Accounting and Medicine An ExploratoryInvestigation into .docx

Accounting and Medicine: An Exploratory
Investigation into Physicians’ Attitudes
Toward the Use of Standard
Cost-Accounting Methods in Medicine
Greg M. Thibadoux
Marsha Scheidt
Elizabeth Luckey
ABSTRACT. Research studies demonstrate wide varia-
tion in how physicians diagnose and treat patients with
similar medical conditions and suggest that at least some
of the variation reflects inefficiencies and unnecessary
medical costs. Health care researchers are actively exam-
ining ways to reduce variations in practice through
standardization of medicine to reduce the cost of treat-
ment and ensure the quality of outcomes. The most
widely accepted form of this standardization is Evidence
Based Best Practices (EBBP). Furthermore, financial

health care providers such as hospitals and managed care
organizations are investigating methods to tie resource
usage to medical protocols in their efforts to monitor and
control health care costs. Such proposals are contentious
because they report on physicians’ medical practice
behaviors (such as the number of tests ordered, use of
specific therapies, etc.) and such reports could potentially
be used to influence their clinical behaviors. The intent of
this exploratory study was to examine physicians’
perceptions about linking a standard costing system to
EBBP guidelines. The authors interviewed nine practic-
ing physicians asking each physician to respond to the
question, ‘As a physician working in a hospital environ-
ment, what are your reactions to and concerns with
combining standard costing techniques with EBBP?’ The
interviews were in-depth and free form in nature. The
physicians’ responses were recorded and analyzed using
Grounded Theory Methodology. Using this methodol-

ogy the field data was categorized into two major themes.
The most important theme centered on ethics and the
second theme was concerned with the implementation
and use of a standard cost system in regard to EBBP. If
physicians’ worries about ethical dilemmas and imple-
mentation issues are not resolved, then it is likely that
doctors would be unwilling to participate in any efforts to
develop or use a standard cost-reporting system in med-
icine. While this study was exploratory in nature, it
should provide future guidance to accountants, health
care researchers and health care providers about physi-
cians’ issues with the use of standard costing methods in
medicine.
KEY WORDS: diagnostic related groups (DRGs),
evidence based best practices (EBBP), grounded theory
methodology, health care ethics, physician practices
Introduction
Healthcare costs in the United States have been

rising at an alarming rate over the last several dec-
ades, outpacing the Consumer Price Index. Cur-
rently, nearly 16% of the Gross Domestic Product
(GDP) is spent on health care (Kolata, 2006), and it
is projected to rise 7.3% annually for the next dec-
ade. By 2013 health care spending is projected to be
Greg M. Thibadoux, Ph.D. is a Professor of Accounting at the
University of Tennessee at Chattanooga. He has published
extensively on cost accounting and the business aspects of
healthcare in such journals as the Journal of Accountancy,
the CPA Journal, and Health Care Financial Manage-
ment.
Marsha Scheidt, DBA, CMA, is a Professor of Accounting at
the University of Tennessee at Chattanooga. She has pub-
lished exensively on cost accounting and information systems
in such journals as the Journal of Accountancy, the CPA
Journal, and Management Accounting Quarterly.
Elizabeth Luckey, B.S., CPA is a staff professional at Ernest &

Young, Nashville, Tennessee.
Journal of Business Ethics (2007) 75:137–149 � Springer 2007
DOI 10.1007/s10551-006-9241-z
$3.4 trillion and 18.4% of GDP (Centers for Medi-
care and Medicaid Services, 2004; Davis, 2003).
In part rising costs have been attributed to an
increasing use of unwarranted tests and treatments
performed primarily as defensive medicine against the
threat of malpractice lawsuits and in some cases pos-
sibly to increase revenue flow. These inefficiencies are
often termed by researchers as clinical variations,
although few researchers are willing to attribute such
variations to a specific cause. But regardless of the
reasons for variability, most researchers believe that
these variations may represent inefficiencies in prac-
tices. According to Dr. Blanton Bessinger, president
of the Minnesota Medical Association, fewer varia-

