.reimbursement per case treated.

Efficient organization of day inpatient care presupposes that it should be moved out ofEfficient organization of day inpatient care presupposes that it should be moved out of the clinical departments of the hospital. It should be located in a more economicallythe clinical departments of the hospital. It should be located in a more economically designed building or space that would ensure unit operating costs lower than those in thedesigned building or space that would ensure unit operating costs lower than those in the main hospital clinical building. In this case, the day clinic would become sufficientlymain hospital clinical building. In this case, the day clinic would become sufficiently autonomous to be considered a cost center. The day clinic (which in Westernautonomous to be considered a cost center. The day clinic (which in Western terminology might be called, for example, a day surgery center) should then,terminology might be called, for example, a day surgery center) should then, undoubtedly, be classified into the revenue-generating cost centers.undoubtedly, be classified into the revenue-generating cost centers.

In OTH’s case, the day clinic beds are spread across the inpatient bed capacity ofIn OTH’s case, the day clinic beds are spread across the inpatient bed capacity of respective clinical departments. They are therefore included in therespective clinical departments. They are therefore included in the revenue-generatingrevenue-generating cost centers as part of the clinical departments in which they are anchored.cost centers as part of the clinical departments in which they are anchored.

3.2.1.33.2.1.3 Outpatient DepartmentOutpatient Department

A hospital providing a substantial volume of outpatient services may apply variousA hospital providing a substantial volume of outpatient services may apply various strategies of structuring and managing outpatient activities. The status of the Outpatientstrategies of structuring and managing outpatient activities. The status of the Outpatient Department cost center may vary according to those strategies.Department cost center may vary according to those strategies.

1.1. If the Outpatient Department is focused on preadmission diagnostics, post-hospitalIf the Outpatient Department is focused on preadmission diagnostics, post-hospital follow-up, rehabilitation, and nursing care, the mainstream of the Outpatientfollow-up, rehabilitation, and nursing care, the mainstream of the Outpatient Department patient flow will consist of those patients who have gone throughDepartment patient flow will consist of those patients who have gone through hospitalization before and/or after receiving outpatient care. In this case, thehospitalization before and/or after receiving outpatient care. In this case, the department would function as an intermediate cost center with respect to the hospitaldepartment would function as an intermediate cost center with respect to the hospital proper. The department’s costs would be reimbursed on a per patient discharge basis,proper. The department’s costs would be reimbursed on a per patient discharge basis, that is, through revenue-generating (clinical) departments that serve their patientsthat is, through revenue-generating (clinical) departments that serve their patients with inputs from the Outpatient Department.with inputs from the Outpatient Department.

2.2. If the Outpatient Department operates basically as a free-standing community facility,If the Outpatient Department operates basically as a free-standing community facility, providing consultative and diagnostic care to both resident and nonresidentproviding consultative and diagnostic care to both resident and nonresident populations regardless of the prospects for hospitalization, the Outpatient Departmentpopulations regardless of the prospects for hospitalization, the Outpatient Department cost center must be considered an end servicecost center must be considered an end service provider. In other words, it brings inprovider. In other words, it brings in

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income to the hospital independently from the clinical departments and should beincome to the hospital independently from the clinical departments and should be reimbursed directly.reimbursed directly.

3.3.4.4. As a revenue-generating cost center, the Outpatient Department may be paid (1) on aAs a revenue-generating cost center, the Outpatient Department may be paid (1) on a

fee-for-service basis, (2) according to a partial annual capitated rate per enrollee,fee-for-service basis, (2) according to a partial annual capitated rate per enrollee, covering outpatient care only, or (3) according to a comprehensive annual capitatedcovering outpatient care only, or (3) according to a comprehensive annual capitated rate covering all types of care.rate covering all types of care.

3.2.1.43.2.1.4 Cost Centers Outside the HospitalCost Centers Outside the Hospital

Consumers of hospital care that do not make up part of the hospital itself may be shownConsumers of hospital care that do not make up part of the hospital itself may be shown among revenue-generating cost centers. These are organizations that pay for hospitalamong revenue-generating cost centers. These are organizations that pay for hospital services that are either (1) unrelated to care provision to either inpatients or outpatients ofservices that are either (1) unrelated to care provision to either inpatients or outpatients of the hospital (such as the Radiological Safety Control Department or air transportation ofthe hospital (such as the Radiological Safety Control Department or air transportation of patients to other health care facilities), or (2) unrelated to clinical activities at large (realpatients to other health care facilities), or (2) unrelated to clinical activities at large (real estate; equipment, car, and truck rentals; road transportation services; catering outside theestate; equipment, car, and truck rentals; road transportation services; catering outside the hospital; and so on).hospital; and so on).

The following may appear as out-of-hospital cost centers: (1) health care administrationThe following may appear as out-of-hospital cost centers: (1) health care administration and purchasing authorities; (2) providers of care entitled to contracting services out toand purchasing authorities; (2) providers of care entitled to contracting services out to other health care facilities; (3) enterprises and organizations renting hospital assets orother health care facilities; (3) enterprises and organizations renting hospital assets or otherwise financing hospital activities.otherwise financing hospital activities.

Inclusion of outside cost centers in the system of hospital cost accounting and analysisInclusion of outside cost centers in the system of hospital cost accounting and analysis makes it possible to present the hospital as an open economic system. The concept ofmakes it possible to present the hospital as an open economic system. The concept of openness implies a complete preparedness of the hospital to incorporate into its businessopenness implies a complete preparedness of the hospital to incorporate into its business plan alternative sources of revenue, be they from clinical or nonclinical activity. Thus,plan alternative sources of revenue, be they from clinical or nonclinical activity. Thus, the proposed management accounting system is designed with room for growth, inthe proposed management accounting system is designed with room for growth, in anticipation of further diversification of hospital activity and sources of income.anticipation of further diversification of hospital activity and sources of income.

3.2.23.2.2 Intermediate Cost CentersIntermediate Cost Centers

Unlike with revenue-generating cost centers, the activity of intermediate cost centers doesUnlike with revenue-generating cost centers, the activity of intermediate cost centers does not result in the final output for which purchasers of care pay the hospital. Intermediatenot result in the final output for which purchasers of care pay the hospital. Intermediate costs centers’ activity provides the prerequisites that clinical departments and othercosts centers’ activity provides the prerequisites that clinical departments and other revenue-generating cost centers build upon to produce final output of inpatient care.revenue-generating cost centers build upon to produce final output of inpatient care.

As intermediaries, many cost centers may have a double status:As intermediaries, many cost centers may have a double status:

·· As intermediaries, the cost centers may work for the clinical departments of theAs intermediaries, the cost centers may work for the clinical departments of the hospital and be reimbursed from revenues that the hospital receives per patienthospital and be reimbursed from revenues that the hospital receives per patient discharge. For example, Physiotherapy serves the inpatients; the kitchen feedsdischarge. For example, Physiotherapy serves the inpatients; the kitchen feeds those patients; and the Planning and Financing Department ensures planning,those patients; and the Planning and Financing Department ensures planning, marketing, and financial management of the hospital. Without any of these, itmarketing, and financial management of the hospital. Without any of these, it would be impossible to treat patients, and produce the clinical output that awould be impossible to treat patients, and produce the clinical output that a

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clinical department would report and for which the hospital would getclinical department would report and for which the hospital would get reimbursed.reimbursed.

·· As income producers, the cost centers engage in direct provision and marketing ofAs income producers, the cost centers engage in direct provision and marketing of services. For such services, the hospital receives payment directly on behalf of theservices. For such services, the hospital receives payment directly on behalf of the cost center which performed the service. For example, the same Physiotherapycost center which performed the service. For example, the same Physiotherapy Department may provide services to outpatients from voluntary health insuranceDepartment may provide services to outpatients from voluntary health insurance covered by a private insurance company. The kitchen may increase its productioncovered by a private insurance company. The kitchen may increase its production of cookies and pastries and sell the surplus through retail outlets downtown. Theof cookies and pastries and sell the surplus through retail outlets downtown. The Planning and Financing Department may directly earn funds for the hospital byPlanning and Financing Department may directly earn funds for the hospital by selling the manual on and software support for an integrated system of costselling the manual on and software support for an integrated system of cost accounting and analysis, as well as for technical assistance services to implementaccounting and analysis, as well as for technical assistance services to implement that system.that system.

The proposed cost accounting and analysis system will make it possible to determine inThe proposed cost accounting and analysis system will make it possible to determine in quantitative terms the degree to which a double-status organizational unit is anquantitative terms the degree to which a double-status organizational unit is an intermediate and an income-generating cost center.intermediate and an income-generating cost center.

Intermediate cost centers may be classified into two categories: administrative andIntermediate cost centers may be classified into two categories: administrative and paraclinical cost centers.paraclinical cost centers.

3.2.2.13.2.2.1 Administrative Cost CentersAdministrative Cost Centers

The distinguishing feature of administrative cost centers is the nonmedical character ofThe distinguishing feature of administrative cost centers is the nonmedical character of their activity. Expenditures of the cost centers of this category are usually associated withtheir activity. Expenditures of the cost centers of this category are usually associated with general hospital overhead. Functionally, these include all types of administrative activitygeneral hospital overhead. Functionally, these include all types of administrative activity (general administration of the facility, financial and personnel management, procurement(general administration of the facility, financial and personnel management, procurement of supplies and materials, data processing and reporting), as well as building and utilitiesof supplies and materials, data processing and reporting), as well as building and utilities maintenance and housekeeping services. All these functions are aimed at providingmaintenance and housekeeping services. All these functions are aimed at providing general prerequisites for hospital operation as a legal entity, economically autonomousgeneral prerequisites for hospital operation as a legal entity, economically autonomous facility, and site equipped with utilities and technological equipment.facility, and site equipped with utilities and technological equipment.

3.2.2.23.2.2.2 Paraclinical Cost CentersParaclinical Cost Centers

Paraclinical cost centers include departments and services that are focused on medicalParaclinical cost centers include departments and services that are focused on medical activities and that contribute to the clinical work outside the scope of clinicalactivities and that contribute to the clinical work outside the scope of clinical departments. Functionally, these include all types of laboratory and instrumentdepartments. Functionally, these include all types of laboratory and instrument diagnostics, pharmacy services, support services for operating room procedures, autopsy,diagnostics, pharmacy services, support services for operating room procedures, autopsy, medical rehabilitation, and so on.medical rehabilitation, and so on.

3.2.33.2.3 The Case of the Tomsk Oblast Teaching HospitalThe Case of the Tomsk Oblast Teaching Hospital

In view of the above, the cost centers of OTH are separated into three categories: (1)In view of the above, the cost centers of OTH are separated into three categories: (1) administrative, (2) paraclinical, and (3) clinical departments and services. Clinical costadministrative, (2) paraclinical, and (3) clinical departments and services. Clinical cost centers are equated with revenue-generating cost centers at large. Conventionalcenters are equated with revenue-generating cost centers at large. Conventional terminology in this case does not lead to much distortion in substance, since only three ofterminology in this case does not lead to much distortion in substance, since only three of

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the revenue-generating cost centers in this system of management accounting are notthe revenue-generating cost centers in this system of management accounting are not clinical departments of OTH: the Outpatient Department, the Office of Medical Genetics,clinical departments of OTH: the Outpatient Department, the Office of Medical Genetics, and the Oblast Health Administration. (The full list of cost centers by three categories isand the Oblast Health Administration. (The full list of cost centers by three categories is shown in Tables 2–13 of Annexes T and F.)shown in Tables 2–13 of Annexes T and F.)

In OTH’s case, the following micro-level decisions were made to classify the cost centersIn OTH’s case, the following micro-level decisions were made to classify the cost centers by three categories.by three categories.

The Anesthesiology and Intensive Care Department was classified into clinicalThe Anesthesiology and Intensive Care Department was classified into clinical departments. This resolves the problem of incomplete cost recovery that has developeddepartments. This resolves the problem of incomplete cost recovery that has developed in the hospital (an analysis was carried out by V. N. Provada, OTH chief economist, forin the hospital (an analysis was carried out by V. N. Provada, OTH chief economist, for October 1994. From now on, the patient will be reimbursed to the hospital even if he orOctober 1994. From now on, the patient will be reimbursed to the hospital even if he or she died in the Intensive Care Department without getting on a hospital bed in a clinicalshe died in the Intensive Care Department without getting on a hospital bed in a clinical department. However, it must be kept in mind that recognition of intensive care patientsdepartment. However, it must be kept in mind that recognition of intensive care patients as the final output of clinical activity creates an incentive for hospitals to exaggerate theas the final output of clinical activity creates an incentive for hospitals to exaggerate the volume of intensive care. The enormous amount of costs deriving from such anvolume of intensive care. The enormous amount of costs deriving from such an approach may become a heavy burden for purchasers of hospital care.approach may become a heavy burden for purchasers of hospital care.

The role of the Outpatient Department (also known as the OTH polyclinic) as a costThe role of the Outpatient Department (also known as the OTH polyclinic) as a cost center was examined. Patients served by the OTH polyclinic are divided into twocenter was examined. Patients served by the OTH polyclinic are divided into two categories: 1) patients admitted before, after, or at the time of being served in thecategories: 1) patients admitted before, after, or at the time of being served in the Outpatient Department (the services provided for these patients are consideredOutpatient Department (the services provided for these patients are considered intermediate and are reimbursed to the hospital as part of a per patient discharge rate; inintermediate and are reimbursed to the hospital as part of a per patient discharge rate; in this case, the Outpatient Department acts as a paraclinical unit of the hospital); or 2)this case, the Outpatient Department acts as a paraclinical unit of the hospital); or 2) patients who receive care exclusively at the Outpatient Department (correspondingly,patients who receive care exclusively at the Outpatient Department (correspondingly, their contact with the hospital is limited to the Outpatient Department). The lattertheir contact with the hospital is limited to the Outpatient Department). The latter patients are the final product of the Outpatient Department. Therefore, care provided topatients are the final product of the Outpatient Department. Therefore, care provided to them may be reimbursed on a fee-for-service basis, per-visit basis, or otherwise definedthem may be reimbursed on a fee-for-service basis, per-visit basis, or otherwise defined episode-of-care basis. Since as much as 85 percent of the Outpatient Department patientepisode-of-care basis. Since as much as 85 percent of the Outpatient Department patient flow never gets admitted into the hospital, the decision was made to treat the Outpatientflow never gets admitted into the hospital, the decision was made to treat the Outpatient Department as a final output producer and revenue-generating cost center.Department as a final output producer and revenue-generating cost center.

The Medical Genetics Office was included among the final output producers, since it isThe Medical Genetics Office was included among the final output producers, since it is reimbursed apart from the clinical departments—from the budget of the Geneticsreimbursed apart from the clinical departments—from the budget of the Genetics Research Institute.Research Institute.

As an out-of-hospital revenue-generating cost center, the Oblast Health Administration is As an out-of-hospital revenue-generating cost center, the Oblast Health Administration is considered mainly to be a payer of OTH’s exorbitantly high costs of medical airconsidered mainly to be a payer of OTH’s exorbitantly high costs of medical air transportation (two-thirds of the patients transported by air and paid for by OTH wouldtransportation (two-thirds of the patients transported by air and paid for by OTH would be referred to rural facilities and City of Tomsk health care facilities, and thus never bebe referred to rural facilities and City of Tomsk health care facilities, and thus never be admitted to OTH). Obviously, air transportation costs should be billed to the Oblastadmitted to OTH). Obviously, air transportation costs should be billed to the Oblast Health Administration budget; they should not be internalized in OTH’s annual operatingHealth Administration budget; they should not be internalized in OTH’s annual operating budget. budget.

Prospectively, we also recommend that costs of laboratory and diagnostic tests performedProspectively, we also recommend that costs of laboratory and diagnostic tests performed at OTH for outpatients referred by the Oblast Health Administration should accrue to aat OTH for outpatients referred by the Oblast Health Administration should accrue to a

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special-purpose account. The OTH AIDS Test Laboratory should be transferred to directspecial-purpose account. The OTH AIDS Test Laboratory should be transferred to direct contractual relationships with the Oblast Health Administration. contractual relationships with the Oblast Health Administration.

In the near future, the City of Tomsk and Tomsk Oblast enterprises will appear on the listIn the near future, the City of Tomsk and Tomsk Oblast enterprises will appear on the list of out-of-hospital revenue-generating cost centers should they be purchasing prophylacticof out-of-hospital revenue-generating cost centers should they be purchasing prophylactic check-up care from OTH as performed by The Outreach Specialty Diagnosticscheck-up care from OTH as performed by The Outreach Specialty Diagnostics Department.Department. As already noted, the proposed methodology is flexible enough to be integrated into theAs already noted, the proposed methodology is flexible enough to be integrated into the cost accounting and analysis system of any other OTH consumers, be they medical orcost accounting and analysis system of any other OTH consumers, be they medical or nonmedical services, as they emerge.nonmedical services, as they emerge.

3.33.3 Step 3: Calculation of Direct CostsStep 3: Calculation of Direct Costs

Direct costs are the kinds of costs that may be directly mapped into the cost centers.Direct costs are the kinds of costs that may be directly mapped into the cost centers. Unlike indirect costs, which are more like those of a general hospital, direct costs can beUnlike indirect costs, which are more like those of a general hospital, direct costs can be easily associated with specific cost centers. Which Chapter allocation categories shouldeasily associated with specific cost centers. Which Chapter allocation categories should be classified into direct costs? The Russian Federal Accounting Code of March 20, 1992,be classified into direct costs? The Russian Federal Accounting Code of March 20, 1992, addresses neither this issue nor the issue of cost separation into direct and indirect, fixedaddresses neither this issue nor the issue of cost separation into direct and indirect, fixed and variable costs. In commodity producing industries, the flow and asset accountingand variable costs. In commodity producing industries, the flow and asset accounting stipulate that direct costs are composed of 1) raw materials and intermediate goods, 2)stipulate that direct costs are composed of 1) raw materials and intermediate goods, 2) component parts and purchased semifinished products, 3) fuel and electric power, 4)component parts and purchased semifinished products, 3) fuel and electric power, 4) production personnel labor costs, 5) production start-up costs, and 6) losses from waste.production personnel labor costs, 5) production start-up costs, and 6) losses from waste.

