Costing hospital Services poses serious challenges in identifying the basis of allocation of costs and the allocation itself. This PPT gives you the entire methodology

1. Healthcare Service Level Costing
The Challenges & Solution

2. CA.S.Manivannan
• Business Strategist & Healthcare Consultant
• 19+ years experience in P/L Management,
Board Participation, Hospital Operations,
Costing & Budgeting, HCIT, SCM and
consulting
•Previous Exp.: Apollo Hospital Group, KLES-Belgaum, SRM Medical Collage &
Hospital,AIIMS – New Delhi, Star Health Insurance, Knowledge Partner to Institute
of Cost Accountants of India and Ministry of Health in healthcare costing, Medall
Healthcare and 100 plus projects
•Member FICCI Task Force on pricing of healthcare, Healthcare Costing,
Federation of Indian Chamber of Commerce (FICCI).
•Specialising in Costing for hospitals from 2007 onwards…..

3. Contents
Why costing is important to you ?
Developments in cost transformation and optimization
What costing will deliver to you ? – improving profits
without spending money !
What do you mean by costs ?
Methods of costing
The process for Time Driven Activity Based Costing
What is Value Based Care reimbursement and the future
Conclusion

4. Why Costing
is important
to you ?
An industry under pressure –
incremental changes not
producing results
Awareness & pressure on costs
among all the stakeholders –
Govt, payers & Consumers
Government trying to reduce
cost of implants &
consumables

5. Why Costing
is important
to you ?
Hospitals facing double
whammy – Price Pressure and
Cost Pressure
Increasing manpower costs
both medical and non-medical
Advanced technology leading
to increase in cost of treatment

6. Why Costing
is important
to you ?
Clustered Distribution of
hospitals resulting in
competition
Pressure from Insurance
companies to reduce claims
Shift from Top Line
Management to Bottom Line
Management

7. Why Costing
is important
to you ?
Need to generate Return
on Investment for For-
Profit Hospitals
Need to generate surplus
for Not-For-profit
hospitals to maintain and
grow

8. Developments
in Cost
Transformation
and
Optimization
Generate capital for GrowthGenerate capital for Growth
Government and Corporate buying healthcare services at
lesser prices offering higher volumes – Public Private
Partnership Models
Government and Corporate buying healthcare services at
lesser prices offering higher volumes – Public Private
Partnership Models
Bridging GAP between operating performance and financial
performance
Bridging GAP between operating performance and financial
performance
Changing care models due to Internet of Things & AI and
Machine learning
Changing care models due to Internet of Things & AI and
Machine learning
Value Based Care – Linking reimbursement to clinical
outcomes
Value Based Care – Linking reimbursement to clinical
outcomes

9. What Costing
will deliver to
you ?
• Understand your true MarginsToTo
• opportunities to reduce costsIdentifyIdentify
• Total costs of both inpatient and
outpatient ServicesUnderstandUnderstand
• Capacity utilization of your
hospital facilities and address
under-utilization
IdentifyIdentify

10. What Costing
will deliver to
you ?
• you formulate a pricing
strategyHelpHelp
• at a Standard Recovery Rate
for services to negotiate your
payer contracts
ArriveArrive
• Actual Recovery Rate,
deviations from Standard
Recovery Rate and reasons
UnderstandUnderstand
• to identify volume levels at
which you generate surplus
with standard recovery rate
HelpHelp

11. What Costing
will deliver to
you ?
• Package ProfitabilityAnalyzeAnalyze
• medical-department wise
profitability
Analyze and
compare
Analyze and
compare
• areas of savings in material
consumption, OT, ICU, wards,
lab, pharmacy and other
support departments
IdentifyIdentify
• Consultant wise costs &
surplusAnalyzeAnalyze

12. What Costing
will deliver to
you ?
• Benchmarks for monitoringDevelopDevelop
• A Dashboard to top
managementDevelopDevelop
• To outsource or notDecisionDecision