tions in practice would result in less unnecessary
medicine and lower medical costs (Adams, 2001).
Carnett (1999) in Quality Management Health Care
states that a leading cause of inadequate care can be
traced to clinical variations unaccounted for by pa-
tient variations. Recently, the Wall Street Journal
reported, ‘‘The Rand Corporation found that
Americans get the right treatment only half the time,
and other research shows the U.S. could reduce
health-care spending by 30% merely by eliminating
unnecessary care, operating more efficiently and
improving quality’’ (Landro, 2004).
In theory, one way to reduce clinical variations
and thereby control rising costs in healthcare, is to
encourage physicians to follow standard practice
guidelines known as Evidence Based Best Practices
(EBBP), clinical pathways, clinical practice guide-
lines, and standards of quality. These are all methods

for defining a general plan for diagnosis and treat-
ment of a disease including the appropriate tests and
the best treatment regimes. These guidelines are
based on results of scientific studies that provide
evidence about how to achieve the best outcomes in
the most cost-efficient manner. Many studies have
reported on the efficacy of using such standards. For
example, Flores et al. (2002) found that ‘‘clinical
path guidelines can improve health processes and
outcomes, including shorter hospital length of stays
and reduced utilization of resources.’’
Independent of the issue of clinical standards, stra-
tegic and financial healthcare planners have expressed
interest in the standardization of medical costs as a tool
for budgeting, planning, and variance analysis. For
example, Cleverly and Cameron (2002) in Essentials of
Health Care Finance have proposed a model for stan-
dardizing medical treatment costs for specific disease

classifications. The model could be used for planning
purposes, for reporting and for variance analysis.
The authors believe it is only a matter of time
before EBBP guidelines are tied to standardized costs
and that such efforts will increasingly require the use
of sophisticated cost-accounting methods. In fact, it
was recently announced that 28 major companies
including Sprint, Corp., Lowe’s Cos., J. C. Penney,
and BellSouth Corp, were making available physi-
cian ‘scorecards’ to their two million employees.
These ‘scorecards’ would include information about
the quality of care and would give patients financial
incentives to use doctors who were cost-efficient
quality care providers. The ‘scorecard’ will include
information about how well the physician performs
in comparison to accepted medical guidelines and
how effective she or he is at controlling the cost of
care, information that will in part come from

accounting systems (Landro, 2004).
While the use of cost-accounting methods in
medicine can be expected to provide much useful
information particularly to institutional providers,
third party payers and consumers, there will be
resistance from physicians. It is to be expected that
many physicians will decry this as a pernicious form
of ‘cookbook’ medicine, and that it will create a
number of ethical dilemmas. If accountants are to
become more involved in the business aspects of
health care delivery, they must be fully aware of
the many ethical concerns that physicians have
about the application of management techniques to
their clinical practices. Without such awareness,
accountants may end up creating accounting sys-
tems that jeopardize physicians’ relationships to
health care institutions, to third party payers, to
their professional commitment, and finally to their

patients.
It was the intent of the authors to investigate what
problems and concerns and also what (if any) ben-
efits physicians believe will result from combining
standard costs with EBBP guidelines to measure the
quality and the efficiency of medical treatment. Of
particular interest, will be whether such actions
create ethical dilemmas for practicing physicians.
Research methodology and the results of this study
are discussed after an introductory consideration
of evidence-based medicine and standard cost-
accounting techniques in health care.
138 Greg M. Thibadoux et al.
Standard costing in health care
In order to develop a standard costing model, one
must first determine the cost object (product or
service), secondly, define the inputs required for

producing the product or service, and finally,
determine acceptable standard quantities and costs
for the inputs. In health care all three of these steps
have been problematic and sources of contention.
Each issue is discussed below.
Products in health care
Exactly what is a product for a physician and for a
health care institution? Is the product the patient, the
disease category, the inputs such as x-rays, surgery,
drug therapy or is the product the change in the
patient’s health status? In fact, all of these and other
measures have been at some time defined as a cost
object in medicine.
Traditionally, there was little concern about the
cost object or its inputs on the part of physicians or
hospitals during most of the 20th century. Since
physicians were able to charge insurance companies
or Medicare, a ‘‘usual, customary, and reasonable fee’’

and expect near full reimbursement and reimburse-
ments (revenues) to hospitals were based on actual
costs incurred. Under these schemes, cost information
was primarily used to document expenses for tax
purposes and financial reporting and was used only
incidentally for planning and decision-making.
Typically for physicians, practice costs were
aggregated and collected in a chart of accounts
system which included categorizations for: labor
expenses, benefits, supplies, lab costs, facility costs,
etc. Products were essentially the services and
procedures that were billed out under standard
insurance codes. For hospitals, costs were allocated
to revenue-producing departments and then divided
by patient days to calculate cost per patient day
(patient day being the product). In summary, his-
torically the health care product for physicians has
been inputs used to treat patients, and for hospitals,