In the health sector, direct cost Chapters are fewer:In the health sector, direct cost Chapters are fewer:

·· Chapter 1:Chapter 1: Wages and Salaries;Wages and Salaries;·· Chapter 2:Chapter 2: Surcharges on Labor (Earmarked Payroll Taxes);Surcharges on Labor (Earmarked Payroll Taxes);·· Chapter 9:Chapter 9: Food for Patients;Food for Patients;·· Chapter 10: Pharmaceuticals and Dressings;Chapter 10: Pharmaceuticals and Dressings;·· Chapter 14: Linens and Uniforms; andChapter 14: Linens and Uniforms; and·· Chapter 18: Miscellaneous Expenditures (free prosthetics, for example).Chapter 18: Miscellaneous Expenditures (free prosthetics, for example).

Direct costs are computed by cost centers as the sum of costs under the listed Chapters.Direct costs are computed by cost centers as the sum of costs under the listed Chapters. (This calculation is described as a statistical formula on page 8 of Annex M. It is also(This calculation is described as a statistical formula on page 8 of Annex M. It is also displayed numerically in Table 5 on pages T11displayed numerically in Table 5 on pages T11--T12 of Annex T, and in the form ofT12 of Annex T, and in the form of programmed formulas in Table 5 on pages F10programmed formulas in Table 5 on pages F10--11 of Annex F. Table 5 corresponds to11 of Annex F. Table 5 corresponds to the workbook sheet 5 of file COSTWIZ.XLS.)the workbook sheet 5 of file COSTWIZ.XLS.)

The primary data for direct costs computation was reported in OTH’s financial statementThe primary data for direct costs computation was reported in OTH’s financial statement for nine months of 1994 under allocation Chapters 1, 9, 10, 14, and 18. Chapter 2 costsfor nine months of 1994 under allocation Chapters 1, 9, 10, 14, and 18. Chapter 2 costs were calculated for each cost center and the hospital as a whole.were calculated for each cost center and the hospital as a whole.

3.43.4 Step 4: Calculation of Indirect CostsStep 4: Calculation of Indirect Costs

3.4.13.4.1 Identification of Indirect Costs and Their Apportionment to Direct Identification of Indirect Costs and Their Apportionment to Direct

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CostsCosts

Indirect costs are those not classified into direct costs, namely:Indirect costs are those not classified into direct costs, namely:

·· Chapter 3:Chapter 3: Housekeeping Expenditures;Housekeeping Expenditures;·· Chapter 4:Chapter 4: Business Trips; andBusiness Trips; and·· Chapter 18: Miscellaneous Expenditures (such as medical air transportation).Chapter 18: Miscellaneous Expenditures (such as medical air transportation).

Since, as noted above, indirect costs are of a facility-wide nature, they may not be trackedSince, as noted above, indirect costs are of a facility-wide nature, they may not be tracked down by cost centers. Indirect costs are apportioned down by cost centers. Indirect costs are apportioned to direct costs by means of statisticalto direct costs by means of statistical procedure as follows:procedure as follows:

1.1. Apportionment statistics are identified according to in-kind nature and technologicalApportionment statistics are identified according to in-kind nature and technological role of specific types of indirect costs. role of specific types of indirect costs.

2.2. The share of each cost center in the hospital total of selected statistics is calculated.The share of each cost center in the hospital total of selected statistics is calculated.3.3. The cost center’s share in a given indirect cost is equated with its share in theThe cost center’s share in a given indirect cost is equated with its share in the

apportionment statistic.apportionment statistic.

(The algorithm is integrated into the statistical formula as displayed on page M8 of (The algorithm is integrated into the statistical formula as displayed on page M8 of Annex M. Table 6 shows the input data and the output of cost calculations and may be Annex M. Table 6 shows the input data and the output of cost calculations and may be found on pages T13–T16 of Annex T. The same table in its formula version is displayed found on pages T13–T16 of Annex T. The same table in its formula version is displayed on pages F12–F21 of Annex F. Table 6 corresponds to the workbook sheet 6 of on pages F12–F21 of Annex F. Table 6 corresponds to the workbook sheet 6 of COSTWIZ.XLS file.) COSTWIZ.XLS file.)

Apportionment of indirect costs to direct costs is a statistical procedure, and as such is Apportionment of indirect costs to direct costs is a statistical procedure, and as such is characterized by conventionality. The quantitative apportionment statistics used to characterized by conventionality. The quantitative apportionment statistics used to identify a cost center’s share in a particular indirect cost does not yield precision as high identify a cost center’s share in a particular indirect cost does not yield precision as high as direct accounting would. At the same time, giving up 100 percent accuracy, one gains as direct accounting would. At the same time, giving up 100 percent accuracy, one gains the possibility of allocating indirect costs by cost centers at a relatively low cost in terms the possibility of allocating indirect costs by cost centers at a relatively low cost in terms of time and effort.of time and effort.

From the standpoint of management efficiency, apportionment criteria should be selected From the standpoint of management efficiency, apportionment criteria should be selected in such a way as to minimize errors of transiting from direct accounting to a statistical in such a way as to minimize errors of transiting from direct accounting to a statistical allocation procedure. Even if the smallest of potential errors is quite visible, the task of allocation procedure. Even if the smallest of potential errors is quite visible, the task of finding the best apportionment statistic is considered accomplished if there is no better finding the best apportionment statistic is considered accomplished if there is no better alternative.alternative.

3.4.23.4.2 The Case of the Tomsk Oblast Teaching HospitalThe Case of the Tomsk Oblast Teaching Hospital

In the case of the Tomsk Oblast Teaching Hospital, 20 types of indirect costs were In the case of the Tomsk Oblast Teaching Hospital, 20 types of indirect costs were identified and allocated to cost centers using certain apportionment criteria. Eleven identified and allocated to cost centers using certain apportionment criteria. Eleven different criteria were used. The "Indirect Cost—Apportionment Statistic " pairs are different criteria were used. The "Indirect Cost—Apportionment Statistic " pairs are presented in the following table:presented in the following table:

Table 1Table 1

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Apportionment Criteria for Indirect Cost Allocation Apportionment Criteria for Indirect Cost Allocation

Type of Indirect costsType of Indirect costs Criterion for Allocation to Direct CostsCriterion for Allocation to Direct Costs

Chapter 3:Chapter 3: HeatingHeating Building volume, mBuilding volume, m33

Chapter 3:Chapter 3: ElectricityElectricity Building volume, mBuilding volume, m33

Chapter 3:Chapter 3: Water supplyWater supply Direct costsDirect costsChapter 3:Chapter 3: Building maintenance & minor repair Building maintenance & minor repair Building volume, mBuilding volume, m33

Chapter 3:Chapter 3: Office suppliesOffice supplies Direct costsDirect costsChapter 3:Chapter 3: Telephone communicationsTelephone communications Telephone unitsTelephone unitsChapter 3:Chapter 3: Contracted services Contracted services Direct costsDirect costsChapter 3:Chapter 3: Road transportationRoad transportation Patient dischargesPatient dischargesChapter 3:Chapter 3: Cleaning serviceCleaning service Building spaceBuilding spaceChapter 3:Chapter 3: SecuritySecurity DepreciationDepreciationChapter 3: Chapter 3: Fire alarmFire alarm Patient-daysPatient-daysChapter 3: Chapter 3: In-house radio networkIn-house radio network Building spaceBuilding spaceChapter 3: Chapter 3: Equipment maintenance and repairEquipment maintenance and repair Equipment depreciationEquipment depreciationChapter 3: Radio equipment repairChapter 3: Radio equipment repair Patient dischargesPatient dischargesChapter 3: Chapter 3: Workplace safetyWorkplace safety Number of personnelNumber of personnelChapter 3:Chapter 3: Rat exterminationRat extermination Building spaceBuilding spaceChapter 3: Chapter 3: Transport of dead bodiesTransport of dead bodies LethalityLethalityChapter 4:Chapter 4: Business travel, local and out of townBusiness travel, local and out of town Number of personnelNumber of personnelChapter 18:Chapter 18: Medical air transportationMedical air transportation Direct accountingDirect accounting

The conventionality of the apportionment criteria mentioned in Section 3.4.1 may beThe conventionality of the apportionment criteria mentioned in Section 3.4.1 may be illustrated with the case of such type of indirect costs as Road transportation. From Tableillustrated with the case of such type of indirect costs as Road transportation. From Table 1, it is evident that road transportation services are apportioned by patients.1, it is evident that road transportation services are apportioned by patients. Correspondingly, the costs of road transportation are allocated to clinical departmentsCorrespondingly, the costs of road transportation are allocated to clinical departments only. Obviously this is not quite accurate: Road transportation serves not only the needsonly. Obviously this is not quite accurate: Road transportation serves not only the needs of the clinical cost centers, but also those of the administrative staff, kitchen, laboratory,of the clinical cost centers, but also those of the administrative staff, kitchen, laboratory, and so on. One question arises, though: Is there a better apportionment criterion thatand so on. One question arises, though: Is there a better apportionment criterion that could more accurately account for the functional diversity of road transportation services?could more accurately account for the functional diversity of road transportation services? The answer is no. Indeed, if an alternative apportionment statistic is applied that is validThe answer is no. Indeed, if an alternative apportionment statistic is applied that is valid for clinical departments, the kitchen, administration, and laboratories alike, it would befor clinical departments, the kitchen, administration, and laboratories alike, it would be equally valid for all cost centers without exception. Using such a criterion would resultequally valid for all cost centers without exception. Using such a criterion would result in two-thirds of road transportation costs being allocated to nonclinical departments. Thisin two-thirds of road transportation costs being allocated to nonclinical departments. This would lead to an even greater inaccuracy than in the former case, whereby most of thewould lead to an even greater inaccuracy than in the former case, whereby most of the transportation needs of the administrative and ancillary departments were ignored. Thus,transportation needs of the administrative and ancillary departments were ignored. Thus, selection of the apportionment criteria for allocating indirect costs to the cost centers mayselection of the apportionment criteria for allocating indirect costs to the cost centers may be seen as an art of inaccuracy minimization. Put differently, full precision does not evenbe seen as an art of inaccuracy minimization. Put differently, full precision does not even come into consideration.come into consideration.

3.53.5 Step 5: Calculation of DepreciationStep 5: Calculation of Depreciation

Along with the direct and indirect costs, depreciation is a third cost element subject toAlong with the direct and indirect costs, depreciation is a third cost element subject to inclusion in the full costs of health care services. Up until now, depreciation had beeninclusion in the full costs of health care services. Up until now, depreciation had been used as an accounting and reporting category, yet had never been considered as a sourceused as an accounting and reporting category, yet had never been considered as a source of internally generated funds for fixed investment. In other words, it was calculated butof internally generated funds for fixed investment. In other words, it was calculated but

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not reimbursed. Health care providers were not, thus, entitled to earning funds fornot reimbursed. Health care providers were not, thus, entitled to earning funds for construction, capital repairs, and acquisition of durable equipment. If speaking seriouslyconstruction, capital repairs, and acquisition of durable equipment. If speaking seriously of granting legal and economic autonomy to health care providers, the issue of includingof granting legal and economic autonomy to health care providers, the issue of including depreciation into production costs subject to reimbursement must be resolved.depreciation into production costs subject to reimbursement must be resolved.

(The formulas for depreciation calculation by cost centers are presented on pages M7–M8(The formulas for depreciation calculation by cost centers are presented on pages M7–M8 of Annex M, and the input and output indicators are presented in Table 4 of Annex Tof Annex M, and the input and output indicators are presented in Table 4 of Annex T (pages T9–T10). The same table with programmed formulas is displayed in Table 4 of(pages T9–T10). The same table with programmed formulas is displayed in Table 4 of Annex F (pages F5–F9). Table 4 corresponds to the workbook sheet 4 of theAnnex F (pages F5–F9). Table 4 corresponds to the workbook sheet 4 of the COSTWIZ.XLS file.)COSTWIZ.XLS file.)

3.5.13.5.1 General Sequence in Calculation of DepreciationGeneral Sequence in Calculation of Depreciation

Depreciation calculation by cost centers assumes the following basic steps:Depreciation calculation by cost centers assumes the following basic steps:

·· Calculation of the total book value of such fixed assets as installed capitalCalculation of the total book value of such fixed assets as installed capital equipment, minor equipment (Account 013), and means of transport (Accountequipment, minor equipment (Account 013), and means of transport (Account 015).015).

·· Allocation of fixed assets inventory to the cost centers (1) directly (on an item-by-Allocation of fixed assets inventory to the cost centers (1) directly (on an item-by-item basis) according to the function of stored units of capital and minoritem basis) according to the function of stored units of capital and minor equipment; or (2) indirectly (on an apportionment basis), whereby items ofequipment; or (2) indirectly (on an apportionment basis), whereby items of universal application are allocated to the cost centers proportionally to theuniversal application are allocated to the cost centers proportionally to the value of installed capital and minor equipment.value of installed capital and minor equipment.

·· The allocated fixed assets inventory is added to the value of the installed capitalThe allocated fixed assets inventory is added to the value of the installed capital and minor equipment (item 1 plus item 2).and minor equipment (item 1 plus item 2).

·· The total book value of machinery and equipment (see item 3) is adjusted forThe total book value of machinery and equipment (see item 3) is adjusted for inflation as mandated by the Ministry of Finance’s monthly deflators. Theinflation as mandated by the Ministry of Finance’s monthly deflators. The output is an indicator somehow resembling the replacement value of theoutput is an indicator somehow resembling the replacement value of the producer’s durable equipment. producer’s durable equipment.

·· The annual depreciation of fixed assets is calculated based on the assumption ofThe annual depreciation of fixed assets is calculated based on the assumption of straight-line depreciation over useful life, that is, by means of dividing thestraight-line depreciation over useful life, that is, by means of dividing the fixed asset replacement value by the number of years of the useful servicefixed asset replacement value by the number of years of the useful service term. Still effective, the 1974 Accounting Bylaws mandate unreasonablyterm. Still effective, the 1974 Accounting Bylaws mandate unreasonably lengthy life cycles of producer’s equipment, which allows neither for the pacelengthy life cycles of producer’s equipment, which allows neither for the pace of modern technology innovation nor, most importantly, for the need forof modern technology innovation nor, most importantly, for the need for accelerated capital accumulation to replace overwhelmingly obsolete fixedaccelerated capital accumulation to replace overwhelmingly obsolete fixed assets. The mandated low write-off rates would particularly affectassets. The mandated low write-off rates would particularly affect technological modernization in the health sector, which over decades oftechnological modernization in the health sector, which over decades of inadequate investment lagged far behind the technologic capacities of moderninadequate investment lagged far behind the technologic capacities of modern medicine. It is therefore appropriate to increase depreciation rates. For themedicine. It is therefore appropriate to increase depreciation rates. For the years to come, we recommend setting the annual depreciation for capitalyears to come, we recommend setting the annual depreciation for capital equipment in the health care sector at 20 percent of its book (replacement)equipment in the health care sector at 20 percent of its book (replacement)

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value (that is, complete write-off over 5 years) and 2 percent for structures andvalue (that is, complete write-off over 5 years) and 2 percent for structures and buildings (complete write-off over 50 years). This would still be slower than,buildings (complete write-off over 50 years). This would still be slower than, say, in the United States, where it is customary to have sophisticated, costlysay, in the United States, where it is customary to have sophisticated, costly diagnostic equipment totally depreciated and replaced over 3 years, whilediagnostic equipment totally depreciated and replaced over 3 years, while hospital buildings are depreciated over 30 to 35 years. At the same time, it ishospital buildings are depreciated over 30 to 35 years. At the same time, it is better than 7 and 100 years, as stipulated respectively for medical equipmentbetter than 7 and 100 years, as stipulated respectively for medical equipment and buildings of health care facilities by the 1974 Bylaws.and buildings of health care facilities by the 1974 Bylaws.

·· The value of buildings and equipment is allocated to the cost center per space,The value of buildings and equipment is allocated to the cost center per space, unless the exact value of the building (work space) occupied by a particularunless the exact value of the building (work space) occupied by a particular cost center is known.cost center is known.

·· Appreciation of structures and buildings is carried out based on the same monthlyAppreciation of structures and buildings is carried out based on the same monthly deflators as mandated for equipment. The annual depreciation rate is 2 percent.deflators as mandated for equipment. The annual depreciation rate is 2 percent.

For each cost center, the total value is calculated of producer’s capital and minorFor each cost center, the total value is calculated of producer’s capital and minor equipment, means of transport, structures, and buildings.equipment, means of transport, structures, and buildings.

3.5.23.5.2 Depreciation and Investment StrategiesDepreciation and Investment Strategies

The rules for computing depreciation may be established and regulated by the OblastThe rules for computing depreciation may be established and regulated by the Oblast Health Administration and the Territorial MHI Fund, based on the objectives set out forHealth Administration and the Territorial MHI Fund, based on the objectives set out for capital investment policy. The following scenario is worth considering:capital investment policy. The following scenario is worth considering:

Purchasers of care decide to discontinue at 90 percent the centralized financing of capitalPurchasers of care decide to discontinue at 90 percent the centralized financing of capital investments. At the same time, health care providers are entitled to depreciating theirinvestments. At the same time, health care providers are entitled to depreciating their fixed assets, as part of the production costs, thus internally generating funds for capitalfixed assets, as part of the production costs, thus internally generating funds for capital investment. It would stand to reason to set the depreciation rates in such a way that theinvestment. It would stand to reason to set the depreciation rates in such a way that the annual amount of depreciation at all health care facilities in the oblast would total theannual amount of depreciation at all health care facilities in the oblast would total the same 90 percent of the investments that formerly had been subject to central allocation bysame 90 percent of the investments that formerly had been subject to central allocation by health care authorities. Decentralization thus would not affect the overall volume ofhealth care authorities. Decentralization thus would not affect the overall volume of capital investments across provider network. This approach would ensure budgetcapital investments across provider network. This approach would ensure budget neutrality of depreciation policies. neutrality of depreciation policies.