13. What do you
mean by
costs ?
When Government talks of costs, it means the amount
reimbursed or amount spent in state run service
providers
When Consumers talk of costs, it means the amount
spent by them for treatment or health insurance
premium & uncovered compensation of the treatment.
For insurance companies, the claims to be paid to the
service providers
For the service providers, costs incurred within their
system to provide treatment to the patients

14. Service Level
Costing
Per Patient Cost
Per Bed Cost
Per Procedure Cost
Which one to prefer…

15. Concept of
Costs & Cost
Classification
for hospitals
• Classification of Costs in
• Direct Costs
• Indirect Costs
• With Cost drivers such as labour,
materials, & overheads
conventionally but reclassified for
convenience as Manpower,
Materials, Machinery & expenses

16. Concept of
Costs & Cost
Classification
for hospitals
• Classification of by department
• Medical Departments
• Medical Support Departments
• Service Departments

17. Costing Methodology
3Me
Methodology
3Me
Methodology
MATERIAL MANPOWER
MACHINERY &
Expenses

18. Costing Methodology
3Me
Methodology
3Me
Methodology
MATERIAL
MACHINERY &
Expenses
MANPOWER
DIRECT
INDIRECT
FIXED
VARIABLE
FIXED
VARIABLE

19. Costing Methodology –
Marginal Costing
• Marginal Costing
• Marginal Costing
differentiates costs in to
fixed and variable costs.
• Decisions are made based
on the variable costs.
• It is used in analysis of
cost of additional unit of
service.
• It is useful deciding
pricing/expanding and
outsourcing of an activity.

20. Methods of
Costing
• Has limitations of over or
under absorbtion
Traditional
Costing
Traditional
Costing
• Specifically used for
certain decisions
Marginal
Costing
Marginal
Costing
• Time consuming and
expensive
Activity Based
Costing
Activity Based
Costing
• Easy to use, uses Cost
Capacity Ratio of
resources
Time Driven
Activity Based
Costing
Time Driven
Activity Based
Costing

21. Approach
Mgmt.
Cost
Unit Level /
Dept. Level
Costs
Medical/procedure
level cost

22. Approach
Mgmt.
Cost, ROI
Cardilology, Ortho,
Oncololgy, Gastro,
Gynecology, Paediatric,
Neuro, General Medicine,
Nephrology etc
Outpatient Services- Consultation &
Diagnostics/procedure & Surgeries
level cost/Inpatient Services

23. Methods of
Costing
Time Driven Activity
Based Costing is the
method for Value
Based Care Concept

24. The Process
for Time
Driven
Activity Based
Costing
• The Clinical ProcessesMappingMapping
• Clinical & Non-Clinical
Resources
MappingMapping
• For each Resource
Find Cost
Capacity Ratio
- CCR
Find Cost
Capacity Ratio
- CCR
• Cost of resources for every
patient based on CCR –
Based on consumption of
units of resources
Find outFind out

25. Time Driven
Activity Based
Costing
(TDABC)
• Time-driven ABC
requires estimates of
only two parameters:
• The unit cost of
supplying capacity
(Supply Cost Ratio)
• The time required to
perform a
transaction or an
activity

26. Important
Parameters
Determine measurement of Unit of
Cost each resource…It could per
hour, per patient, per Bed or the
number of surgeries/procedures
Determine the capacity of each
resource….It could be std no of
hours for OT or Equipment or
minutes per procedure or number
of procedures per day for a surgeon

27. Important
Parameters
Find out number of units of
resource consumed for the
procedure
Cost per unit of resource
and the number of units of
resource per procedure lead
to cost of the resource

28. •Example of
Capacity
Cost Ratio
Capacity of Nursing resource
Number of days in a year 365
Less Sundays 50
Saturdays 24
Casual Leave 12
Earned Leave 12
Training 5
Sick Leave 10
Number of days available 252
Number of Hours per nurse 8
Less Break 1
Fatigue and handing over 1
6
Nursing cost 20000
Add benefits 15% 3000
Training costs 10% 2000
Supervision cost 10% of supervision cost 4000
amanities and space 2% 400
Total Cost 29400
per annum 352800
per day cost 1400
per hour cost 233.33