the product has been patient days (without any re-
gard for the type of patient or for their health status).
The traditional methods of paying physicians for
services rendered and for reimbursing hospitals on a
cost-plus basis provided incentives for physicians and
hospitals to maximize the number and costs of tests
and procedures performed and to generally over-
utilize institutional resources.
To address this problem, in 1983, Medicare
launched a new hospital payment system known as
Prospective Payment System (PPS). The PPS paid
for hospital costs on a prospective basis meaning that
rather than reimbursing the hospital for the cost of
the services after the fact, they would pay for health
care services that were provided with a predeter-
mined fixed price. The amount of reimbursement
was based on patient classification by Diagnostic
Related Groups. ‘‘The DRG system takes all possi-

ble diagnosis from the International Classification of
Diseases, 9th Revision, Clinical Modification system and
classifies them in to 25 major diagnostic categories
based on organ system ... These 25 categories are
further broken down in 511 distinct medically
meaningful groupings called DRGs. Medicare con-
tends that all resources required to treat a given
DRG entity should be similar for all patients with a
DRG category’’ (Cleverley, 2002).
Under this system, the costs of overutilization of
resources are now a financial risk to the provider (the
hospital) who is responsible for the costs of all tests
and procedures. It is important to keep in mind that
hospital resources used to treat patients are generated
by physicians not employed by the hospital. Prior to
the introduction of PPS, hospital revenues were
directly related to resources used and hospitals had
basically no incentive to monitor or control physi-

cian’s clinical behaviors. But now in order to
maintain financial solvency, hospitals have to mon-
itor and to some extent control physician practices
(the ultimate sanction being the loss of admitting
privileges). The prospective payment methodology
also affected physician behaviors outside of the
hospital since the Medicare system was adopted in
part by many managed care organizations that con-
tracted with practicing physicians. Given the
acceptance of the DRG as a health care product,
Cleverley has shown how standard costs for a DRG
classified patient can be calculated.
Developing standard costs in health care
Cleverley has developed a concept termed a Standard
Treatment Protocol (STP) which is analogous to a
Accounting and Medicine 139
standard job-order cost sheet for a manufacturing

firm. The STP is calculated in following manner.
• Step 1. Identify the DRG classification. One
would first select the DRG of interest such
as cardiac disease-by-pass surgery.
• Step 2. Define general inputs. The general in-
puts needed to treat a DRG classified patient
would be determined. For example, Illustra-
tion 1 below is a list of the inputs required
for by-pass surgery. Note that at this level of
analysis the inputs are primarily a listing of
departments involved in treatment.
• Step 3. Define departmental service units. After
identifying the general inputs required for an
STP (as in Illustration 1) the type and stan-
dard quantity of departmental inputs required
for treatment are formulated. For example,
in Illustration 2 the dietary needs are six
meals. The output of a hospital department
is known as a service unit, e.g. the service
unit for dietary is a meal; for radiology,

x-rays; for nursing care, nursing hours, etc.
• Step 4. Develop a cost profile for departmental
service units. The costs of each department’s
service units would include the costs of
materials, labor, and direct and indirect
departmental overhead. These would be cal-
culated as standard costs. An example of
ILLUSTRATION 2
Standard cost profile for patient meal-SU-202 (hypothetical ex.)
Variable units Fixed units Unit cost Variable cost Fixed cost
Total cost
One regular patient meal – Service unit 202 (Assuming 2,000
patients a day, 365 days a year)
Direct cost
Direct materials 1.00 0.00 $1.10 $1.10 – $1.10
Direct labor
Manager 0.00 1.00 $0.02 – $0.02 $0.02
Chefs 0.05 of 1 hour 0.00 $12.00 $0.60 – $0.60
Servers 0.05 of 1 hour 0.00 $7.50 $0.38 – $0.38

Dishwashers 0.05 of 1 hour 0.00 $6.75 $0.34 – $0.34
Total direct labor $1.32 $0.02 $1.34
Total direct costs $2.42 $0.02 $2.44
Allocated cost
Housekeeping 0.00 0.10 $1.00 – $0.10 $0.10
Overhead 0.00 1.00 $0.15 – $0.15 $0.15
Total allocated costs $0.25 $0.25
Total cost $2.42 $0.27 $2.69
Calculations
Managers unit cost
Salary $45,000.00
Meals/year $2,190,000.00
Cost/meal $0.02
ILLUSTRATION 1
General inputs needed to treat DRG-cardiac
disease-by-pass surgery
Diagnostic tests
Education of available choices