Qualitatively, however, there would be a significant change: the Oblast HealthQualitatively, however, there would be a significant change: the Oblast Health Administration and the Territorial MHI Fund would loose control over the amount ofAdministration and the Territorial MHI Fund would loose control over the amount of fixed investments by specific health care facilities, and listed agencies would reimbursefixed investments by specific health care facilities, and listed agencies would reimburse depreciation in line with (1) clinical volume or (2) actual value of unit fixed asset costs asdepreciation in line with (1) clinical volume or (2) actual value of unit fixed asset costs as of the moment of setting reimbursement rates. Since both criteria would put well-of the moment of setting reimbursement rates. Since both criteria would put well-equipped health care facilities at an advantage, the gap would start growing between theequipped health care facilities at an advantage, the gap would start growing between the well-off and relatively poorly equipped providers. The decentralization of investmentwell-off and relatively poorly equipped providers. The decentralization of investment policy would thus intensify the stratification between the rich and the poor, driving somepolicy would thus intensify the stratification between the rich and the poor, driving some of the latter out of business. of the latter out of business.

Anticipating such development, the health financing authorities will in many casesAnticipating such development, the health financing authorities will in many cases consent to shedding the inefficient part of a provider network. They will rely on theconsent to shedding the inefficient part of a provider network. They will rely on the

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business potential of efficient providers, who by allocating substantial funds to growthbusiness potential of efficient providers, who by allocating substantial funds to growth and development can increase their production capacity, enlarge the catchment area, andand development can increase their production capacity, enlarge the catchment area, and eventually replace closed facilities. If, however, alternative providers are unlikely to entereventually replace closed facilities. If, however, alternative providers are unlikely to enter the local health care market (as in, for example, sparsely populated areas), healththe local health care market (as in, for example, sparsely populated areas), health financing authorities may have to provide direct subsidies to inefficient providers that arefinancing authorities may have to provide direct subsidies to inefficient providers that are earmarked for fixed investment. This would improve the economic viability of theearmarked for fixed investment. This would improve the economic viability of the respective facilities. The same goal can be achieved by allowing the lagging facilities torespective facilities. The same goal can be achieved by allowing the lagging facilities to internalize depreciation in reimbursement at increased depreciation rates.internalize depreciation in reimbursement at increased depreciation rates.

Substantial efficiency gains may be achieved if depreciation policies are enforcedSubstantial efficiency gains may be achieved if depreciation policies are enforced whereby fixed assets are depreciated based on time in use versus calendar time. Numberwhereby fixed assets are depreciated based on time in use versus calendar time. Number of services performed may be then used as a proxy for capacity utilization. For example,of services performed may be then used as a proxy for capacity utilization. For example, the standard length of service of a cat scan is taken to be five years. It is also assumedthe standard length of service of a cat scan is taken to be five years. It is also assumed that equipment must be in use for two work shifts daily. If under given assumptions thethat equipment must be in use for two work shifts daily. If under given assumptions the annual number of average relative intensity procedures to be performed on the cat scan isannual number of average relative intensity procedures to be performed on the cat scan is set on 1,500, then reimbursement claimed for each patient diagnosed will include 1/1,500set on 1,500, then reimbursement claimed for each patient diagnosed will include 1/1,500 of the cat scan’s annual depreciation (1/1,500 of 1/20 of its book value). of the cat scan’s annual depreciation (1/1,500 of 1/20 of its book value).

It is also assumed that the fraction of book value that may be included in a case-specificIt is also assumed that the fraction of book value that may be included in a case-specific reimbursement rate is fixed, that is, that it does not depend on the actual number ofreimbursement rate is fixed, that is, that it does not depend on the actual number of procedures performed. Health care facilities that succeed in equipping themselves withprocedures performed. Health care facilities that succeed in equipping themselves with expensive technology, yet in turn become unable to maintain an appropriate capacityexpensive technology, yet in turn become unable to maintain an appropriate capacity utilization rate, will fail to recover their costs of equipment by the time they need toutilization rate, will fail to recover their costs of equipment by the time they need to replace obsolete technology. The investment decisions of the health care facilities willreplace obsolete technology. The investment decisions of the health care facilities will have to be aligned with demand for specific types of health care services. A stronghave to be aligned with demand for specific types of health care services. A strong incentive will be created for providers to increase inflow of patients to boost capacityincentive will be created for providers to increase inflow of patients to boost capacity utilization. utilization.

3.5.33.5.3 The Case of the Tomsk Oblast Teaching HospitalThe Case of the Tomsk Oblast Teaching Hospital

Since in OTH case depreciation had to be calculated as part of the planned 1995 budget,Since in OTH case depreciation had to be calculated as part of the planned 1995 budget, the main concern was how to adjust fixed assets for inflation over the time period fromthe main concern was how to adjust fixed assets for inflation over the time period from February 1994 (the date of the latest appreciation) till January 1, 1995. The deflator wasFebruary 1994 (the date of the latest appreciation) till January 1, 1995. The deflator was assessed at 3.22 through extrapolating reported monthly inflation rates in the investmentassessed at 3.22 through extrapolating reported monthly inflation rates in the investment sector to the last three months of 1994. The reported data used in extrapolation coverssector to the last three months of 1994. The reported data used in extrapolation covers January to September 1994.January to September 1994.

Depreciation of equipment was geared to the calendar time regardless of the time in use.Depreciation of equipment was geared to the calendar time regardless of the time in use. Underutilized equipment will still burden case-specific costs, however, putting the facilityUnderutilized equipment will still burden case-specific costs, however, putting the facility at a competitive disadvantage with the providers of the same services that operate atat a competitive disadvantage with the providers of the same services that operate at higher capacity utilization rates and/or use less expensive technologies while maintaininghigher capacity utilization rates and/or use less expensive technologies while maintaining equal quality.equal quality.

3.63.6 Step 6: Calculation of Full CostsStep 6: Calculation of Full Costs

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Full costs by the cost centers are the total of direct costs, indirect costs, and depreciation.Full costs by the cost centers are the total of direct costs, indirect costs, and depreciation. (The corresponding formula is displayed on page M9 of Annex M, and the calculation is(The corresponding formula is displayed on page M9 of Annex M, and the calculation is carried out in columns B–E of Table 6, Annex T (pages T17–T19). The cell-specificcarried out in columns B–E of Table 6, Annex T (pages T17–T19). The cell-specific formulas as programmed electronically are presented in Table 6 of Annex F (pages F22–formulas as programmed electronically are presented in Table 6 of Annex F (pages F22–F26). Table 6 corresponds to the workbook sheet 6 of the COSTWIZ.XLS file.)F26). Table 6 corresponds to the workbook sheet 6 of the COSTWIZ.XLS file.)

3.73.7 Step 7: Step-down Allocation of Full CostsStep 7: Step-down Allocation of Full Costs

3.7.13.7.1 The Overall ConceptThe Overall Concept

The algorithm that applies in this case is presented in mathematical form in Annex MThe algorithm that applies in this case is presented in mathematical form in Annex M (pages M9–M11), and the calculations are carried out in Table 7 of Annex T (pages T17–(pages M9–M11), and the calculations are carried out in Table 7 of Annex T (pages T17–T28). The programmed formulas of this same table are given in Table 7 of Annex FT28). The programmed formulas of this same table are given in Table 7 of Annex F (pages F22–F81).(pages F22–F81).

The goal of this step in the algorithm is to allocate the full costs of cost centers asThe goal of this step in the algorithm is to allocate the full costs of cost centers as suppliers of services to the full costs of cost centers as users of services. Such asuppliers of services to the full costs of cost centers as users of services. Such a procedure provides a clear view of how costs flow across the hospital and howprocedure provides a clear view of how costs flow across the hospital and how administrative and paraclinical cost centers contribute to one another’s activities andadministrative and paraclinical cost centers contribute to one another’s activities and those of the clinical departments. It should be clarified from the outset that unlike the fullthose of the clinical departments. It should be clarified from the outset that unlike the full costs by cost centers as calculated prior to step-down allocation as the sum of the directcosts by cost centers as calculated prior to step-down allocation as the sum of the direct and indirect costs and depreciation (see Section 3.6), the full costs after step-downand indirect costs and depreciation (see Section 3.6), the full costs after step-down allocation will be called final costs.allocation will be called final costs.

Step-down allocation as an accounting method graphically takes the form of a triangularStep-down allocation as an accounting method graphically takes the form of a triangular matrix with the right angle and ladder-like (step-down) slope. Such a matrix may bematrix with the right angle and ladder-like (step-down) slope. Such a matrix may be perceived as a truncated version of the input-output table of the hospital. Conversely, aperceived as a truncated version of the input-output table of the hospital. Conversely, a complete input-output table would have the form of a rectangular matrix. From thecomplete input-output table would have the form of a rectangular matrix. From the viewpoint of calculation, the difference is that the triangular version implies aviewpoint of calculation, the difference is that the triangular version implies a unidirectional process of cost allocation. In any pair of cost centers, one is only a supplierunidirectional process of cost allocation. In any pair of cost centers, one is only a supplier while the other is only a user of services. Correspondingly, the full costs of the formerwhile the other is only a user of services. Correspondingly, the full costs of the former are allocated to the latter, but not vice versa. In the rectangular version, two-wayare allocated to the latter, but not vice versa. In the rectangular version, two-way allocation occurs: the first cost center would allocate costs to the second one, and theallocation occurs: the first cost center would allocate costs to the second one, and the other way around.other way around.

Clearly, the double-charge method is more accurate in reflecting the interactions amongClearly, the double-charge method is more accurate in reflecting the interactions among the cost centers, as it records all instances of bilateral technological links between the costthe cost centers, as it records all instances of bilateral technological links between the cost centers. The step-down allocation method simplifies such cases to a unilateralcenters. The step-down allocation method simplifies such cases to a unilateral interaction.interaction.

Both methods are legitimate. In our case, preference was given to step-down costBoth methods are legitimate. In our case, preference was given to step-down cost allocation because management accounting should be efficient. Reduction of theallocation because management accounting should be efficient. Reduction of the rectangular matrix to the triangular one by truncating the triangle above the mainrectangular matrix to the triangular one by truncating the triangle above the main diagonal reduces the number of cells by a factor of two. If the lower triangle is designeddiagonal reduces the number of cells by a factor of two. If the lower triangle is designed correctly, the loss in accuracy will be insignificant. In other words, the majority of cellscorrectly, the loss in accuracy will be insignificant. In other words, the majority of cells in the omitted upper triangle would have zero values in them. Here, as elsewhere inin the omitted upper triangle would have zero values in them. Here, as elsewhere in

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management accounting, a trade-off between mathematical accuracy and reasonable costsmanagement accounting, a trade-off between mathematical accuracy and reasonable costs should be sought rather than mathematical accuracy alone. An optimal approach is theshould be sought rather than mathematical accuracy alone. An optimal approach is the one under which the initial 20 percent of effort ensures 80 percent of the solution.one under which the initial 20 percent of effort ensures 80 percent of the solution. Strictly speaking, the last 20 percent of accuracy may be skipped.Strictly speaking, the last 20 percent of accuracy may be skipped.

3.7.23.7.2 Establishing the Sequence of Step-down Cost AllocationEstablishing the Sequence of Step-down Cost Allocation

In the previous section it was noted that the triangular matrix of step-down cost allocationIn the previous section it was noted that the triangular matrix of step-down cost allocation requires correct internal organization in order to minimize the losses and inaccuracies thatrequires correct internal organization in order to minimize the losses and inaccuracies that otherwise may occur in calculating the final costs by cost centers. otherwise may occur in calculating the final costs by cost centers.

Since step-down cost allocation is carried out top-down, on top of the pyramid formed bySince step-down cost allocation is carried out top-down, on top of the pyramid formed by the triangular matrix must be cost centers that provide services to all cost centers, whilethe triangular matrix must be cost centers that provide services to all cost centers, while using services from few. At the base of the pyramid should be cost centers which areusing services from few. At the base of the pyramid should be cost centers which are linked to other cost centers as predominantly users. In essence, the task of ranking costlinked to other cost centers as predominantly users. In essence, the task of ranking cost centers in this vertical hierarchy for the purposes of step-down cost allocation wascenters in this vertical hierarchy for the purposes of step-down cost allocation was already resolved in Section 3.2, whereby the cost centers were classified intoalready resolved in Section 3.2, whereby the cost centers were classified into administrative, paraclinical, and clinical. The downward sequence of the three groups inadministrative, paraclinical, and clinical. The downward sequence of the three groups in a step-down cost allocation matrix should be arranged precisely as listed. The next issuea step-down cost allocation matrix should be arranged precisely as listed. The next issue to resolve is how to sequence the cost centers within each of the three categories.to resolve is how to sequence the cost centers within each of the three categories.

The general problem is that only one cost center may be placed per line in the verticalThe general problem is that only one cost center may be placed per line in the vertical listing of the step-down matrix. Correspondingly, costs of the cost center placed on toplisting of the step-down matrix. Correspondingly, costs of the cost center placed on top will be allocated to all the remaining cost centers; the cost center that occupies the secondwill be allocated to all the remaining cost centers; the cost center that occupies the second stair will allocate its costs to all others except the one standing above it, and so forth. Thestair will allocate its costs to all others except the one standing above it, and so forth. The question arises of how to rank the cost centers that provide services to an equal number ofquestion arises of how to rank the cost centers that provide services to an equal number of other cost centers. The solution is that one cost center should be preferred over anotherother cost centers. The solution is that one cost center should be preferred over another according to some formal criterion. Below we will examine the logic of such aaccording to some formal criterion. Below we will examine the logic of such a preference as applied to different subgroups of cost centers.preference as applied to different subgroups of cost centers.

3.7.2.13.7.2.1 Administrative Cost CentersAdministrative Cost Centers

Among the administrative cost centers, three subgroups may be distinguished:Among the administrative cost centers, three subgroups may be distinguished:

First subgroupFirst subgroup: Cost centers that work for all of the hospital cost centers without: Cost centers that work for all of the hospital cost centers without exception. In order to minimize inaccuracies resulting from the impossibility ofexception. In order to minimize inaccuracies resulting from the impossibility of allocating costs of lower-placed to higher-placed cost centers, it is essential to arrangeallocating costs of lower-placed to higher-placed cost centers, it is essential to arrange equally ranked cost centers in a given subgroup in descending order by the volume ofequally ranked cost centers in a given subgroup in descending order by the volume of their full costs. As a result, the larger the unit in terms of its cost volume, the less losstheir full costs. As a result, the larger the unit in terms of its cost volume, the less loss will be incurred in the allocation of its costs to lower-standing cost centers. Putwill be incurred in the allocation of its costs to lower-standing cost centers. Put differently, the total of accurately allocated costs will be enhanced.differently, the total of accurately allocated costs will be enhanced.

Second subgroup:Second subgroup: Cost centers that serve exclusively clinical departments. They may be Cost centers that serve exclusively clinical departments. They may be placed randomly; all that matters is that an apportionment statistic is found that wouldplaced randomly; all that matters is that an apportionment statistic is found that would apply to clinical departments alone. This will ensure that the costs of the cost centersapply to clinical departments alone. This will ensure that the costs of the cost centers under consideration will not be dispersed across nonclinical departments. If, however, theunder consideration will not be dispersed across nonclinical departments. If, however, the

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value of the preferred apportionment criterion is other than zero for nonclinicalvalue of the preferred apportionment criterion is other than zero for nonclinical departments as well, then some of the costs will accrue to cost centers other than clinicaldepartments as well, then some of the costs will accrue to cost centers other than clinical departments regardless of the fact that they do not use services of the respectivedepartments regardless of the fact that they do not use services of the respective administrative department. This indicates inaccuracy in step-down allocation.administrative department. This indicates inaccuracy in step-down allocation.

Third subgroup:Third subgroup: Cost centers that work for both paraclinical and clinical departments. Cost centers that work for both paraclinical and clinical departments. Since the preferred apportionment statistic most likely will be applicable toSince the preferred apportionment statistic most likely will be applicable to administrative cost centers as well, it is essential that the given cost center is placed at theadministrative cost centers as well, it is essential that the given cost center is placed at the bottombottom of the administrative cost center category. Thus, allocation of its costs to of the administrative cost center category. Thus, allocation of its costs to nonmedical cost centers will never happen.nonmedical cost centers will never happen.

3.7.2.23.7.2.2 Paraclinical Departments and ServicesParaclinical Departments and Services

Similarly to the administrative cost centers, the paraclinical cost centers are classified intoSimilarly to the administrative cost centers, the paraclinical cost centers are classified into three subgroups.three subgroups.

First subgroupFirst subgroup: Cost centers that serve both paraclinical and clinical departments. As: Cost centers that serve both paraclinical and clinical departments. As such, they are placed in the upper part of the list. Within the subgroup the ranking issuch, they are placed in the upper part of the list. Within the subgroup the ranking is arranged by costs in descending order. This allows one to minimize the inaccuraciesarranged by costs in descending order. This allows one to minimize the inaccuracies resulting from the impossibility of upward cost allocation in the context of the step-downresulting from the impossibility of upward cost allocation in the context of the step-down procedureprocedure..