29. Time Driven Activity
Based Costing (TDABC)

30. Important
observations
arising from
costing
exercise….
Appropriate technology and not necessarily
advanced technology
Capacity Utilization and cost recovery
Areas of saving OT, consumable, pharmacy and
wards
Consultant wise costs and profitability
Brand VS Generic
Imported VS Indigenous

31. FICCI REPORT

32. Depth of Work Involved
• Standard templates were developed
• 10 surgeries from across specialties
• 10 hospitals of different sizes from different locations
• Each Surgery had cost allocation sheets of 25
departments approximately.

33. Key Findings- Comparison of Procedure Cost
with AB-NHMP Package Rates

34. Key Findings- Deviation from Mean Value for
Procedure Costs across Hospitals

35. Key Findings
• Volumes have different impact on different cost
components
• Machinery and Materials
• Clinical Teams
• Smaller size hospital have cost challenges
• Clinical teams- payment method
• Equipment Renting

36. Key Findings (Contd.)
• Difference in location has impact on cost components
• Manpower
• Real estate
• Impact of land costs
• Difference in costs between government and private
hospitals

37. MANPOWER MATERIAL MACHINERY EXPENSES UTILITIES TOTAL
OT 58,909 60,210 11,671 3,389 8,279 142,458
ICU 6,450 4,341 1,937 3,088 1,956 17,772
LAB 1,869 1,295 133 7 71 3,374
RADIOLOGY - - - 3,000 - 3,000
PHYSIOTHERAPHY 9,091 - - 2,639 452 12,182
BLOOD BANK 993 - 131 23 92 1,238
PHARMACY 767 - - 24 16 807
WARD 6,340 3,511 - 78 1,107 11,035
MANPOWER MATERIAL MACHINERY EXPENSES UTILITIES TOTAL
CSSD 5,133 31 7,035 17 2,618 14,834
IT 481 18 549 23 20 1,091
CCTV 522 - 10 0 38 570
FIRESAFETY 65 - 59 2 - 126
OPERATIONS & ADMIN 2,335 4 - 26 405 2,770
FINANCE & ACCOUNTS 512 2 - 4 4 523
PURCHASE & STORES 427 2 1 1 123 553
HR 394 6 - 1 33 434
MAINTENANCE 643 493 - 0 - 1,136
MRD 105 - - 0 22 127
ADMISSIONS 130 - - - - 130
SECURITY 1,142 - - - - 1,142
DIETICS 3,494 - - - 3,494
HOUSE KEEPING 39 7 4 0 33 82
LAUNDRY & LINEN - 1,348 - - - 1,348
MANPOWER MATERIAL MACHINERY EXPENSES UTILITIES TOTAL
BUILDING COST - - - 4,056 - 4,056
COMMUNICATION - - 17 434 - 451
GENSET POWER BACK UP - - 348 - - 348
BIOMEDICAL WASTE (OUT
SOURCED) - - - 56 - 56
NON MEDICAL
FURNITURE(INDIRECT) - - - 1,038 - 1,038
BIO METRIC - - 1 - - 1
SOLAR HEATING - - - - - -
UPS - - 44 - - 44
WATER FACILITIES - 45 26 - - 71
TOTAL COST 99,840 71,311 21,965 17,906 15,269 226,292
OTHERCOSTS
MEDICALSUPPORT
DEPARTMENTS
COSTING FOR CABG ON-PUMP SURGERY - (Cash)
SERVICEDEPARTMENTS

38. What is Value
Based Care
and the future
• Payers will pay a bundled sum for an outcome
• This is irrespective of volume of services to the patient
• The financial risk of treating the patient is with the
service provider
• All the stake holders in treating the patients including
consultants and outsourcing partners should work
closely to achieve outcome at an optimum cost
• Value Based Care is the way forward with increasing role
of insurance, public private partnership and government
in reimbursing Medical bills

39. THANK YOU !
S.Manivannan
+919840976340
smvchary@gmail.com