Administrative receiving charges
Nurse ‘prep’ time before surgery
Surgery
Hours of nursing care/day
Dietary
Housekeeping
Linen services
Pharmacy
Preventative education
Administrative billing charges
how to cost the dietary department service
unit, regular meal, is shown in Illustration 2.
• Step 5. Cost out the STP. A complete hypo-
thetical standard cost report for the STP used
to treat DRG-cardiac disease-by-pass surgery
is shown in Illustration 3. Note that in the
cost report, the standard quantities of service

units needed (see Step 3) are multiplied by
the standard costs of service units (see Step
4) and all costs are summed.
Using standard costs in health care
Knowing the cost for treating a typical DRG clas-
sification could be very useful to hospital financial
planners for budget projects, for contract negotia-
tions, and for decisions such as hospital expansion,
addition of new services, and outsourcing. But such
information could also be used to monitor the
performance of the hospital departments as well as
physician behaviors in regard to test ordering, length
of hospital stay, and overall cost and quality
effectiveness. In essence, a STP incorporating stan-
dard quantities allowed and standard costs per input
could be used to calculate cost variances for each
DRG classified patient. An example of how this
could be done is shown in Illustration 4 for one of

the service units (nursing care) for the By-Pass
Surgery DRG.
In this case, the $1,350 unfavorable nursing care
price variance might be due to unanticipated wage
increases or may reflect the use of a more skilled and
expensive mix of nurses than was planned. The
favorable nursing care efficiency variance of $1,030
created when the nursing used fewer hours than was
originally budgeted could be the result of the
patients’ conditions, the efficacy of the surgeons,
improved technology and nursing care or even ran-
dom variation. In any case, significant variances only
direct managers’ attention to a situation. Determin-
ing the reasons for the variances will require further
investigation (note: both significant favorable and
unfavorable variances should be investigated).
Problems with standard costing in health care
Technically, Cleverley’s STP scheme is not theo-

retically or practically any more complex than the
standard cost reporting being currently done in
ILLUSTRATION 3
Standard treatment protocol cost report-cardiac disease-by-pass
surgery (hypothetical example)
Service
unit
Service unit name Quantity Variable
cost per
unit
Fixed
cost per
unit
Total
cost per
unit
Total
var.

cost
Total
fixed
cost
Total
cost
Standard treatment protocol for by-pass surgery
92 Diagnostic tests 1 $200.00 $150.00 $350.00 $200.00 $150.00
$350.00
900 Education of available choices 1 $4.00 – $4.00 $4.00 –
$4.00
500 Administrative receiving charges 1 $30.00 $15.00 $45.00
$30.00 $15.00 $45.00
211 Nurse ‘prep’ time before surgery 1 $2.50 $0.50 $3.00 $2.50
$0.50 $3.00
300 Surgery 1 $2,200.00 $1,000.00 $3,200.00 $2,200.00
$1,000.00 $3,200.00
201 Nursing care level 1 2.5 $18.00 $0.30 $18.30 $45.00 $0.75
$45.75
202 Nursing care Level 2 5 $10.00 $0.30 $10.30 $50.00 $1.50
$51.50
020 Meals 6 $2.41 $0.27 $2.68 $14.46 $1.62 $16.08

010 Housekeeping 2 $1.20 $0.40 $1.60 $2.40 $0.80 $3.20
015 Linen services 1 $1.20 – $1.20 $1.20 – $1.20
131 Pharmacy 2 $151.00 $1.24 $152.24 $302.00 $2.48 $304.48
124 Laboratory tests 1 $52.00 $48.00 $100.00 $52.00 $48.00
$100.00
901 Prevention education 1 $6.00 – $6.00 $6.00 – $6.00
502 Administrative billing charges 1 $40.00 $10.00 $50.00
$40.00 $10.00 $50.00
Total $2,949.56 $1,230.65 $4,180.21
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manufacturing and service industries. In fact, costing
departmental hospital service units is a fairly routine
task. The problem comes in specifying the type and
quantities of inputs needed for treatment for a DRG
classified patient. The examples used by Cleverley and
those presented in this paper are not based on any
accepted normative treatment standards (they are
simply made up for demonstration purposes).
Without acceptable treatment guidelines, standard