Second subgroup:Second subgroup: Cost centers that work exclusively for clinical departments and/or the Cost centers that work exclusively for clinical departments and/or the Outpatient Department. They are ranked by costs in ascending order. Thus, inaccuraciesOutpatient Department. They are ranked by costs in ascending order. Thus, inaccuracies are minimized originating from unavoidable allocation of part of the costs of respectiveare minimized originating from unavoidable allocation of part of the costs of respective cost centers among one another.cost centers among one another.

Third subgroup: Third subgroup: The sequence within the group of clinical departments was established The sequence within the group of clinical departments was established at random, since there is no cross-allocation among the cost centers of this category. Inat random, since there is no cross-allocation among the cost centers of this category. In other words, step-down allocation stops when it gets to the clinical departments.other words, step-down allocation stops when it gets to the clinical departments.

3.7.2.33.7.2.3 The Case of the Tomsk Oblast Teaching HospitalThe Case of the Tomsk Oblast Teaching Hospital

In the Tomsk Oblast Teaching Hospital, the order of cost centers for the purposes of step-In the Tomsk Oblast Teaching Hospital, the order of cost centers for the purposes of step-down cost allocation was established as explained in Sections 3.7.2.1 and 3.7.2.2. Thisdown cost allocation was established as explained in Sections 3.7.2.1 and 3.7.2.2. This has led to the following sequence (the subgroup numbers match those in Sections 3.7.2.1has led to the following sequence (the subgroup numbers match those in Sections 3.7.2.1 and 3.7.2.2):and 3.7.2.2):

Administrative Cost Centers:Administrative Cost Centers:First SubgroupFirst Subgroup Second SubgroupSecond Subgroup Third SubgroupThird Subgroup

General AdministrationGeneral Administration OperationsOperations Medical StatisticsMedical StatisticsLaundryLaundry

Planning and FinancePlanning and Finance KitchenKitchen Secretarial ServicesSecretarial ServicesAccountingAccounting HotelHotelHuman ResourcesHuman ResourcesMethodology and OrganizationMethodology and Organization

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HousekeepingHousekeepingSecuritySecurityTransportationTransportation

Paraclinical Cost Centers:Paraclinical Cost Centers:First SubgroupFirst Subgroup Second SubgroupSecond Subgroup Third SubgroupThird Subgroup

Radiology DepartmentRadiology Department Preadmission TestingPreadmission Testing Outpatient PharmacyOutpatient PharmacyEndoscopy DepartmentEndoscopy Department

Admissions DepartmentAdmissions Department Autopsy DepartmentAutopsy DepartmentSterilization DepartmentSterilization Department X-ray DepartmentX-ray DepartmentGeneral Clinical LaboratoryGeneral Clinical Laboratory Physiotherapy DepartmentPhysiotherapy DepartmentBacteriological LaboratoryBacteriological Laboratory Clinical Immunology LaboratoryClinical Immunology Laboratory

RadiologyRadiologyBlood BankBlood BankPlanned and Emergency CarePlanned and Emergency CareComputer TomographyComputer TomographyFamily Planning CenterFamily Planning CenterMedical GeneticsMedical GeneticsPsychiatric CarePsychiatric CareDentalDentalHyperbaric OxygenationHyperbaric OxygenationOperating RoomOperating Room

Clinical Departments:Clinical Departments:

·· CardiologyCardiology·· HematologyHematology·· GastroenterologyGastroenterology·· NephrologyNephrology·· UrologyUrology·· TraumatologyTraumatology·· ProctologyProctology·· NeurosurgeryNeurosurgery·· Vascular SurgeryVascular Surgery·· General SurgeryGeneral Surgery·· Thoracic SurgeryThoracic Surgery

·· OtolaryngologyOtolaryngology·· NeurologyNeurology·· GynecologyGynecology·· RheumatologyRheumatology·· EndocrinologyEndocrinology·· PulmonologyPulmonology·· OphthalmosurgeryOphthalmosurgery·· Detoxication CenterDetoxication Center·· Kidney DialysisKidney Dialysis·· AllergologyAllergology·· Intensive CareIntensive Care·· MicrosurgeryMicrosurgery·· OutpatientOutpatient

3.7.33.7.3 Step-down Cost Allocation StatisticsStep-down Cost Allocation Statistics

3.7.3.13.7.3.1 General ApproachGeneral Approach

As with allocation of indirect costs to direct (see Section 3.4.1), allocation of full costs ofAs with allocation of indirect costs to direct (see Section 3.4.1), allocation of full costs of provider cost centers to full costs of user cost centers is a statistical procedure; that is, it isprovider cost centers to full costs of user cost centers is a statistical procedure; that is, it is of a conventional nature. Cases in which the allocation is carried out by direct (job order)of a conventional nature. Cases in which the allocation is carried out by direct (job order) accounting make an exception. It stands to reason to avoid excessive use of directaccounting make an exception. It stands to reason to avoid excessive use of direct accounting since it is time- and labor-intensive. Direct accounting makes sense when itaccounting since it is time- and labor-intensive. Direct accounting makes sense when it addresses large volumes of costs and their relatively rare repetitiveness, for example,addresses large volumes of costs and their relatively rare repetitiveness, for example, costs for air transportation of patients.costs for air transportation of patients.

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In most cases, an apportionment statistic would be found to determine the share of userIn most cases, an apportionment statistic would be found to determine the share of user cost centers in the costs of the provider cost center. As in the allocation of indirect costscost centers in the costs of the provider cost center. As in the allocation of indirect costs to direct, the apportionment statistic is supposed to be adequate, that is, matchingto direct, the apportionment statistic is supposed to be adequate, that is, matching technological meaning of the provider-user relationships. The following issues should betechnological meaning of the provider-user relationships. The following issues should be addressed and analyzed:addressed and analyzed:

·· Exactly what services does the provider cost center render to the user cost center?Exactly what services does the provider cost center render to the user cost center?·· What is the role of these services in the activity of the user cost center?What is the role of these services in the activity of the user cost center?·· What determines the demand for these services?What determines the demand for these services?·· Is there a common demand factor for services of a particular provider cost centerIs there a common demand factor for services of a particular provider cost center

shared by the majority of the user cost centers?shared by the majority of the user cost centers?·· If yes, can such a common factor be quantified?If yes, can such a common factor be quantified?·· Can a respective quantitative indicator be developed under a given system ofCan a respective quantitative indicator be developed under a given system of

statistical reporting?statistical reporting?·· How much would it take to develop such an indicator from scratch?How much would it take to develop such an indicator from scratch?·· How much will be lost in accuracy if an optimal yet nonexistent indicator is givenHow much will be lost in accuracy if an optimal yet nonexistent indicator is given

up, substituted with a less optimal but better available indicator?up, substituted with a less optimal but better available indicator?··

The best indicator to use as a statistic for step-down allocation is the one that matches theThe best indicator to use as a statistic for step-down allocation is the one that matches the following requirements: (1) grasps a role common for all the user cost centers of servicesfollowing requirements: (1) grasps a role common for all the user cost centers of services rendered by a given provider cost center; and (2) is available from the existing system ofrendered by a given provider cost center; and (2) is available from the existing system of statistical reporting. If there is no statistical reporting. If there is no common common functional role of respective services acrossfunctional role of respective services across all the user cost centers, a statistically neutral indicator (such as direct costs) will beall the user cost centers, a statistically neutral indicator (such as direct costs) will be preferred as an apportionment criterion.preferred as an apportionment criterion.

3.7.3.23.7.3.2 The Case of the Tomsk Oblast Teaching HospitalThe Case of the Tomsk Oblast Teaching Hospital

Step-down cost allocation was carried out with the use of the following apportionmentStep-down cost allocation was carried out with the use of the following apportionment statistics:statistics:

Cost CentersCost Centers Step-down Apportionment StatisticsStep-down Apportionment Statistics

GarageGarage Direct costsDirect costsBuilding Maintenance DepartmentBuilding Maintenance Department SpaceSpaceHousekeepingHousekeeping SpaceSpaceGeneral AdministrationGeneral Administration Number of personnelNumber of personnelAccountingAccounting Direct costsDirect costsSecuritySecurity DepreciationDepreciationHuman ResourcesHuman Resources Number of personnelNumber of personnelPlanning and FinancePlanning and Finance Wages and salariesWages and salariesProcurementProcurement Direct costsDirect costsMethodology and OrganizationMethodology and Organization Full costsFull costsSecretarial ServicesSecretarial Services Number of personnelNumber of personnelDispatchersDispatchers PatientsPatients

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LaundryLaundry Patient-daysPatient-daysKitchenKitchen Patient-daysPatient-daysHotelHotel Relative value unitsRelative value unitsMedical StatisticsMedical Statistics PatientsPatientsGeneral Clinical LaboratoryGeneral Clinical Laboratory Relative value unitsRelative value unitsAdmissions OfficeAdmissions Office patientspatientsPharmacyPharmacy Costs of medicinesCosts of medicinesSterilizationSterilization Patient-daysPatient-daysBacteriological LaboratoryBacteriological Laboratory Relative value unitsRelative value unitsX-rayX-ray Relative value unitsRelative value unitsPsychiatric CarePsychiatric Care PatientsPatientsDentalDental PatientsPatientsAnesthesiologyAnesthesiology SurgeriesSurgeriesBlood BankBlood Bank Surgeries Surgeries Hyperbaric OxygenationHyperbaric Oxygenation PatientsPatientsPlanned and Emergency CarePlanned and Emergency Care Direct accountingDirect accountingClinical Immunology LaboratoryClinical Immunology Laboratory Relative value unitsRelative value unitsComputed TomographyComputed Tomography Hospital bedsHospital bedsAutopsyAutopsy Relative value unitsRelative value unitsPhysiotherapyPhysiotherapy Relative value unitsRelative value unitsPreadmission TestingPreadmission Testing Relative value unitsRelative value unitsOperating TheaterOperating Theater Surgeries Surgeries EndoscopyEndoscopy Relative value unitsRelative value unitsRadiologyRadiology Relative value unitsRelative value unitsX-rayX-ray Relative value unitsRelative value units

3.83.8 Step 8: Unit Costing by Clinical DepartmentsStep 8: Unit Costing by Clinical Departments

Step-down allocation of costs of nonclinical cost centers to clinical cost centers (seeStep-down allocation of costs of nonclinical cost centers to clinical cost centers (see Section 3.7) generates the final costs by clinical department. This opens the way toSection 3.7) generates the final costs by clinical department. This opens the way to calculating clinical department-wide average unit costs per hospital bed, patient-day, andcalculating clinical department-wide average unit costs per hospital bed, patient-day, and patient discharge; as well as outpatient department costs per visit to a doctor. The outputpatient discharge; as well as outpatient department costs per visit to a doctor. The output of such computations is presented in the right lower part of Table 7 of Annex T (pageof such computations is presented in the right lower part of Table 7 of Annex T (page T28), and the programmed formulas are presented in Table 7 of Annex F (pages F79–T28), and the programmed formulas are presented in Table 7 of Annex F (pages F79–F81). Table 7 corresponds to the workbook sheet 7 of the COSTWIZ.XLS file.F81). Table 7 corresponds to the workbook sheet 7 of the COSTWIZ.XLS file.

The average unit costs per clinical specialty are the final product of the basic costThe average unit costs per clinical specialty are the final product of the basic cost accounting algorithm. These indicators are relevant for the current system of financialaccounting algorithm. These indicators are relevant for the current system of financial planning and management at health care facilities, since funding is allocated andplanning and management at health care facilities, since funding is allocated and controlled according to standard unit costs per hospital bed and patient-day. Thecontrolled according to standard unit costs per hospital bed and patient-day. The indicators generated through our methodology differ from the customary indicators forindicators generated through our methodology differ from the customary indicators for the value of depreciation.the value of depreciation.

Along with the average unit costs by clinical specialty, the full (before step-downAlong with the average unit costs by clinical specialty, the full (before step-down allocation) and final (after step-down allocation) costs by each administrative andallocation) and final (after step-down allocation) costs by each administrative and

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paraclinical cost centers were calculated. These types of data are missing in the currentlyparaclinical cost centers were calculated. These types of data are missing in the currently existing cost accounting systems. Even without resorting to in-depth analysis, hospitalexisting cost accounting systems. Even without resorting to in-depth analysis, hospital economists can use such information for simple feasibility evaluation of decisions oneconomists can use such information for simple feasibility evaluation of decisions on setting up/shutting down and merging/splitting cost centers associated with large hospitalsetting up/shutting down and merging/splitting cost centers associated with large hospital overhead, as well as to determine the financial implications of introducing new kinds ofoverhead, as well as to determine the financial implications of introducing new kinds of diagnostic services. At the same time, the listed types of decisions would require morediagnostic services. At the same time, the listed types of decisions would require more sophisticated methods of analysis.sophisticated methods of analysis.

Subsequent steps of the algorithm supplement basic techniques of cost accounting withSubsequent steps of the algorithm supplement basic techniques of cost accounting with cost analysis methodologies.cost analysis methodologies.

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SECTION 4SECTION 4

METHODOLOGY OF COST ANALYSISMETHODOLOGY OF COST ANALYSIS

4.14.1 Step 9: Separation of Costs into Fixed and VariableStep 9: Separation of Costs into Fixed and Variable

Various cost analysis methodologies are based on separation of costs into fixed andVarious cost analysis methodologies are based on separation of costs into fixed and variable costs. The composition of fixed and variable costs is presented in Table 8 ofvariable costs. The composition of fixed and variable costs is presented in Table 8 of Annex T (pp. T29–T34).Annex T (pp. T29–T34).

4.1.14.1.1 DefinitionsDefinitions

Fixed costsFixed costs. These are costs that remain constant regardless of a provider’s clinical. These are costs that remain constant regardless of a provider’s clinical volume. Over time, however, fixed costs are subject to change. Therefore, it would bevolume. Over time, however, fixed costs are subject to change. Therefore, it would be more correct to define fixed costs as constant within a planning horizon. A commonmore correct to define fixed costs as constant within a planning horizon. A common instance of fixed costs is space rent.instance of fixed costs is space rent.

Variable costs, Variable costs, by contrast, grow in line with increases in clinical volume. An exampleby contrast, grow in line with increases in clinical volume. An example of variable costs is medical supplies and pharmaceuticals.of variable costs is medical supplies and pharmaceuticals.

Semi-variable costs.Semi-variable costs. Similar to fixed costs, semi-variable costs remain on a constant Similar to fixed costs, semi-variable costs remain on a constant level but, unlike fixed costs, they change more often. The changes are discrete andlevel but, unlike fixed costs, they change more often. The changes are discrete and uneven. Costs for administrative and management personnel provide an example ofuneven. Costs for administrative and management personnel provide an example of semi-variables. Salary costs of part-time health personnel grow more or less in line withsemi-variables. Salary costs of part-time health personnel grow more or less in line with growth in bed capacity and patient flow, that is, they vary. Gradual growth results fromgrowth in bed capacity and patient flow, that is, they vary. Gradual growth results from the fact that it is relatively easy to find part-time job candidates to staff clinical positions;the fact that it is relatively easy to find part-time job candidates to staff clinical positions; there is no need to wait until the workload increases to justify opening an additional full-there is no need to wait until the workload increases to justify opening an additional full-time position. Labor costs can be increased that way, by half- and even quarter-FTEs.time position. Labor costs can be increased that way, by half- and even quarter-FTEs.

Management staff makes a different case. With each new physician or nurse hired, theManagement staff makes a different case. With each new physician or nurse hired, the volume of administration and managerial activity increases. However, there is no pointvolume of administration and managerial activity increases. However, there is no point in hiring a personnel manager or hospital deputy medical director part-time. That is whyin hiring a personnel manager or hospital deputy medical director part-time. That is why managerial personnel costs would be growing in a discrete way, with additional jobmanagerial personnel costs would be growing in a discrete way, with additional job openings occurring only after the workload had outgrown the capacity of the previouslyopenings occurring only after the workload had outgrown the capacity of the previously hired managers. This occurs with regularity, causing step-up hikes in costs and providinghired managers. This occurs with regularity, causing step-up hikes in costs and providing enough rationale to consider these costs as semi-variable costs. Many other overheadenough rationale to consider these costs as semi-variable costs. Many other overhead costs can also be classified into this category, including fixtures and furniture and minorcosts can also be classified into this category, including fixtures and furniture and minor equipment.equipment.

The temptation occasionally arises to equate direct costs with variable costs, and indirectThe temptation occasionally arises to equate direct costs with variable costs, and indirect costs with fixed costs. In many cases this is erroneous (for example, in the Kidneycosts with fixed costs. In many cases this is erroneous (for example, in the Kidney Dialysis Department, all costs for kidney dialysis are direct). Some costs are variable,Dialysis Department, all costs for kidney dialysis are direct). Some costs are variable, however (for example, the cost of cleaning solutions for the dialysis installation), whilehowever (for example, the cost of cleaning solutions for the dialysis installation), while others are fixed (salary of the department head). By the same token, the indirect costs forothers are fixed (salary of the department head). By the same token, the indirect costs for dialysis may also be fixed (such as the salary of the head of the accounting department,dialysis may also be fixed (such as the salary of the head of the accounting department,

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which in part should be allocated to the Kidney Dialysis Department) and variable (forwhich in part should be allocated to the Kidney Dialysis Department) and variable (for example, the cost of electricity consumed by kidney dialysis equipment).example, the cost of electricity consumed by kidney dialysis equipment).

4.1.24.1.2 Criteria for Classifying Costs into Fixed and VariableCriteria for Classifying Costs into Fixed and Variable

Each type of cost is associated with a particular input resource or a variety of similarEach type of cost is associated with a particular input resource or a variety of similar inputs essential for hospital operation. The costs are allocated to fixed or variable costsinputs essential for hospital operation. The costs are allocated to fixed or variable costs depending on the technological and functional role of inputs provided from those costs.depending on the technological and functional role of inputs provided from those costs. Here much is determined not only by the type of resource, but also by operational profileHere much is determined not only by the type of resource, but also by operational profile of user cost centers. It is not infrequent that same resource may be classified as a fixedof user cost centers. It is not infrequent that same resource may be classified as a fixed cost when used in some cost centers, and as a variable cost in others.cost when used in some cost centers, and as a variable cost in others.