cost reporting in medicine will remain only a the-
oretical possibility. But now as more physicians and
health care payers accept the validity and usefulness
of normative EBBP guidelines, it may be possible to
turn theory into practice.
EBBP are diagnostic and treatment clinical
guidelines that have been scientifically proven to
provide for the best medical outcomes (given the
current state of practice). These standards have been
evolving over the last 20 years in response to man-
aged care initiatives and to advances in the theory
and the science of measuring quality of care (Kinney,
2001, p. 324).
The efforts of the federal government (Medicare,
Veterans Administration and Center for Medicare and
Medicaid Services), managed care organizations such
as Kaiser Permanente, and medical specialty societies
(discussed below) have been particularly instrumental

in development of EBBP. A number of studies have
shown that EBBP can lower hospital costs, improve
medical outcomes and are generally acceptable to
practicing physicians; see Flores et al., 2002; Hitchens,
2002; Lain et al., 1998; Stewart et al., 1997.
When physicians practice with EBBP they
usually refer to a published checklist of guidelines
since full text versions of EBBP can exceed a
hundred pages (see http://www.guideline.gov/
summary/summary for available checklists.). It is
the development of such guidelines and checklists
that make it feasible to combine standard cost
profiles with DRG classifications, particularly for
more common conditions.
Given that cost-accounting techniques are
increasingly used in health care institutions, the
growing concern over variability in physician prac-
tices, alarm over rapidly rising health care costs, and

the acceptance of EBBP checklists by practicing
physicians, the authors contend that it is only a
matter of time before efforts are made to standardize
the costs of treatment for the more common medical
conditions. Obviously, any effort to tie the practice
of medicine to the cost of treatment can be expected
to be highly contentious to both health care pro-
viders and third party payers. The authors’ intent was
to determine physicians’ perceptions about the use of
standard costing in medicine and in particular their
ethical concerns about such efforts. The study fo-
cused on cost reporting in hospitals for two reasons;
first, because these institutions have well-defined
products (DRG classified patients), and secondly,
because they have a clear incentive to limit resource
usage.
Methodology
The authors used Grounded Theory methodology to

test physicians’ perceptions about the viability of using
standard cost EBBP guidelines in a hospital environ-
ment. This methodology is an accepted tool used in
the social sciences for qualitative analysis of interview
and other forms of narrative data (Willig, 2001). The
following is a brief discussion of this methodology and
the specific application by the authors.
Model formulation
A model is postulated in the form of a question or
statement. The model in this study is the viability of
using standard cost EBBP guidelines in a hospital
environment. The operational model was the
question, ‘‘As a physician working in a hospital
environment, what are your reactions to and con-
cerns with combining standard costing techniques
with EBBP?’’
Initial field data collection
Initially, in-depth free form interviews were con-

ducted with seven physicians currently practicing in
two southeastern states.
1
All physicians had extensive
front-line hospital experience and include both pri-
mary care providers and specialists. At the beginning
of the interviews, the physicians were given a gen-
eral explanation of cost accounting and standard
costing. Illustrations 1–4 were used as visual aids.
They were also questioned about their knowledge of
EBBP; all were very familiar with the concept. The
physicians were then encouraged to respond to the
research question and allowed to discuss any issues or
concerns they felt were relevant (there was no time
limit or pre-set agenda). Their responses were
transcribed.
Coding data

After data collection, the researcher analyzed and
coded the data into specific categories. These cate-
gories were then compared and analyzed to deter-
mine if there were common themes or relationships
between them. The coding of data was repeated
until the researchers were confident that all possible
relationships have been defined.
Themes (core categories)
An initial core category (occasionally more than one)
will emerge from the field data interviews. These
categories represent major themes from which will
emerge a number of related basic issues and specific
concerns. Ultimately, unless the specific concerns
are adequately addressed, the respondents will likely
reject the implications of the research question. At
issue in this study, unless basic issues and specific
concerns about the use of standard EPPB guidelines
in a hospital environment are resolved, physicians