General hospital layout and management and operation patterns may influenceGeneral hospital layout and management and operation patterns may influence significantly decisions on how to separate costs into fixed and variable. In particular, thesignificantly decisions on how to separate costs into fixed and variable. In particular, the following factors may play an important role.following factors may play an important role.

Employment patterns and practices. Employment patterns and practices. The larger the share of permanent staff in the The larger the share of permanent staff in the hospital payroll, the larger the share of wages and salaries costs that will fall into thehospital payroll, the larger the share of wages and salaries costs that will fall into the category of fixed costs. Conversely, the more customary it is to employ temporary andcategory of fixed costs. Conversely, the more customary it is to employ temporary and part-time personnel (outside consultants, temporary nurses, and nurse's aides hired forpart-time personnel (outside consultants, temporary nurses, and nurse's aides hired for seasonal peaks), the greater the odds that salary will be considered as a variable expense,seasonal peaks), the greater the odds that salary will be considered as a variable expense, flexibly reacting to the ups and downs in clinical volume.flexibly reacting to the ups and downs in clinical volume.

Involvement in cooperation with other facilitiesInvolvement in cooperation with other facilities. The more the hospital deals with other. The more the hospital deals with other providers as subcontractors, the more visible the place in the cost structure that contractedproviders as subcontractors, the more visible the place in the cost structure that contracted services will occupy. The volume of orders and payments to subcontractors wouldservices will occupy. The volume of orders and payments to subcontractors would promptly react to changes in the hospital’s clinical volume. The corresponding costs,promptly react to changes in the hospital’s clinical volume. The corresponding costs, therefore, are likely to be treated as variable costs. If the hospital performs alltherefore, are likely to be treated as variable costs. If the hospital performs all housekeeping services as well as diagnostics from its own resources, respective costs willhousekeeping services as well as diagnostics from its own resources, respective costs will be fixed. be fixed.

The difference in classification of costs related to whether or not the hospital cooperatesThe difference in classification of costs related to whether or not the hospital cooperates with other facilities may be illustrated using transportation costs as an example. Bywith other facilities may be illustrated using transportation costs as an example. By maintaining its own cars and transportation department, the hospital incurs fixed costs ofmaintaining its own cars and transportation department, the hospital incurs fixed costs of depreciation and drivers’ salaries. Conversely, contracting car transportation services outdepreciation and drivers’ salaries. Conversely, contracting car transportation services out to an external supplier allows the hospital to carry the same costs as variable, insofar asto an external supplier allows the hospital to carry the same costs as variable, insofar as their volume may be flexibly adjusted to suit current needs.their volume may be flexibly adjusted to suit current needs.

Capacity utilization ratio. Capacity utilization ratio. If the hospital operates at full capacity, an insignificant If the hospital operates at full capacity, an insignificant increase in the flow of patients may lead to the growth of costs that are largely fixedincrease in the flow of patients may lead to the growth of costs that are largely fixed (expansion of space and bed capacity leads to hikes in annual depreciation costs; hiring(expansion of space and bed capacity leads to hikes in annual depreciation costs; hiring additional personnel will result in increases in the fixed component of wages andadditional personnel will result in increases in the fixed component of wages and salaries). Within the planning period, therefore, many fixed costs will turn out to be semi-salaries). Within the planning period, therefore, many fixed costs will turn out to be semi-variable. A similar effect may arise in a hospital with chronically underutilized capacity.variable. A similar effect may arise in a hospital with chronically underutilized capacity. If the decision is made to shed excessive beds and space, some fixed operating costs willIf the decision is made to shed excessive beds and space, some fixed operating costs will become variable.become variable.

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In sum, it may be concluded that the classification of costs into fixed and variable isIn sum, it may be concluded that the classification of costs into fixed and variable is determined by the economic and organizational context in which a given health caredetermined by the economic and organizational context in which a given health care facility operates.facility operates.

4.1.34.1.3 The Case of the Tomsk Oblast Teaching HospitalThe Case of the Tomsk Oblast Teaching Hospital

The separation of costs into fixed and variable was analyzed for 61 cost centers and 27The separation of costs into fixed and variable was analyzed for 61 cost centers and 27 cost categories of OTH’s operating budget, including 6 types of direct costs, 20 types ofcost categories of OTH’s operating budget, including 6 types of direct costs, 20 types of indirect costs, and depreciation.indirect costs, and depreciation.

The concrete decisions made in separating costs into fixed and variable are presentedThe concrete decisions made in separating costs into fixed and variable are presented below:below:

Chapter 1, "Wages and Salaries," was allocated to fixed costs, taking the followingChapter 1, "Wages and Salaries," was allocated to fixed costs, taking the following circumstances into account:circumstances into account:

The entire personnel of the hospital is on staff and paid regardless of the volume ofThe entire personnel of the hospital is on staff and paid regardless of the volume of hospital activity.hospital activity.

·· Should the hospital be transferred to a performance-based method ofShould the hospital be transferred to a performance-based method of reimbursement (that is, one that links revenues and the payroll to the number ofreimbursement (that is, one that links revenues and the payroll to the number of patient discharges), revenues of hospital workers might increase (or decrease).patient discharges), revenues of hospital workers might increase (or decrease). The discretionary part of the salary under such a scenario becomes a variable cost.The discretionary part of the salary under such a scenario becomes a variable cost. However, it should be taken into account that when changing to a performance-However, it should be taken into account that when changing to a performance-based system of reimbursement, the hospital will try to build in the reimbursementbased system of reimbursement, the hospital will try to build in the reimbursement rates its current wage and salary costs. Such an approach stands to reason bothrates its current wage and salary costs. Such an approach stands to reason both tactically and economically—tactically, because the purchaser of care will hardlytactically and economically—tactically, because the purchaser of care will hardly agree to case-mix reimbursement rates other than those fixing the current (low)agree to case-mix reimbursement rates other than those fixing the current (low) salary scale. If even some concessions are made by the purchaser of care in termssalary scale. If even some concessions are made by the purchaser of care in terms of wages and salary, budget neutrality adjustment will affect other cost itemsof wages and salary, budget neutrality adjustment will affect other cost items anyway, so there seems to be no particular incentive for a hospital to insist on asanyway, so there seems to be no particular incentive for a hospital to insist on as regards outright increases in wages and salaries. The most important at the initialregards outright increases in wages and salaries. The most important at the initial stage is to transfer to a desired system of reimbursement, even if it does not yieldstage is to transfer to a desired system of reimbursement, even if it does not yield immediate returns. The above approach also makes sense economically, becauseimmediate returns. The above approach also makes sense economically, because shifting resources across clinical specialties seems to be a necessary structuralshifting resources across clinical specialties seems to be a necessary structural adjustment measure in response to the demand/supply conditions in the healthadjustment measure in response to the demand/supply conditions in the health care market. Reimbursement per patient discharge will make it an unaffordablecare market. Reimbursement per patient discharge will make it an unaffordable luxury to keep idle beds and clinical departments with low occupancy rates. Withluxury to keep idle beds and clinical departments with low occupancy rates. With some specialties expanding and others contracting, hospital-fund payrolls maysome specialties expanding and others contracting, hospital-fund payrolls may remain unchanged.remain unchanged.

Chapter 2, “Payroll Taxes," was classified into fixed costs as a derivative of Chapter 1.Chapter 2, “Payroll Taxes," was classified into fixed costs as a derivative of Chapter 1.

Chapter 9, "Food," and Chapter 10, "Drugs and Supplies," are variable costs, responsiveChapter 9, "Food," and Chapter 10, "Drugs and Supplies," are variable costs, responsive as they are to the volume of clinical activity.as they are to the volume of clinical activity.

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Chapter 14, "Linens and Uniforms," was classified into fixed costs taking into accountChapter 14, "Linens and Uniforms," was classified into fixed costs taking into account their rigidly fixed (and unjustifiably long) standard service life of three years on average.their rigidly fixed (and unjustifiably long) standard service life of three years on average. Under the existing system of accounting, spending on this input category is essentiallyUnder the existing system of accounting, spending on this input category is essentially unrelated to the intensity of wear and tear. Linen and uniform costs found themselves inunrelated to the intensity of wear and tear. Linen and uniform costs found themselves in the blind spot (fell out) of the hospital’s investment policies. This cost item is alreadythe blind spot (fell out) of the hospital’s investment policies. This cost item is already omitted from working capital, given its prolonged service life, yet it is also left out ofomitted from working capital, given its prolonged service life, yet it is also left out of fixed assets, since the depreciation rates for linens and uniforms may not be internallyfixed assets, since the depreciation rates for linens and uniforms may not be internally regulated in line with hospital capacity utilization and efficiency. In conclusion, costregulated in line with hospital capacity utilization and efficiency. In conclusion, cost recovery with respect to minor equipment and supplies (such as linens and uniforms) isrecovery with respect to minor equipment and supplies (such as linens and uniforms) is planned and managed with less flexibility than is the case with fixed investments. planned and managed with less flexibility than is the case with fixed investments.

Another peculiarity that makes linen and uniform costs look and behave as fixed costs isAnother peculiarity that makes linen and uniform costs look and behave as fixed costs is that they are planned and reimbursed per hospital bed, not per patient-day. As a result,that they are planned and reimbursed per hospital bed, not per patient-day. As a result, the functional meaning of these costs is distorted. It would be advisable to considerthe functional meaning of these costs is distorted. It would be advisable to consider average length of stay and, correspondingly, bed turnover as a determinant of need for theaverage length of stay and, correspondingly, bed turnover as a determinant of need for the input resource under consideration.input resource under consideration.

Chapter 18, "Dietary Formula Food for Staff Exposed to Occupational Hazards," wasChapter 18, "Dietary Formula Food for Staff Exposed to Occupational Hazards," was allocated to fixed costs. Such a decision is discretionary and is actually more of aallocated to fixed costs. Such a decision is discretionary and is actually more of a suggestion. These costs are geared to certain positions in the staffing schedule andsuggestion. These costs are geared to certain positions in the staffing schedule and consequently planned per FTE, regardless of the volume of activity of respective staffconsequently planned per FTE, regardless of the volume of activity of respective staff and the actual amount of their exposure to occupational hazards. It might be more correctand the actual amount of their exposure to occupational hazards. It might be more correct to plan these costs on the basis of duration or number of exposure episodes. to plan these costs on the basis of duration or number of exposure episodes.

Chapter 3, "Heating," was included among fixed costs. Costs of utilities and buildingChapter 3, "Heating," was included among fixed costs. Costs of utilities and building maintenance services depend on the size, design, interior layout, and condition ofmaintenance services depend on the size, design, interior layout, and condition of buildings. Listed factors do not depend on the clinical volume or specialty compositionbuildings. Listed factors do not depend on the clinical volume or specialty composition of the hospital's activity unless structural adjustment and resource shifts bring aboutof the hospital's activity unless structural adjustment and resource shifts bring about building remodeling, elimination of excessive space, and so forth. In the latter case,building remodeling, elimination of excessive space, and so forth. In the latter case, heating costs will behave more like semi-variable costs.heating costs will behave more like semi-variable costs.

Chapter 3, “Lighting,” as the sum of electricity costs, should be divided by sources ofChapter 3, “Lighting,” as the sum of electricity costs, should be divided by sources of energy use. Electricity costs of general lighting, bactericidal lamps, office equipment,energy use. Electricity costs of general lighting, bactericidal lamps, office equipment, and other constantly plugged-in electrical appliances are closer to fixed costs. Medicaland other constantly plugged-in electrical appliances are closer to fixed costs. Medical equipment, especially energy-intensive, is largely associated with variable costs. In theequipment, especially energy-intensive, is largely associated with variable costs. In the Tomsk Oblast Teaching Hospital, there are no reported data on the composition ofTomsk Oblast Teaching Hospital, there are no reported data on the composition of electricity costs by the costs centers. Under these circumstances, it is recommended thatelectricity costs by the costs centers. Under these circumstances, it is recommended that electricity costs be classified as fixed or variable, depending on the predominantelectricity costs be classified as fixed or variable, depending on the predominant functional and technological profile of energy consumption. It can be assumed thatfunctional and technological profile of energy consumption. It can be assumed that profiles will vary on a cost-center-by-cost-center basis. The following tentativeprofiles will vary on a cost-center-by-cost-center basis. The following tentative breakdown of cost centers by prevalent profile of electricity consumption is adopted:breakdown of cost centers by prevalent profile of electricity consumption is adopted:

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Electricity Consumption As Electricity Consumption As Electricity Consumption AsElectricity Consumption Asa Fixed Costa Fixed Cost a Variable Costa Variable Cost

Administrative Cost CentersAdministrative Cost Centers:: Administrative Cost CentersAdministrative Cost Centers::Car TransportationCar Transportation LaundryLaundryBuilding MaintenanceBuilding Maintenance KitchenKitchenHousekeepingHousekeepingGeneral AdministrationGeneral Administration

Paraclinical Cost CentersParaclinical Cost Centers:: Paraclinical Cost Centers:Paraclinical Cost Centers:AccountingAccounting SterilizationSterilizationSecuritySecurity DentalDentalHuman ResourcesHuman Resources AnesthesiologyAnesthesiologyPlanning and FinancingPlanning and Financing Hyperbaric OxygenationHyperbaric OxygenationProcurementProcurement Computer TomographyComputer TomographyMethodology and OrganizationMethodology and Organization PhysiotherapyPhysiotherapySecretarial ServiceSecretarial Service Preadmission TestingPreadmission TestingDispatchersDispatchers Operating RoomOperating RoomHotel Hotel EndoscopyEndoscopyMedical StatisticsMedical Statistics RadiologyRadiologyGeneral Clinical LaboratoryGeneral Clinical Laboratory X-rayX-rayKidney DialysisKidney DialysisAdmissions OfficeAdmissions Office Clinical DepartmentsClinical DepartmentsPharmacyPharmacy Intensive CareIntensive CareBacteriological LaboratoryBacteriological Laboratory UrologyUrologyX-rayX-rayPsychiatric CarePsychiatric CareBlood BankBlood BankPlanned and Emergency CarePlanned and Emergency CareClinical Immunology LaboratoryClinical Immunology LaboratoryAutopsyAutopsy

Clinical Departments:Clinical Departments:All, except those classified into variable costsAll, except those classified into variable costs

Hence, to provide for more accurate separation of electricity costs into fixed or variableHence, to provide for more accurate separation of electricity costs into fixed or variable costs it would be advisable to install energy meters separately in each of the cost centers.costs it would be advisable to install energy meters separately in each of the cost centers.

Chapter 3, "Water," is classified into fixed costs as regards water consumption forChapter 3, "Water," is classified into fixed costs as regards water consumption for housekeeping and other general needs versus variable costs for clinical needs.housekeeping and other general needs versus variable costs for clinical needs. Accordingly, the water bill of administrative services is allocated to fixed costs, whileAccordingly, the water bill of administrative services is allocated to fixed costs, while similar costs of paraclinical and clinical departments are assigned to variable costs.similar costs of paraclinical and clinical departments are assigned to variable costs.

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Chapter 3, "Building Maintenance and Repair," was classified into fixed costs. TheChapter 3, "Building Maintenance and Repair," was classified into fixed costs. The volume of routine maintenance and repairs depends on the condition of the buildings,volume of routine maintenance and repairs depends on the condition of the buildings, which in turn is determined by the age, quality of design and construction, and effort inwhich in turn is determined by the age, quality of design and construction, and effort in maintaining fixed assets to a far greater extent than by the volume of activities carried outmaintaining fixed assets to a far greater extent than by the volume of activities carried out in those buildings.in those buildings.

Chapter 3, "Office Supplies," will be considered as fixed as regards administrative costChapter 3, "Office Supplies," will be considered as fixed as regards administrative cost centers and variable for medical cost centers. The underlying assumption here is that thecenters and variable for medical cost centers. The underlying assumption here is that the mainstream of paperwork is associated with clinical activity and increases in proportionmainstream of paperwork is associated with clinical activity and increases in proportion to it.to it.

Chapter 3, "Telephone Communication," correlates only weakly with the clinical volume,Chapter 3, "Telephone Communication," correlates only weakly with the clinical volume, thus representing fixed costs.thus representing fixed costs.

Chapter 3, "Contracted Services," is of a sporadic nature largely unrelated to the volumeChapter 3, "Contracted Services," is of a sporadic nature largely unrelated to the volume of clinical activity. As such, these costs were classified into fixed costs. A better insightof clinical activity. As such, these costs were classified into fixed costs. A better insight into the composition and periodicity of costs under this chapter as well as a listing of theirinto the composition and periodicity of costs under this chapter as well as a listing of their users in the hospital will be required.users in the hospital will be required.

Chapter 3, "Road Transportation Services," was classified into fixed costs as consumedChapter 3, "Road Transportation Services," was classified into fixed costs as consumed by administrative and paraclinical cost centers and into variable costs provided to clinicalby administrative and paraclinical cost centers and into variable costs provided to clinical departments. The assumption here is that the borderline is drawn according to thedepartments. The assumption here is that the borderline is drawn according to the functional implications of transportation services: general transportation reacts weakly tofunctional implications of transportation services: general transportation reacts weakly to the volume of clinical activity, whereas medical transportation is used in proportion to thethe volume of clinical activity, whereas medical transportation is used in proportion to the number of patients.number of patients.

Chapter 3, "Housekeeping Services," "Security," and "Fire Prevention," are fixed costsChapter 3, "Housekeeping Services," "Security," and "Fire Prevention," are fixed costs in the strict sense of the word.in the strict sense of the word.

Chapter 3, "Radio Cable Service," was allocated to fixed costs, that is, the number ofChapter 3, "Radio Cable Service," was allocated to fixed costs, that is, the number of radio outlets remains constant, regardless of the occupancy rate.radio outlets remains constant, regardless of the occupancy rate.

Chapter 3, "Elevator Maintenance," clearly is a fixed cost.Chapter 3, "Elevator Maintenance," clearly is a fixed cost.

Chapter 3, "Equipment Maintenance and Repair," was allocated to the variable costs,Chapter 3, "Equipment Maintenance and Repair," was allocated to the variable costs, since the need for repair (obviously the prevalent component of this cost item) depends,since the need for repair (obviously the prevalent component of this cost item) depends, or at least should depend, on the equipment use intensity. A better thought-out decisionor at least should depend, on the equipment use intensity. A better thought-out decision on how to classify these costs should be based on precise knowledge of how maintenanceon how to classify these costs should be based on precise knowledge of how maintenance and repair or organized and handled, in particular: (1) Are they carried out on an and repair or organized and handled, in particular: (1) Are they carried out on an ad hocad hoc job-order basis or regularly under long-term contracts? (2) What determines charges: arejob-order basis or regularly under long-term contracts? (2) What determines charges: are those linked to the time-in-use (workload) or calendar time resource? (3) What dominatesthose linked to the time-in-use (workload) or calendar time resource? (3) What dominates costs: preventive maintenance or malfunction repair?costs: preventive maintenance or malfunction repair?

Chapter 3, "Repair of Radio Communications Equipment," was classified into fixed costsChapter 3, "Repair of Radio Communications Equipment," was classified into fixed costs for the same reasons as was the preceding cost item.for the same reasons as was the preceding cost item.

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Chapter 3, "Workplace Safety Activities," was classified into fixed costs, as determinedChapter 3, "Workplace Safety Activities," was classified into fixed costs, as determined mainly by the number of personnel. It is presumed that for the near future they willmainly by the number of personnel. It is presumed that for the near future they will remain unchanged (see also the reasons for classifying Chapter 1 "Wages and Salaries"remain unchanged (see also the reasons for classifying Chapter 1 "Wages and Salaries" costs into fixed costs).costs into fixed costs).

Chapter 3, "Rat Extermination," is a fixed cost. There are of a predominantly preventiveChapter 3, "Rat Extermination," is a fixed cost. There are of a predominantly preventive nature, and have constant periodicity, regardless of clinical volume.nature, and have constant periodicity, regardless of clinical volume.

Chapter 3, "Transportation of Dead Bodies," constitutes variable costs.Chapter 3, "Transportation of Dead Bodies," constitutes variable costs.

Chapter 4, "Business Travel," was classified into fixed costs. In the future this cost itemChapter 4, "Business Travel," was classified into fixed costs. In the future this cost item behavior may change. If economic incentives encourage the hospital to expand outreachbehavior may change. If economic incentives encourage the hospital to expand outreach care, the amount of travel will get to be responsive to the number of enrollees.care, the amount of travel will get to be responsive to the number of enrollees.

Chapter 18, "Air Transportation of Patients," was included in variable costs: the numberChapter 18, "Air Transportation of Patients," was included in variable costs: the number of flights depends on the number of patients in the hospital’s catchment area. Inof flights depends on the number of patients in the hospital’s catchment area. In principle, the classification of this expense into fixed or variable should be consideredprinciple, the classification of this expense into fixed or variable should be considered dependent on how rates are structured by the carrier and what the rental terms of thedependent on how rates are structured by the carrier and what the rental terms of the aircraft are. Currently an airplane would be rented, and charges for operating costs wouldaircraft are. Currently an airplane would be rented, and charges for operating costs would be set per flight. If the rental cost dominates current costs, then air transportation ofbe set per flight. If the rental cost dominates current costs, then air transportation of patients will be a fixed cost and vice versa.patients will be a fixed cost and vice versa.

Depreciation was classified into fixed costs for the time being. If and after the hospitalDepreciation was classified into fixed costs for the time being. If and after the hospital becomes entitled to autonomy in planning depreciation and fixed investment, it will setbecomes entitled to autonomy in planning depreciation and fixed investment, it will set up the depreciation fund. Revenues would accrue to that fund at a rate reflecting tear andup the depreciation fund. Revenues would accrue to that fund at a rate reflecting tear and wear rate. In such setting depreciation will become a variable cost.wear rate. In such setting depreciation will become a variable cost.

4.24.2 Step 10: Step-down Allocation of Fixed CostsStep 10: Step-down Allocation of Fixed Costs

The calculation is presented in Table 9 of Annex T (pages T35–T46). Of the formulasThe calculation is presented in Table 9 of Annex T (pages T35–T46). Of the formulas that were programmed for this calculation, only the formulas of column E were printedthat were programmed for this calculation, only the formulas of column E were printed out, the only column that makes differences between Tables 9 and 7. Respectiveout, the only column that makes differences between Tables 9 and 7. Respective fragment of Table 9 can be found in Annex F on pages F90–91. In the software, Table 9fragment of Table 9 can be found in Annex F on pages F90–91. In the software, Table 9 corresponds to the workbook sheet 9 of the COSTWIZ.XLS file.corresponds to the workbook sheet 9 of the COSTWIZ.XLS file.

The step-down allocation of indirect costs generates as the output the final fixed costs byThe step-down allocation of indirect costs generates as the output the final fixed costs by cost center at large and by clinical department in particular. The specialty-wide averagecost center at large and by clinical department in particular. The specialty-wide average costs were converted into average unit cost per bed, patient-day, and patient discharge.costs were converted into average unit cost per bed, patient-day, and patient discharge. These data set the stage for analytical computations, carried out in the following steps ofThese data set the stage for analytical computations, carried out in the following steps of the algorithm.the algorithm.

The methodology of step-down allocation of fixed costs is an accurate replica of theThe methodology of step-down allocation of fixed costs is an accurate replica of the methodology of step-down allocation of full costs (see Section 3.7). The only differencemethodology of step-down allocation of full costs (see Section 3.7). The only difference is that fixed, not full costs are subject to step-down allocation. The sum of the fixed costsis that fixed, not full costs are subject to step-down allocation. The sum of the fixed costs was calculated by cost center in the preceding step, (see Section 3.1 and, correspondingly,was calculated by cost center in the preceding step, (see Section 3.1 and, correspondingly,

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right column AHright column AH of Table 8 of Annex T). Notably, one and the same set ofof Table 8 of Annex T). Notably, one and the same set of apportionment statistics was used for step-down allocation of both full and fixed costs.apportionment statistics was used for step-down allocation of both full and fixed costs.

4.34.3 Step 11: Calculation of the Share of Fixed and Variable CostsStep 11: Calculation of the Share of Fixed and Variable Costs

The calculation is presented in Table 10 of Annex T (pages T47–T48). The formulasThe calculation is presented in Table 10 of Annex T (pages T47–T48). The formulas programmed in the cells of this table were printed out in Table 10 of Annex F (pagesprogrammed in the cells of this table were printed out in Table 10 of Annex F (pages F92–F93). In the software, Table 10 corresponds to the workbook sheet 10 of theF92–F93). In the software, Table 10 corresponds to the workbook sheet 10 of the COSTWIZ.XLS file.COSTWIZ.XLS file.

The share of fixed versus variable costs was calculated for both full and final costs, thatThe share of fixed versus variable costs was calculated for both full and final costs, that is, before and after step-down allocation. As it appears to be, in all clinical departments ofis, before and after step-down allocation. As it appears to be, in all clinical departments of the hospital and in 12 of 21 paraclinical departments, the share of variable costs in thethe hospital and in 12 of 21 paraclinical departments, the share of variable costs in the final costs is lower than in the full costs. As a result of allocation of costs of nonmedicalfinal costs is lower than in the full costs. As a result of allocation of costs of nonmedical cost centers to the costs of paraclinical and clinical cost centers, the burden of fixed costscost centers to the costs of paraclinical and clinical cost centers, the burden of fixed costs on the clinical departments increases. The same phenomenon occurs after costs ofon the clinical departments increases. The same phenomenon occurs after costs of paraclinical cost centers are apportioned to clinical departments.paraclinical cost centers are apportioned to clinical departments.

Thus, the burdening of the hospital budget with fixed costs occurs mainly because ofThus, the burdening of the hospital budget with fixed costs occurs mainly because of administrative cost centers and activities, and almost to an equal degree because of theadministrative cost centers and activities, and almost to an equal degree because of the paraclinical cost centers and activities. In subsequent sections it will be demonstratedparaclinical cost centers and activities. In subsequent sections it will be demonstrated that fixed costs provide the main threat of underreimbursement of the hospital’s operatingthat fixed costs provide the main threat of underreimbursement of the hospital’s operating costs. In this sense the downsizing of cost centers with a large share of fixed costs mightcosts. In this sense the downsizing of cost centers with a large share of fixed costs might be considered an important approach to making the hospital’s organizational structurebe considered an important approach to making the hospital’s organizational structure more efficient. In the case of the Tomsk Oblast Teaching Hospital, the simulationsmore efficient. In the case of the Tomsk Oblast Teaching Hospital, the simulations confirmed that streamlining of the organizational structure should be carried outconfirmed that streamlining of the organizational structure should be carried out primarily along the line of shedding redundancies at administrative cost centers. Theprimarily along the line of shedding redundancies at administrative cost centers. The share of fixed costs in that cost center category varies from 77 percent to 100 percent.share of fixed costs in that cost center category varies from 77 percent to 100 percent.

4.44.4 Step 12: Step-down Allocation of Wages and SalariesStep 12: Step-down Allocation of Wages and Salaries

The calculation is presented in Table 11 of Annex T (pages T49–T60). Of the formulasThe calculation is presented in Table 11 of Annex T (pages T49–T60). Of the formulas programmed for this calculation, only the formulas of Column E are printed out, the onlyprogrammed for this calculation, only the formulas of Column E are printed out, the only one that makes difference between Tables 11, 7, and 9. This part of Table 11 can beone that makes difference between Tables 11, 7, and 9. This part of Table 11 can be found in Annex F on pages F94–F95. In the software, Table 11 corresponds to thefound in Annex F on pages F94–F95. In the software, Table 11 corresponds to the workbook sheet 11 of the COSTWIZ.XLS file.workbook sheet 11 of the COSTWIZ.XLS file.

The step-down allocation of wages and salaries was carried out based on the sameThe step-down allocation of wages and salaries was carried out based on the same methodology as the allocation of the full and fixed costs. The purpose of this calculationmethodology as the allocation of the full and fixed costs. The purpose of this calculation is to identify the full and direct wage-intensity of the clinical departments and the flowsis to identify the full and direct wage-intensity of the clinical departments and the flows of labor costs across all cost centers as expressed in wages and salaries. These data areof labor costs across all cost centers as expressed in wages and salaries. These data are important for facility-wide internal allocation of funds generated through the clinicalimportant for facility-wide internal allocation of funds generated through the clinical departments. The data show how much and to whom the clinical department owes fromdepartments. The data show how much and to whom the clinical department owes from each ruble of wages and salaries reimbursed in unit wage costs per hospital bed, patient-each ruble of wages and salaries reimbursed in unit wage costs per hospital bed, patient-day, and patient discharge. In the subsequent steps of the algorithm these data will beday, and patient discharge. In the subsequent steps of the algorithm these data will be

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employed to model the allocation of funds saved by the clinical departments throughemployed to model the allocation of funds saved by the clinical departments through increases in the volume of clinical activity while keeping bed capacity unchanged.increases in the volume of clinical activity while keeping bed capacity unchanged.

4.54.5 Step 13: Modeling Financial Performance under Alternative Scenarios ofStep 13: Modeling Financial Performance under Alternative Scenarios ofChanges in Clinical VolumeChanges in Clinical Volume

A variety of computations that model the financial performance of clinical departments inA variety of computations that model the financial performance of clinical departments in relation to the volume of clinical activity are presented in mathematical notations inrelation to the volume of clinical activity are presented in mathematical notations in Annex M (pages M11– M12). The baseline and calculated data are presented in Table 12Annex M (pages M11– M12). The baseline and calculated data are presented in Table 12 of Annex T (pages T61 –T65). The same table with programmed formulas is printed inof Annex T (pages T61 –T65). The same table with programmed formulas is printed in Annex F, on pages F96–F115. In the software, Table 12 corresponds to sheet 12 of theAnnex F, on pages F96–F115. In the software, Table 12 corresponds to sheet 12 of the COSTWIZ.XLS file.COSTWIZ.XLS file.

4.5.14.5.1 Introductory RemarksIntroductory Remarks

The computations hold valid under two assumptions:The computations hold valid under two assumptions:

·· the hospital costs are reimbursed per patient discharge;the hospital costs are reimbursed per patient discharge;·· the hospital cost function is linear, that is, the unit costs remain constant withthe hospital cost function is linear, that is, the unit costs remain constant with

changes in the number of patients discharged.changes in the number of patients discharged.

The calculation was carried out for each of 23 clinical departments of OTH.The calculation was carried out for each of 23 clinical departments of OTH.

An independent variable of the model is the change in the annual number of patientAn independent variable of the model is the change in the annual number of patient discharges. Seven scenarios are preset in the software: reduction of the number of patientsdischarges. Seven scenarios are preset in the software: reduction of the number of patients by 30 percent, 20 percent, and 10 percent; the number of patients unchanged; increase inby 30 percent, 20 percent, and 10 percent; the number of patients unchanged; increase in the number of patients by 10 percent, 20 percent, and 30 percent. The independentthe number of patients by 10 percent, 20 percent, and 30 percent. The independent variable (that is, the percent change of clinical volume) is displayed in the shadedvariable (that is, the percent change of clinical volume) is displayed in the shaded Column B of Table 12. By changing the number in any of the shaded cells, the hospitalColumn B of Table 12. By changing the number in any of the shaded cells, the hospital economist obtains the financial performance indicators of the respective clinicaleconomist obtains the financial performance indicators of the respective clinical department for a given percent change in the number of patient discharges. Column Cdepartment for a given percent change in the number of patient discharges. Column C shows the absolute number of patients matching given percent change.shows the absolute number of patients matching given percent change.

The functions (dependent variables) of the number of patient discharge are:The functions (dependent variables) of the number of patient discharge are:

·· department overall costs (Columns D and E),department overall costs (Columns D and E),·· department revenues (Columns F and G),department revenues (Columns F and G),·· department profit margin (column H),department profit margin (column H),·· gain/loss impact (columns I–N), in particular the amount of savings on fixed costsgain/loss impact (columns I–N), in particular the amount of savings on fixed costs

that may be made available for allocation to wages and salaries.that may be made available for allocation to wages and salaries.

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4.5.24.5.2 The Interrelationship between Clinical Volume, Costs, Revenue, The Interrelationship between Clinical Volume, Costs, Revenue, Profit Margin, and Wages and SalariesProfit Margin, and Wages and Salaries

Let us assume that a clinical department is reimbursed for its costs per patient discharge.Let us assume that a clinical department is reimbursed for its costs per patient discharge. The number of patients, therefore, directly affects the amount of the department’sThe number of patients, therefore, directly affects the amount of the department’s revenues. The revenues will grow in straight-line proportion to growth in the number ofrevenues. The revenues will grow in straight-line proportion to growth in the number of patients and will go down in straight-line proportion to decline in the number of patients.patients and will go down in straight-line proportion to decline in the number of patients.

However, the financial performance outcomes for the department will be shaped not soHowever, the financial performance outcomes for the department will be shaped not so much by its revenues, as the revenue-to-costs ratio. For example, if costs are growingmuch by its revenues, as the revenue-to-costs ratio. For example, if costs are growing more rapidly than revenues, the increase in the number of patients will be tantamount tomore rapidly than revenues, the increase in the number of patients will be tantamount to the growth in the department’s negative profit margin. Therefore, it is important to take athe growth in the department’s negative profit margin. Therefore, it is important to take a closer look at how costs behave with changes in the clinical volume.closer look at how costs behave with changes in the clinical volume.

In order to analyze this trend, we will return to separation of costs into fixed and variable.In order to analyze this trend, we will return to separation of costs into fixed and variable. The point is that changes in the number of patients affect each of the two cost categoriesThe point is that changes in the number of patients affect each of the two cost categories in a different way: the variables change in straight-line correlation with the number ofin a different way: the variables change in straight-line correlation with the number of patients, while the fixed costs, by definition, remain constant. Building on these trends letpatients, while the fixed costs, by definition, remain constant. Building on these trends let us examine two scenarios of a clinical department performance: (1) reduction in theus examine two scenarios of a clinical department performance: (1) reduction in the number of patients; (2) increase in the number of patients.number of patients; (2) increase in the number of patients.

4.5.2.14.5.2.1 Financial Impact of Reduced Clinical VolumeFinancial Impact of Reduced Clinical Volume

The number of patient discharges is declining. The revenues decline in line with patientThe number of patient discharges is declining. The revenues decline in line with patient discharges. The costs decline too, yet slower, since an important, if not the prevalent costdischarges. The costs decline too, yet slower, since an important, if not the prevalent cost component, such as fixed costs, remains unchanged. The operating budget of the clinicalcomponent, such as fixed costs, remains unchanged. The operating budget of the clinical department gets crippled with a deficit.department gets crippled with a deficit.