can be expected to reject any such proposals. In this
study, two core categories or themes emerged from
the field data.
Refine model
After the initial hypotheses are constructed, the
model is further defined to include any missing but
relevant conditions not reflected in the original
research question or statement. In this study, the
research question was not modified.
Test for theoretical saturation
Additional data are collected to ensure that all
relevant issues have been defined. In this study,
two additional practicing physicians were inter-
viewed and no additional concerns or issues were
noted.
Develop basic issues (subcategories)
For each theme a number of basic issues are iden-
tified. Each issue or subcategory is in some way re-

lated to the overarching theme but in and of itself is
not definitive of that more general core category. In
this study, a number of basic issues were identified
for each theme.
Define specific concerns related to each basic issue
(operational measure)
To be useful in a real world situation, a theme must
be defined by a number of basic issues which in turn
can be further broken into a number of specific
concerns. Based on the interview data, a number of
physician concerns with standard cost reporting
were identified. The assumption is that unless these
specific concerns are resolved, physicians will not
support the use of standard cost reports in a hospital
environment.
Results
Physicians’ responses to the research question were
categorized into two themes or core categories; one

involving ethical issues and the second concerned
with the implementation and use of a standard cost-
reporting system. These two themes, related basic
issues, and specific physician concerns are discussed
below.
Ethics (theme)
Ethical issues were cited more often than any others
with eight of the nine physicians expressing concern
about ethical dilemmas that may arise from the use of
standard costing models in medicine. A graphical
depiction of the ethics theme, related basic issues and
specific physician concerns about potential ethical
problems related to implementing and using a stan-
dard cost system in medicine is shown in Figure 1.
The following is a discussion of the basic issues and
specific concerns relating to the Ethics Theme.

Ethics and the use of variance analysis for performance
evaluation (basic issue)
Several of the respondents indicated that they felt
that standard cost reports could be a positive and
useful tool if used only for reporting and not for
performance evaluation. For example, one physician
stated that as long as costing methods were used
only to indicate possible problems and not used to
reprimand or control the physician there would be
no ethical concerns. One physician noted that
interpretation of variances may be problematic since
a positive cost variance may be a reflection of
inadequate treatment rather than compliance to
guidelines.
Another physician, a neonatal care doctor, stated
that it was possible to calculate the survival odds for a
premature baby based on their birth weight and
gestation time. She was concerned that physician

evaluations based on cost data would negatively af-
fect her clinical decisions for babies with low survival
odds. It would be crucial to know if cost consider-
ations might either directly or indirectly influence a
physician’s clinical behaviors.
Specific ethical concerns involving reporting
were:
• The use of variance analysis for reporting
only.
• The use of variance analysis for monitoring
and control.
Ethics and responsibility without authority (basic issue)
Physicians are concerned that they will be respon-
sible for costs for which they have no authority as in
the case of residents, interns, emergency room
Ethical
Themes
Data Collect and
Patient Confidentiality
Belief and Value

Issues
Responsibility
&Accountability
Treatment
Other Providers
Different Values
Ethnic Variation
Lifestyles
Medicine as Business
Variance
Analysis
Monitoring
Evaluation
THEME BASIC ISSUES SPECIFIC CONCERNS
Figure 1. Ethics theme.
physicians, and hospitalists. For example, Dr. Jones
might be the admitting emergency room (ER)

physician when a patient enters the hospital. But,
every 12 hours the ER physicians (in this example)
rotate patients. A patient hospitalized for more than
one day may see several physicians. Dr. Jones does
not want to be responsible for the tests the other
doctors order, medications they prescribe, etc.
Additionally, physicians have little control over the
care given their patients by nurses and other hospital
personnel.
Specific ethical concerns related to responsibility
were:
• The degree of responsibility and authority
the physician has over the patient once
admitted to the hospital.
• The degree of responsibility and authority
the physician has over the hospital personnel
such as nurses.
Ethics and differing values (basic issue)
Physicians were worried that patients and doctors

may hold beliefs and values that conflict with EBBP
guidelines. For example, some patients may not
agree to blood transfusions, life-support or organ
transplantation because of religious beliefs for per-
sonal ethical reasons.
Patients may also make certain lifestyle choices
such as smoking that may negatively impact the
success of a treatment plan. In such a situation a
physician may be held responsible for the conse-
quences of the patient’s behavior even though
physicians may have little or no influence on lifestyle
choices. Some physicians feel that imposing EBBP
guidelines directly on every patient will not be an
effective means of measurement because not all pa-
tients hold the same health values or make the most
beneficial lifestyle choices.
A related and more basic concern is that most of
the EBBP guidelines are based on scientific studies