Let us illustrate this dependency using as a case the Cardiology Department of the TomskLet us illustrate this dependency using as a case the Cardiology Department of the Tomsk Oblast Teaching Hospital (see page T61 of Annex T). By shifting the number of patientOblast Teaching Hospital (see page T61 of Annex T). By shifting the number of patient discharges in the range of -30 percent to +30 percent (Column B), we obtain a change indischarges in the range of -30 percent to +30 percent (Column B), we obtain a change in revenues correspondingly from -30 percent to +30 percent (Column F). The response ofrevenues correspondingly from -30 percent to +30 percent (Column F). The response of costs to change in the number of patient discharges is attenuated, since fixed costscosts to change in the number of patient discharges is attenuated, since fixed costs remained constant. As a result, with change in the number of patients and revenues fromremained constant. As a result, with change in the number of patients and revenues from -30 percent to +30 percent the costs of the department have changed in the range of -14.6-30 percent to +30 percent the costs of the department have changed in the range of -14.6 percent to +14.6 percent (Column D). The department’s financial losses grow withpercent to +14.6 percent (Column D). The department’s financial losses grow with reduction in the number of patient discharges. Thus, if the number of patients declines byreduction in the number of patient discharges. Thus, if the number of patients declines by 10 percent, negative profit margin (excess of expenditures over revenues) ascends to 5.410 percent, negative profit margin (excess of expenditures over revenues) ascends to 5.4 percent (cell H7). With reduction in the number of patients by 20 percent, negative profitpercent (cell H7). With reduction in the number of patients by 20 percent, negative profit margin amounts to 11.4 percent (cell H6). Finally, with reduction of the number ofmargin amounts to 11.4 percent (cell H6). Finally, with reduction of the number of patients by 30 percent, negative profit margin hits 18 percent (cell H5).patients by 30 percent, negative profit margin hits 18 percent (cell H5).

The economic meaning that underlies the observed interrelationships is as follows. TheThe economic meaning that underlies the observed interrelationships is as follows. The fixed costs are allocated by even fractions to every patient discharged. The plannedfixed costs are allocated by even fractions to every patient discharged. The planned number of patient discharges is set in such a way that under the actual specialty-widenumber of patient discharges is set in such a way that under the actual specialty-wide average reimbursement rate all fixed costs will be recovered. If the number of patientsaverage reimbursement rate all fixed costs will be recovered. If the number of patients

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falls, the variable costs are cut in direct proportion, without posing any threat offalls, the variable costs are cut in direct proportion, without posing any threat of inadequate reimbursement. The fixed costs, however, become under-reimbursed.inadequate reimbursement. The fixed costs, however, become under-reimbursed.

In order to prevent or eliminate the threat of running a deficit, it is advisable to employIn order to prevent or eliminate the threat of running a deficit, it is advisable to employ one or more of the following three solutions:one or more of the following three solutions:

1.1. Increase the rate of reimbursement. Increase the rate of reimbursement. Once the number of patients has decreased,Once the number of patients has decreased, naturally, the hospital would strive to recover more in fixed costs per patient thannaturally, the hospital would strive to recover more in fixed costs per patient than before. This approach is hardly acceptable for two reasons: (1) If the price isbefore. This approach is hardly acceptable for two reasons: (1) If the price is capped by the purchaser of care, its arbitrary increase by specific providers iscapped by the purchaser of care, its arbitrary increase by specific providers is ruled out by regulations or contract terms; and (2) If the reimbursement rates areruled out by regulations or contract terms; and (2) If the reimbursement rates are not explicitly capped, they would be regulated by the market. In a market-drivennot explicitly capped, they would be regulated by the market. In a market-driven setting the hospital that increases rates under the pressure of fixed costs would besetting the hospital that increases rates under the pressure of fixed costs would be losing to the competitors, who provide similar kinds of care at lower costs andlosing to the competitors, who provide similar kinds of care at lower costs and rates. The purchaser of care would prefer to make an agreement with providers ofrates. The purchaser of care would prefer to make an agreement with providers of care, who, other things equal, offer services at more advantageous rates.care, who, other things equal, offer services at more advantageous rates. Eventually, the hospital would lose market share backed up with funding from aEventually, the hospital would lose market share backed up with funding from a given source and would be driven out of the market.given source and would be driven out of the market.

2.2. Cut down on fixed costs Cut down on fixed costs by reducing amount of resources covered from these costs.by reducing amount of resources covered from these costs. The most powerful tools of fixed cost savings are the following:The most powerful tools of fixed cost savings are the following:

·· Elimination of excess areas, and thereby major fixed costs of heating, cleaning,Elimination of excess areas, and thereby major fixed costs of heating, cleaning, renting, and so on. Respective savings can be achieved in a few ways: (1)renting, and so on. Respective savings can be achieved in a few ways: (1) complete or partial removal of buildings and structures from operation; (2)complete or partial removal of buildings and structures from operation; (2) avoidance of rental or non-renewal of rental of buildings and structures; (3)avoidance of rental or non-renewal of rental of buildings and structures; (3) remodeling buildings and specific areas to tailor them to the types of clinicalremodeling buildings and specific areas to tailor them to the types of clinical activities that match best sustainable demand and financing; and (4) rentingactivities that match best sustainable demand and financing; and (4) renting out excess structures and space.out excess structures and space.

Since hospital buildings are highly specialized by design they are Since hospital buildings are highly specialized by design they are resistantresistant to to remodeling for nonmedical activities. The best choice may be to let them out toremodeling for nonmedical activities. The best choice may be to let them out to other health institutions and practices. Letting out excess areas to outpatientother health institutions and practices. Letting out excess areas to outpatient physician practices and diagnostic-therapeutic centers may be a timely andphysician practices and diagnostic-therapeutic centers may be a timely and mutually beneficial solution for both the hospital and the newly emergingmutually beneficial solution for both the hospital and the newly emerging outpatient practices.outpatient practices.

·· Laying off redundant personnel. Underoccupied clinical and underutilizedLaying off redundant personnel. Underoccupied clinical and underutilized diagnostic departments are not in a position to keep all of their employees ondiagnostic departments are not in a position to keep all of their employees on staff. The wages and salaries of staff personnel are one of the largest chapters ofstaff. The wages and salaries of staff personnel are one of the largest chapters of potentially underreimbursed fixed costs.potentially underreimbursed fixed costs.

3.3. Carry out structural adjustment. Carry out structural adjustment. Since a specific clinical department does not operateSince a specific clinical department does not operate in isolation, but as a component part of the hospital, it may be helped out of thein isolation, but as a component part of the hospital, it may be helped out of the trouble of underreimbursed fixed costs by shifting resources across the facility costtrouble of underreimbursed fixed costs by shifting resources across the facility cost

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centers. Put differently, there are to ways available for the hospital of offsettingcenters. Put differently, there are to ways available for the hospital of offsetting financial losses of a particular clinical department:financial losses of a particular clinical department:

·· To increase the volume of activities in steady demand at other revenue-generatingTo increase the volume of activities in steady demand at other revenue-generating cost centers, primarily at other clinical departments. As will be demonstratedcost centers, primarily at other clinical departments. As will be demonstrated in Section 4.5.2.2, this will generate savings on fixed costs that will overridein Section 4.5.2.2, this will generate savings on fixed costs that will override losses on underreimbursement of fixed costs in a given clinical department (inlosses on underreimbursement of fixed costs in a given clinical department (in our case, Cardiology).our case, Cardiology).

·· To reduce fixed costs by eliminating excessive fixed costs in one or more costTo reduce fixed costs by eliminating excessive fixed costs in one or more cost centers of the hospital. To offset losses in Cardiology the number of cars in thecenters of the hospital. To offset losses in Cardiology the number of cars in the car transportation cost center may be reduced. Likewise the number of personnelcar transportation cost center may be reduced. Likewise the number of personnel on the building maintenance staff might be reduced.on the building maintenance staff might be reduced.

Under any of the listed approaches to economizing on fixed costs it is important to knowUnder any of the listed approaches to economizing on fixed costs it is important to know how much exactly should be saved in costs across the hospital to offset financial deficit inhow much exactly should be saved in costs across the hospital to offset financial deficit in Cardiology. The numeric answer to this question is also generated by the ICS. Columns ICardiology. The numeric answer to this question is also generated by the ICS. Columns I and J of Table 12, Annex T (pages T61–T65) present (1) the absolute amount of lossesand J of Table 12, Annex T (pages T61–T65) present (1) the absolute amount of losses from under-reimbursed fixed costs, resulting from reduction in the clinical volume infrom under-reimbursed fixed costs, resulting from reduction in the clinical volume in Cardiology, and (2) the amount of those losses in percentage of the hospital-wide fixedCardiology, and (2) the amount of those losses in percentage of the hospital-wide fixed costs.costs.

Section 4.6 analyzes where (in which cost center) and by how much activity volume mustSection 4.6 analyzes where (in which cost center) and by how much activity volume must be increased or fixed costs reduced in order to offset the underreimbursement in thebe increased or fixed costs reduced in order to offset the underreimbursement in the Cardiology Department.Cardiology Department.

4.5.2.24.5.2.2 Financial Impact of Increased Clinical VolumeFinancial Impact of Increased Clinical Volume

If Cardiology Department succeeds in increasing the number of patient discharges (seeIf Cardiology Department succeeds in increasing the number of patient discharges (see lines 9–11 of Table 12, Annex T on page 61), through better utilization of existinglines 9–11 of Table 12, Annex T on page 61), through better utilization of existing capacity, the positive economic outcome will be twofold.capacity, the positive economic outcome will be twofold.

1.1. The revenue generated will go up in line with the number of patients discharged.The revenue generated will go up in line with the number of patients discharged. With each additional patient the department staff will be getting more in wagesWith each additional patient the department staff will be getting more in wages and salaries. Thus an increase in the workload at the primary workplace leads toand salaries. Thus an increase in the workload at the primary workplace leads to an increase in earnings of personnel. The outcome more than desirable for mostan increase in earnings of personnel. The outcome more than desirable for most of the health sector employees.of the health sector employees.

2.2. With each marginal patient the department is also reimbursed for a fraction of fixedWith each marginal patient the department is also reimbursed for a fraction of fixed costs other than wages and salaries of staff personnel. Since fixed costs would notcosts other than wages and salaries of staff personnel. Since fixed costs would not have increased with the increase in the patient flow (let us remember that clinicalhave increased with the increase in the patient flow (let us remember that clinical volume in our example grew up because potential for savings was employed asvolume in our example grew up because potential for savings was employed as opposed to increasing production capacity), marginally reimbursed fixed costsopposed to increasing production capacity), marginally reimbursed fixed costs would accrue to net savings achieved in the Cardiology Department.would accrue to net savings achieved in the Cardiology Department.

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These funds can be used for the following purposes:These funds can be used for the following purposes:

·· developing the resource base of the same Cardiology Department or the hospitaldeveloping the resource base of the same Cardiology Department or the hospital at large;at large;

·· shifting savings onto another revenue-generating cost center to offsetshifting savings onto another revenue-generating cost center to offset underreimbursement of fixed costs there (such as savings achieved inunderreimbursement of fixed costs there (such as savings achieved in Cardiology will be allocated by the hospital administration to pay bills forCardiology will be allocated by the hospital administration to pay bills for heating and salaries of staff personnel in Gastroenterology, if occupancy rateheating and salaries of staff personnel in Gastroenterology, if occupancy rate got to be persistently low there); andgot to be persistently low there); and

·· increasing earnings of the hospital or specific department personnel.increasing earnings of the hospital or specific department personnel.

Realizing the importance of the last of the listed objectives, we set the system onRealizing the importance of the last of the listed objectives, we set the system on calculating changes in the payroll fund by clinical department under alternative scenarioscalculating changes in the payroll fund by clinical department under alternative scenarios of changes in the number of patient discharges and allocation of fixed cost surplus/deficitof changes in the number of patient discharges and allocation of fixed cost surplus/deficit resulting therefrom to increasing wages and salaries. The output from the computationsresulting therefrom to increasing wages and salaries. The output from the computations is displayed in Columns K, L, M, and N of Table 12.is displayed in Columns K, L, M, and N of Table 12.

Twelve (4 x 3) two-parameter scenarios are preset in the system for each clinicalTwelve (4 x 3) two-parameter scenarios are preset in the system for each clinical department: (1) Alternatively 0, 25 percent, 50 percent or 75 percent of savings on thedepartment: (1) Alternatively 0, 25 percent, 50 percent or 75 percent of savings on the fixed costs is allocated to increases of wages and salaries; and (2) The amount of fixedfixed costs is allocated to increases of wages and salaries; and (2) The amount of fixed costs savings is estimated for 10 percent, 20 percent, or 30 percent increase in thecosts savings is estimated for 10 percent, 20 percent, or 30 percent increase in the number of patient discharges. The hospital economist may easily reset the system on thenumber of patient discharges. The hospital economist may easily reset the system on the scenarios of his/her own, changing the parameters in Column B and cellsscenarios of his/her own, changing the parameters in Column B and cells K4–N4 of TableK4–N4 of Table 12.12.

The simulations as computed for the Cardiology Department are displayed in cells K9:The simulations as computed for the Cardiology Department are displayed in cells K9: N11 of Table 12.N11 of Table 12.

The calculated indicators suggest quite reasonably that if the number of patient dischargesThe calculated indicators suggest quite reasonably that if the number of patient discharges increases by 10 percent, 20 percent, and 30 percent, and none of the savings on fixedincreases by 10 percent, 20 percent, and 30 percent, and none of the savings on fixed costs is allocated to payroll increase, then the wages and salaries of the department staffcosts is allocated to payroll increase, then the wages and salaries of the department staff will increase by the same 10 percent, 20 percent, and 30 percent as the volume of clinicalwill increase by the same 10 percent, 20 percent, and 30 percent as the volume of clinical activity (and, correspondingly, revenues). If, however, 25 percent, 50 percent, and 75activity (and, correspondingly, revenues). If, however, 25 percent, 50 percent, and 75 percent of the savings on fixed costs achieved by increase in the number of patients by 30percent of the savings on fixed costs achieved by increase in the number of patients by 30 percent are allocated to increasing the payroll, the payroll fund of the Cardiologypercent are allocated to increasing the payroll, the payroll fund of the Cardiology Department increases, respectively, by 51.5 percent, 73 percent, and 94.4 percent. TheseDepartment increases, respectively, by 51.5 percent, 73 percent, and 94.4 percent. These indicators account for the fact that part of the funds earmarked for increasing the payrollindicators account for the fact that part of the funds earmarked for increasing the payroll will have to be spent outside the Cardiology Department: to upgrade employee’s earningswill have to be spent outside the Cardiology Department: to upgrade employee’s earnings at administrative cost centers and Paraclinical departments and services. The systemat administrative cost centers and Paraclinical departments and services. The system itself calculates the specific allocation patterns deriving them from the full-to-directitself calculates the specific allocation patterns deriving them from the full-to-direct wage-intensity ratios by clinical department. Such computations are presented in Table 11wage-intensity ratios by clinical department. Such computations are presented in Table 11 of Annex T.of Annex T.

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4.5.34.5.3 Break-even Analysis Break-even Analysis

The analyses described in Sections 4.5.1 and 4.5.2 examine alternative scenarios ofThe analyses described in Sections 4.5.1 and 4.5.2 examine alternative scenarios of change in clinical volume and its impact on financial performance indicators by clinicalchange in clinical volume and its impact on financial performance indicators by clinical department. The general assumption is that the actual (reported) clinical volume matchesdepartment. The general assumption is that the actual (reported) clinical volume matches the department-specific break-even point. This point is taken as the baseline scenario (forthe department-specific break-even point. This point is taken as the baseline scenario (for example, for the Cardiology Department this is Line 8 of Table 12). All indicators of thisexample, for the Cardiology Department this is Line 8 of Table 12). All indicators of this line equal zero.line equal zero.

The economic interpretation of the baseline scenario is as follows:The economic interpretation of the baseline scenario is as follows:

With the number of patient discharges matching the planned or reported one, the costs,With the number of patient discharges matching the planned or reported one, the costs, revenues, profit margin, fixed costs, and payroll of the department (hospital) will matchrevenues, profit margin, fixed costs, and payroll of the department (hospital) will match planned or reported benchmark values too.planned or reported benchmark values too.

The annual budget of the hospital is set on ensuring full reimbursement of costs with zeroThe annual budget of the hospital is set on ensuring full reimbursement of costs with zero excess of revenue over costs. Hence, the baseline scenario would feature such level ofexcess of revenue over costs. Hence, the baseline scenario would feature such level of reimbursement that fixed costs are completely recovered in planned number of patientreimbursement that fixed costs are completely recovered in planned number of patient discharges and in full compliance with the department-specific (hospital-wide) rates. Thedischarges and in full compliance with the department-specific (hospital-wide) rates. The mathematical notation for the baseline (break-even) scenario is as follows:mathematical notation for the baseline (break-even) scenario is as follows:

1. Total revenues equal total costs:1. Total revenues equal total costs:

TR = TCTR = TC

wherewhere TR TR = total revenues and = total revenues and TC TC = total costs.= total costs.

2. Total revenues are estimated in the following way. If the average amount of2. Total revenues are estimated in the following way. If the average amount of reimbursement per patient equals reimbursement per patient equals pp, while the number of patient discharges equals , while the number of patient discharges equals xx, then, then under the baseline scenariounder the baseline scenario total revenues will be the product of:total revenues will be the product of:

TR = pxTR = px

3. The costs may be expressed as the sum of the full fixed costs 3. The costs may be expressed as the sum of the full fixed costs aa and unit variable costs and unit variable costs bb. The full variable costs will then equal . The full variable costs will then equal bxbx, while total department (hospital) costs will, while total department (hospital) costs will be equal under the baseline scenario:be equal under the baseline scenario:

px = a + bx.px = a + bx.

By solving this equation for By solving this equation for xx, we can estimate how many patients must be treated by the, we can estimate how many patients must be treated by the department (hospital) to be able to recover all of their fixed costs while complying withdepartment (hospital) to be able to recover all of their fixed costs while complying with the average per-patient reimbursement rate. Such number of patients is called the break-the average per-patient reimbursement rate. Such number of patients is called the break-even point for the department (hospital). The techniques of estimating this point areeven point for the department (hospital). The techniques of estimating this point are called break-even analysis. In a more general form, the break-even analysis is directedcalled break-even analysis. In a more general form, the break-even analysis is directed toward assessing the volume of activity at which total revenues equal total costs.toward assessing the volume of activity at which total revenues equal total costs.

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4.64.6 Step 14: Calculation of Cross-elasticities in Shifting the Hospital Budget Step 14: Calculation of Cross-elasticities in Shifting the Hospital Budget across across Departments and ServicesDepartments and Services

The computations carried out in this step of the algorithm are presented in the form ofThe computations carried out in this step of the algorithm are presented in the form of mathematical formulas in Annex M (page M13). The output of the calculations ismathematical formulas in Annex M (page M13). The output of the calculations is displayed in Table 13 of Annex T (pages T66–T88). The same table with programmeddisplayed in Table 13 of Annex T (pages T66–T88). The same table with programmed formulas is printed out in Annex F, on pages F116–F143. Table 13 corresponds to theformulas is printed out in Annex F, on pages F116–F143. Table 13 corresponds to the workbook sheet 13 of the COSTWIZ.XLS file.workbook sheet 13 of the COSTWIZ.XLS file.

Elasticities are first calculated for the clinical departments. Table 13 presents elasticitiesElasticities are first calculated for the clinical departments. Table 13 presents elasticities for all 23 specialties and is comprised of 23 pages. Accordingly, each list is a referencefor all 23 specialties and is comprised of 23 pages. Accordingly, each list is a reference manual that may be used by the hospital manager to plan restructuring of the hospital inmanual that may be used by the hospital manager to plan restructuring of the hospital in order to (1) adjust clinical volume of a particular department, and (2) assess contributionorder to (1) adjust clinical volume of a particular department, and (2) assess contribution that the department under consideration can make to balance the hospital-wide budget inthat the department under consideration can make to balance the hospital-wide budget in the event of a financial disruption at one of the cost centers.the event of a financial disruption at one of the cost centers.

It should be emphasized that the entire analysis revolves around controlled break-evenIt should be emphasized that the entire analysis revolves around controlled break-even point for the hospital. In other words, if reduction in clinical volume in the Cardiologypoint for the hospital. In other words, if reduction in clinical volume in the Cardiology Department led to an underreimbursement of fixed costs and there is nothing that can beDepartment led to an underreimbursement of fixed costs and there is nothing that can be done to offset the deficit on the department level (for example, by eliminating respectivedone to offset the deficit on the department level (for example, by eliminating respective cost items or turning them over to a nonmedical source of revenue) the need will arise forcost items or turning them over to a nonmedical source of revenue) the need will arise for increasing clinical volume in other income-earning cost centers and/or for cutting downincreasing clinical volume in other income-earning cost centers and/or for cutting down on fixed costs in any cost center(s), thus offsetting the reimbursement gap in Cardiology.on fixed costs in any cost center(s), thus offsetting the reimbursement gap in Cardiology. Elasticity analysis provides insights into where (by cost center) and by how much itElasticity analysis provides insights into where (by cost center) and by how much it should be saved to keep the hospital-wide budget balanced (that is to keep costs equal toshould be saved to keep the hospital-wide budget balanced (that is to keep costs equal to revenues).revenues).

Let us examine a few concrete scenarios that could occur in the Cardiology DepartmentLet us examine a few concrete scenarios that could occur in the Cardiology Department activity requiring elasticity analysis (see page T66, Table 13, Annex T).activity requiring elasticity analysis (see page T66, Table 13, Annex T).

4.6.14.6.1 Case 1Case 1

Assume that operating funding is provided per patient-day. The demand for cardiologicalAssume that operating funding is provided per patient-day. The demand for cardiological care and the availability of unoccupied beds suggest that 10 percent growth in annualcare and the availability of unoccupied beds suggest that 10 percent growth in annual number of bed days can be planned for the next year. This will generate savings on fixednumber of bed days can be planned for the next year. This will generate savings on fixed costs against the benchmark year. The hospital administration decided to take advantagecosts against the benchmark year. The hospital administration decided to take advantage of the expected savings to offset under-reimbursed costs in Gastroenterology. Theof the expected savings to offset under-reimbursed costs in Gastroenterology. The underreimbursement is expected because of the projected underutilization of bedunderreimbursement is expected because of the projected underutilization of bed capacity. The annual number of bed-days in Gastroenterology have been persistentlycapacity. The annual number of bed-days in Gastroenterology have been persistently lower than planned, thus unable to match the break-even point. The decision was made tolower than planned, thus unable to match the break-even point. The decision was made to remove 15 percent of the beds and to reduce the staff proportionally. The restructuringremove 15 percent of the beds and to reduce the staff proportionally. The restructuring will take one year. For the whole year the indicated 15 percent of the gastroenterologicalwill take one year. For the whole year the indicated 15 percent of the gastroenterological beds will be burdening the hospital with the ballast of uncompensated fixed costs (Tablebeds will be burdening the hospital with the ballast of uncompensated fixed costs (Table 8 of Annex T (pp. T33–T34) shows which allocation chapters contribute to the deficit) .8 of Annex T (pp. T33–T34) shows which allocation chapters contribute to the deficit) .

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The question arises as to what extent the savings expected in Cardiology may offset theThe question arises as to what extent the savings expected in Cardiology may offset the losses that will be incurred for the hospital by Gastroenterology before the fixed costs arelosses that will be incurred for the hospital by Gastroenterology before the fixed costs are eliminated in adjustment for the actual demand for gastroenterologic care.eliminated in adjustment for the actual demand for gastroenterologic care.

Cells C44 and C46 show that the fixed costs per one bed day in Cardiology equal theCells C44 and C46 show that the fixed costs per one bed day in Cardiology equal the fixed costs per 1.22 bed days in Gastroenterology. The cross-elasticity of fixed costs offixed costs per 1.22 bed days in Gastroenterology. The cross-elasticity of fixed costs of Gastroenterology/Cardiology bed day is 1.22. Consequently, if the redundant number ofGastroenterology/Cardiology bed day is 1.22. Consequently, if the redundant number of patient-days, and, correspondingly, of the fixed costs, in Gastroenterology is 15 percent,patient-days, and, correspondingly, of the fixed costs, in Gastroenterology is 15 percent, then the 10 percent savings projected in Cardiology will cover 12.2 percentage points ofthen the 10 percent savings projected in Cardiology will cover 12.2 percentage points of the required 15. The administration then will have to look for additional savings in athe required 15. The administration then will have to look for additional savings in a clinical department other than Cardiology.clinical department other than Cardiology.

4.6.24.6.2 Case 2Case 2

Assume hospital cost reimbursement is carried out per patient discharge. Assume also,Assume hospital cost reimbursement is carried out per patient discharge. Assume also, that the situation examined in Case 1 is now analyzed by the hospital administration inthat the situation examined in Case 1 is now analyzed by the hospital administration in terms of patient flow, rather than the number of patient-days. Cell D46 shows that oneterms of patient flow, rather than the number of patient-days. Cell D46 shows that one cardiac patient is equivalent in terms of fixed costs of 1.18 gastroenterological patients.cardiac patient is equivalent in terms of fixed costs of 1.18 gastroenterological patients. The plan for the coming year is based on a projected increase in the number of cardiologyThe plan for the coming year is based on a projected increase in the number of cardiology patient discharges and a decrease of those in Gastroenterology. The cross-elasticity ofpatient discharges and a decrease of those in Gastroenterology. The cross-elasticity of 1.18 may always be converted into absolute ratios: fixed costs of all marginal patients in1.18 may always be converted into absolute ratios: fixed costs of all marginal patients in Cardiology will be compared to fixed costs of all missing (as compared with the patientCardiology will be compared to fixed costs of all missing (as compared with the patient flow in the previous year) patients in Gastroenterology. This will show how much of theflow in the previous year) patients in Gastroenterology. This will show how much of the underreimbursement gap in Gastroenterology might be filled from the savings expectedunderreimbursement gap in Gastroenterology might be filled from the savings expected in Cardiology.in Cardiology.

Clinical activity planning in terms of patient discharges does not override the importanceClinical activity planning in terms of patient discharges does not override the importance of planning for shedding excessive resources in terms of resource indicators bestof planning for shedding excessive resources in terms of resource indicators best correlated with fixed assets. Such indicators include hospital beds (staffing ratios andcorrelated with fixed assets. Such indicators include hospital beds (staffing ratios and consequently fixed part of salaries are planned per hospital bed), building volume andconsequently fixed part of salaries are planned per hospital bed), building volume and space (heating costs) and a few others. It is therefore advisable to supplement the abovespace (heating costs) and a few others. It is therefore advisable to supplement the above analysis by converting amount of underreimbursement in Gastroenterology as well as theanalysis by converting amount of underreimbursement in Gastroenterology as well as the amount of savings in Cardiology to the equivalent of fixed costs per hospital bed in bothamount of savings in Cardiology to the equivalent of fixed costs per hospital bed in both departments. Having compared them, we find in cell B46 that one cardiology bed equalsdepartments. Having compared them, we find in cell B46 that one cardiology bed equals 1.24 gastroenterological beds. If the program for curtailing Gastroenterology is planned1.24 gastroenterological beds. If the program for curtailing Gastroenterology is planned in terms of eliminating excessive beds, it will be possible to estimate the share of lossesin terms of eliminating excessive beds, it will be possible to estimate the share of losses that will be offset by the Cardiology department of the total amount of losses expected tothat will be offset by the Cardiology department of the total amount of losses expected to be incurred before the reorganization in Gastroenterology happens.be incurred before the reorganization in Gastroenterology happens.

Put differently, the values displayed in the first three columns of Table 13 facilitatePut differently, the values displayed in the first three columns of Table 13 facilitate planning of clinical activity in terms of shifting resources, patient flow, and financingplanning of clinical activity in terms of shifting resources, patient flow, and financing across clinical departments using indicators that suit best the needs of planning andacross clinical departments using indicators that suit best the needs of planning and projecting demand for hospital care.projecting demand for hospital care.

4.6.34.6.3 Case 3 Case 3

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Column E of Table 13 expands the analytical capabilities of the system by gettingColumn E of Table 13 expands the analytical capabilities of the system by getting nonclinical cost centers involved. The purpose of this analysis is to assess the percentagenonclinical cost centers involved. The purpose of this analysis is to assess the percentage by which the volume of activity of each of the administrative and paraclinicalby which the volume of activity of each of the administrative and paraclinical departments and services must be reduced so that the hospital under the planned numberdepartments and services must be reduced so that the hospital under the planned number of patient discharges could afford the underreimbursement of one percent of fixed costsof patient discharges could afford the underreimbursement of one percent of fixed costs in any given clinical department. By the same token, the system will show the fixed costsin any given clinical department. By the same token, the system will show the fixed costs savings potential in any clinical department and its quantitative implications for meetingsavings potential in any clinical department and its quantitative implications for meeting the need for additional permanent staff in a nonclinical cost center.the need for additional permanent staff in a nonclinical cost center.

Cell E12, for example, suggests that fixed cost savings of one percent in the CardiologyCell E12, for example, suggests that fixed cost savings of one percent in the Cardiology Department allows to increase the Planning and Financing cost center budget by 17.12Department allows to increase the Planning and Financing cost center budget by 17.12 percent.percent.

The analysis presented in Table 13 could also have been called impact analysis, since itThe analysis presented in Table 13 could also have been called impact analysis, since it measures the extent to which costs of one cost center respond to changes in fixed costs ofmeasures the extent to which costs of one cost center respond to changes in fixed costs of another cost center.another cost center.

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CONCLUSIONCONCLUSION

What Was AccomplishedWhat Was Accomplished

The Integrated System of Cost Accounting and Analysis (ICS), which was designed forThe Integrated System of Cost Accounting and Analysis (ICS), which was designed for and tested at the Tomsk Oblast Teaching Hospital, has the following features:and tested at the Tomsk Oblast Teaching Hospital, has the following features:

1.1. In-depth analysis underlying the identification of the cost centers:In-depth analysis underlying the identification of the cost centers:

·· The list of the cost centers is sufficiently detailed to reflect the actual flows ofThe list of the cost centers is sufficiently detailed to reflect the actual flows of technology and costs in a large multispecialty hospital. A total of 61 costtechnology and costs in a large multispecialty hospital. A total of 61 cost centers were identified, including 16 administrative, 21 paraclinical, and 24centers were identified, including 16 administrative, 21 paraclinical, and 24 clinical.clinical.

·· The organizational structure of OTH was overhauled at one third in an effort toThe organizational structure of OTH was overhauled at one third in an effort to identify cost centers as functionally, technologically and organizationallyidentify cost centers as functionally, technologically and organizationally integrated entities, capable of assuming the roles as responsibility andintegrated entities, capable of assuming the roles as responsibility and accounting centers.accounting centers.

22 Computations are based on a comprehensive set of hospital resource and utilizationComputations are based on a comprehensive set of hospital resource and utilization indicators. These data facilitated in-depth qualitative analysis of OTH activity. Suchindicators. These data facilitated in-depth qualitative analysis of OTH activity. Such analyses ensured accuracy of assumptions underlying design of the ICS. Detailedanalyses ensured accuracy of assumptions underlying design of the ICS. Detailed analysis of the cost centers’ resources and operational profile proved to be particularlyanalysis of the cost centers’ resources and operational profile proved to be particularly helpful in identifying apportionment statistics for apportioning indirect to direct costshelpful in identifying apportionment statistics for apportioning indirect to direct costs and full costs of nonclinical cost centers onto full costs of clinical departments. Theand full costs of nonclinical cost centers onto full costs of clinical departments. The system distinguishes:system distinguishes:

·· 6 types of resources,6 types of resources,·· 5 types of fixed assets, and5 types of fixed assets, and·· 16 indicators of paraclinical and clinical activity.16 indicators of paraclinical and clinical activity.

3.3. High level of detail in separating costs into input categories. The ICS considers:High level of detail in separating costs into input categories. The ICS considers:

·· 6 kinds of direct costs,6 kinds of direct costs,·· 20 kinds of indirect costs, and20 kinds of indirect costs, and·· depreciation.depreciation.

4.4. Innovative procedure of interim rearrangement of the cost centers within each of threeInnovative procedure of interim rearrangement of the cost centers within each of three categories to minimize inaccuracies inherent in step-down costing.categories to minimize inaccuracies inherent in step-down costing.

5.5. Multiple step-down cost allocation. Respective procedure was run on:Multiple step-down cost allocation. Respective procedure was run on:

·· full costs,full costs,·· fixed costs, andfixed costs, and·· wages and salaries.wages and salaries.

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6.6. Comprehensive multiscenario simulations of financial performance by clinicalComprehensive multiscenario simulations of financial performance by clinical department for alternative clinical volumes.department for alternative clinical volumes.

·· seven baseline scenarios are preset in the system featuring alternative;seven baseline scenarios are preset in the system featuring alternative; ·· numbers of patient discharges for each clinical department;numbers of patient discharges for each clinical department;·· modeling financial performance by a large variety of indicators;modeling financial performance by a large variety of indicators;·· including costs, revenues, profit-margin, wages and salaries; andincluding costs, revenues, profit-margin, wages and salaries; and·· the system can be flexibly readjusted to any user-driven scenario. the system can be flexibly readjusted to any user-driven scenario.

7.7. A complete set of cross-elasticities for each clinical department showing how theA complete set of cross-elasticities for each clinical department showing how the following resources and clinical activity can be shifted across departments whilefollowing resources and clinical activity can be shifted across departments while holding the break-even point constant:holding the break-even point constant:

·· bed capacity,bed capacity,·· patient flow, andpatient flow, and·· operating costs.operating costs.

Having multifaceted capabilities in cost accounting and analysis, the ICS, nevertheless, isHaving multifaceted capabilities in cost accounting and analysis, the ICS, nevertheless, is fully based on standard system of accounting and statistical reporting as inherited byfully based on standard system of accounting and statistical reporting as inherited by Russia from the Soviet era, and developed over the recent few years throughRussia from the Soviet era, and developed over the recent few years through experimentation with clinical statistical groups and medical economic standards.experimentation with clinical statistical groups and medical economic standards.

What Remains to Be DoneWhat Remains to Be Done

Further development of the integrated costing system will proceed along the followingFurther development of the integrated costing system will proceed along the following lines:lines:

1.1. Transition from specialty-wide average cost accounting and analysis to procedure-Transition from specialty-wide average cost accounting and analysis to procedure-level and case-specific costing. This would allow to significantly expand thelevel and case-specific costing. This would allow to significantly expand the boundaries of financial management, in particular in monitoring costs by:boundaries of financial management, in particular in monitoring costs by:

·· clinical cost groups (groups of medical cases that are clinically and cost coherent)clinical cost groups (groups of medical cases that are clinically and cost coherent) to monitor costs against reimbursement rates;to monitor costs against reimbursement rates;

·· physicians for resource control and utilization review;physicians for resource control and utilization review;

·· patients for quantifying correlation between utilization and quality;patients for quantifying correlation between utilization and quality;

·· service line (for example, treatment of specific types of diseases, serving certainservice line (for example, treatment of specific types of diseases, serving certain categories of the population) for programming and cost-effectivenesscategories of the population) for programming and cost-effectiveness  analysis.analysis.

2.2. Building on the modern techniques of management accounting, proceed to capitationBuilding on the modern techniques of management accounting, proceed to capitation rate calculation.rate calculation.

3.3. Use of cost data for constructing an input cost index.Use of cost data for constructing an input cost index.

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4.4. Use of cost data in a cross-sectional study of cost functions to optimize resourceUse of cost data in a cross-sectional study of cost functions to optimize resource allocation across territorial network of providers.allocation across territorial network of providers.

The final goal of the work in the directions proposed is to improve resource allocation,The final goal of the work in the directions proposed is to improve resource allocation, provider payment, and budgeting mechanisms and methodologies in Russia’s reformedprovider payment, and budgeting mechanisms and methodologies in Russia’s reformed health sector. health sector.

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