conducted predominantly on Caucasian males. Dif-
ferent ethnic groups may have different symptoms,
different drug reactions, or be more susceptible to
certain diseases than the study groups.
Specific ethical concerns about differing patient
values included
• Religious and ethical beliefs
• Ethnic differences
• Lifestyle choices
Ethics and data collecting (basic issue)
Information shared between a patient and the
physician is confidential. But, when data is collected
for the purpose of compiling the cost of an entire
episode of care, patient identifiers must be attached
to the data. This makes tracking repeat visits to the
patient’s original episode of care a potential viola-
tion of patient confidentially. For example, if a 73-
year-old woman has just been released from the
hospital for circulation problems related to diabetes

and then is re-admitted the following week because
of breathing problems, the two hospitalizations are
probably related. But, this relationship will not show
up in the cost data unless the patient is identified to
the non-medical personnel responsible for calculat-
ing and reporting on cost variances. Providing pos-
sibly sensitive medical information to accountants,
managers, insurance companies, etc. is problematic.
In this case, since there was only one issue, patient
confidentially, there was no need to further specify
physician concerns.
Ethics of medicine as a business (basic issue)
Finally, as would be expected many of the physicians
interviewed expressed concern and in some case
hostility towards the idea of tying business concepts
to their personal practice of medicine. Even physi-
cians who felt that health care was a business and that
cost control was a major issue were very worried that

their clinical decision-making could be compro-
mised by standard costing methods. One respondent
asked what right an ‘‘outsider’’ has to dictate how he
treats his patients. Another physician stated that cost
controls and providing quality care were two en-
tirely separate issues. It should be noted that several
of the physicians did state that the practice of med-
icine did involve business considerations, and one of
the physicians was currently working toward an
M.B.A. degree. These physicians’ main issue seemed
to be with treating clinical practice as a business
rather than the fact that health care in general is a
major business. Again, since there was only this one
issue, treating medicine as a business, the authors did
not define any specific physician concerns.
Implementation and use of a standard cost-reporting system

(theme)
The second major theme could be characterized as a
general concern with how a standard costing system
would be implemented and actually used. A graph-
ical depiction of this theme, related basic issues, and
specific physician concerns about implementation
and use of standard costing in medicine is shown in
Figure 2. The following is a discussion of the basic
issues and specific concerns relating to the Imple-
mentation and Use Theme.
Data gathering issues (Basic issue)
Several physicians were very concerned about how
the data for cost reports and variance analysis would
be collected. In particular, they felt several condi-
tions must be met in regard to data collection for
them to support a standard cost-reporting system.
First, cost reports should not be for individual inputs
but for the entire episode of care including all of the

diagnostic lab work, nursing hours, surgery time and
costs, and recovery for surgery patients, etc. In some
cases, cost reports should include both inpatient and
outpatient costs.
Secondly, cost must contain all information that
could qualify the use of cost reports for comparison
purposes. For example, the report should include
data about patient demographics, any confounding
medical conditions (co-morbidity), and patient’s
prior history of treatment (or lack of medical care).
Specific concerns involving data gathering were:
• Completeness of report-episode of care
• Completeness of report-patient data
Report usage (basic issue)
The second basic issue centered on how the report
was to be used.
Two physicians stressed the importance of patient
case-mix adjustments in reporting. For example, if
comparison guidelines are derived from a population

of white middle-class male patients and are used to
evaluate the costs and results of treatment for lower
income African-American female patients, signifi-
cant variances may be meaningless.
Second, adjustments must be made for differences
in types of institutions in which care is provided. For
example, it is unfair to make cost comparisons be-
tween health care delivered in primary rural hospitals
versus care provided in a state-of-the-art tertiary
level hospital. In some cases, the only type of
meaningful comparisons may be between physicians
practicing in the same institution.
Usage
Themes
Maintenance Issues
Report Usage Issues
Data Gathering Issues
Treatment Data
Patient Data

Case-Mix Issues
Cost Adjustments
Compliance
Updating EBBP
Disseminating
Updates
THEME BASIC ISSUES SPECIFIC CONCERNS
Figure 2. Implementation and use themes.
Third, there is an inherent difference between
how physicians are compensated and how a hospital
is reimbursed. Generally, a physician is paid the same
amount regardless of whether they use an excessive
number of tests or procedures or how long the
patient is in the hospital. On the other hand, under
prospective payment the hospital’s margins are
related to the amount of resources consumed. At

present, there is little incentive for a physician to
practice cost control in a hospital and if pressured to
do so may choose to admit patients to other hospi-
tals. Unless the hospital instituting a standard cost-
reporting system can devise effective incentives for
physician compliance, the system will likely fail.
Specific concerns about report usage were:
• Case-mix adjustments for clinical guidelines
and costs
• Institutional adjustments for costs
• Compliance incentive program for physicians
Maintenance (basic issue)
The third basic issue involved EBBP maintenance
issues. Interviewees were concerned that EBBP
guidelines used by the hospital may not be updated
often enough to reflect current theory and practice.
They also felt that it would be difficult keeping
physicians informed about changes in guidelines.
Specific concerns related to maintenance were:

• Updating EBBP guidelines
• Disseminating changes in guidelines
Conclusion
The cost of medical care is becoming an increas-
ingly important problem for aging post-industrial
societies. Such concern will continue to translate
into the development and use of better methods for
insuring the most effective and efficient allocation
of health care dollars. It is very probable that some
aspects of medical practice will become more
standardized as a result of various initiatives put
forth by governments, third party payers and
hospitals to control resource usage. Currently,
various parties including the governmental health
services in England, Germany, Australia, and
Canada are calling for the adoption of some aspects
of EBBP. In fact, many of the leading research
institutions concerned with evidence-based medi-
cine are located in Europe, Australia, and Canada.

These include the National Institute for Health
Care and Clinical Excellence (United Kingdom),
the Center for Evidence-Based Medicine (United
Kingdom), Center for Reviews and Dissemination
(United Kingdom), the Australian Centre for Evi-
dence Based Clinical Practice, Centres for Health
Evidence (Canada), the Gruppo Italiano per la
Medicina Basata sulle Evidenze (Italy) and the
Cochrane Collaboration (multinational).
This study examined physicians’ attitudes toward
combining standard costs with EBBP guidelines for
use in a hospital reporting system. All physicians
(including primary care and specialists) interviewed
for the study had extensive front-line experience in a
hospital environment. Physician attitudes about the
use of standard costing were broadly classified into
two core categories: one theme concentrated on
ethical issues and a second theme centered on the

implementation and the use of standard cost reports.
Each theme incorporated a number of basic issues
and specific physician concerns about standard cost
reporting. Ultimately, the acceptance and use of
such a system will depend on how effectively hos-
pital administrators and other management personnel
are able to address these basic issues and physician
concerns.
Although this study was exploratory in nature and
the results should not be considered as definitive or
indicative of all physicians’ perceptions, the authors
believe that the findings indicate that, in general,
physicians are interested in knowing the cost of the
treatment protocols they prescribe. Although phy-
sicians were concerned about the use of such
information as an evaluative tool, most stated that
they currently had very limited knowledge about the
costs of treatment protocols and would welcome

such information.
Ultimately, to control escalating medical costs
and to ensure the best available treatment, physi-
cians, insurance companies, governmental health
service units, and other healthcare payers and
providers must know the clinical efficacy of treat-
ment protocols and the costs of those protocols.
While additional research is needed to determine if
there are any other relevant issues and to ensure
that the results are applicable to a greater range of
practicing physicians, the authors feel that this study
provides valuable information about physicians’
attitudes concerning standard costing and EBBP
guidelines.
Regardless of how healthcare is provided and
financed, whether through a decentralized frag-

mented system as in the United States or more
centralized governmental systems as in Europe,
there will always be an interface between the
management and clinical provision of healthcare.
Perhaps the information generated by applying
traditional standard cost-accounting techniques to
evidence-based medicine protocols will be relevant
to both health care providers and policy planners
who must make crucial decisions about how to
efficiently and effectively deliver health care to
their aging populations.
Note
1
To ensure against sampling bias, a range of physi-
cians were interviewed including family practice, inter-
nal medicine, neonatal, and surgical specialists who
practiced through private offices, hospitals, and medical
schools.

References
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Cleverley, W. and A. Cameron: 2002, Essentials of
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Department of Accounting, College of
Business Administration
University of Tennessee at Chattanooga
615 McCallie Avenue
Chattanooga, TN 37403, U.S.A.
E-mail: [email protected]
Elizabeth Luckey
Ernst & Young
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