COST ANALYSIS

Introduction
There is a simple question that is often asked, but that never receives a simple answer ,
what does it cost? the problem in responding to that simple question is that measurement of cost
is an extremely complicated issue. Cost accounting has become as essential part of the health
care management in the last decades. the drive towards health care reforms and the spread of
manage care have heightened the awareness of the critical role for cost analysis and cost
management. An appropriate measurement of cost one analysis may be totally inappropriate for
another
Hospital and nursing homes be they large or small are the key institution in the
medical care services in India. Keeping in view the concern for rising cost for health care on the
one hand, and higher expectation of the patients and their relatives of the patients as well as
increasingly limited financial resources available at national , state and institutional level on the
other hand, the administrators of this institution have to initiate various programmes and
measures for cost reduction.

Definitions:

1. Cost analysis:
“It is a system of analyzing the relationship between fixed and variable cost.”
2. Fixed cost:
“Costs that do not vary in total as the number of patients vary within a relevant range of
volume or activity.”

3. Variable cost:
“Costs that vary indirect proportion with patient volume.”

4. Accounting cost:
“A measure of cost based on a number of simplifications such as an assumed useful life
for a price of equipment.”

5. Average cost:
“Full cost divided by the number of units of service or patients”

6. Cost center:
“A unit of department in an organization for which a manager is assigned responsibility
for costs.”

7. Direct cost:
Costs clearly and directly associated with the cost objective. They are generally under the
control of the manager who has overall responsibility for the cost objective.

8. Indirect cost:
“All costs that are not direct costs.”
9. Economic cost:
“The amount of money required to obtain the use of a resource.”

10. Joint cost:

Costs that is required for the treatment of several or more types of patients. The cost
would not incur unless the organization stopped treating all of those different types of patients.

11. Opportunity costs:

A measure of cost based on the value of the alternatives that are given up in order to use
the resources as the organization has chosen.

STAGES OF COSTS:

Costs have two stages:

1. Acquisition cost:
when some asset or service is purchased, the resource given in exchange
represents the acquisition cost.
2. Expired cost:
once the asset is fully consumed, it becomes an expired cost or an expense.

Cost containment:
Scrutinizing cost is a way of life in health care today. Every expenditure including
supplies, equipment, and cost important – staff time is closely examined. Organizations have
been restricted and resized, care systems reignited and nursing services redesigned.
The goal of cost containment is to keep cost within acceptable limits for volume, inflation
and other acceptable parameters. It involves cost awareness, monitoring, management and
incentives to prevent, reduce and control.

Cost awareness:
Cost awareness focuses the employee’s attention on costs. It increases organizational
awareness of what cost are, the process available for containing them, how they are managed,
and by whom. Delegation budget, planning and control to the unit level increases awareness.
Intensity awareness of all hospital personnel what the cost direct, indirect are, how they
can be managed and the processes available to contain them.

Cost management:
Cost management focuses on what can be done by whom to contain costs. Programs,
plans, strategies are important. Responsibilities and accountability for the control should be
established. A committee can identify long and range of plans and strategies. A suggestion box
can be used as can contest for the ideas that save the most money.

It establishes a responsibility and accountability system for communicating and controlling the
attainment of plans, strategies and programs involving expenditure.
Cost control:
Cost control is effective use of available resources through careful forecasting, planning,
budgeting, preparation, reporting and monitoring. Cost effectiveness compares cost and identifies
the most beneficial outcomes to cost by specifying costs per program unit of service and amount
of service needed, assessing effect of the outcome and determining cost outcome and cost
effectiveness.

Types of cost analysis

1. Cost benefit analysis [CBA]
2. Cost benefit ratio [CBR]
3. Cost effectiveness analysis [CEA]

1. cost benefit analysis [CBA]

Cost benefit analysis [CBA] is measurement of the relative costs and benefits associated
with a particular project or task.
Cost benefit analysis [CBA] is tool with great potential for the decision makers so long as
he or she recognizes the difficulty in determine the true costs and benefits of various alternatives.
This tool can especially useful when trying deciding between alternative expenditure of money.”
“Cost benefit analysis is a procedure by which all cost resulting from installing and
operating a system are determined and converted to a financial unit [rupees], all resulting
benefits of system are determined and converted to a financial unit [rupees] amount and ratio is
calculated to reflect the relationship of cost to benefits.”

2. Cost benefit ratio [CBR]

“It is the numerical relationship BETWWEN the value of the financial cost of a program
and the value of benefits”
“It is defined as the ratio of the Value of benefits of an alternative to the value of
alternative cost.”

Z= present value of economic benefits

Present value of economic cost.

Cost benefit analysis is often used in the public sector where there is no net income to
serve as a guideline.
The issue becomes one of determining whether the benefits of an action exceed it cost if

= benefit
Cost
 Then the project has a positive benefit per cost ratio and value to society. In order to
determine the ratio, it is necessary to assign value to both the cost and the benefits in monetary
terms. In practice, it is difficult to assign monetary values to health care outcomes. It is difficult
to measure the value of life and even more difficulty in measuring the difference in health
outcomes that do not involve life or death.
Cost benefit analysis is designed to consider the social cost and benefits attributable to
the project. The benefits are expressed in monetary terms to determine whether a given program
is economically sound, and to select the best out of several programs.

3. Cost effectiveness analysis [CEA]:

A measure of whether cost are minimized for the decide outcomes.

Cost effectiveness analysis [CEA]:

“A technique that measure the cost of alternatives that generate the same
outcome”
Cost effective methods are those search for the last costly way of achieving a defined
result. Cost effective analysis are easier to make as that is clear. It helps the administrator in
managing his health resources. The problem is to find the way of achieving the objective at lower
cost”
Cost effectiveness analysis [CEA] is not as ambitious as cost effectiveness analysis
[CEA], in that it dies not require a measurement of the value of the benefits. Rather, it relief on
using comparison. One considers whether a project is c cost effectiveness in comparison with
some alternative approach. An approach that achieves a specific desired outcome for the least
possible cost is considered to be cost effective.
A more cost effectiveness analysis [CEA] oriented approach would consider different
approaches to save a life, and find out which one cost least, that would be the cost effective that
generate similar outcomes.
For ex: suppose a hospital has been treating a certain type of patient using a particular approach
is cost effective, we must first establish that the clinical money than the old approach. If a new
approach generates the exact outcome for less money then it is cost effective.

Steps in cost effectiveness analysis:

1. Identify the program goal or client outcome to be achieved.
2. Identify at least 2 alternatives means of achieving the desired outcomes.
3. Collect baseline data on clients.
4. Determine the cost associated with each program activity.
5. Determine the activities of each group of clients will receive.
6. Determine the client changes after the activities are completed. Combine the cost, amount
of activity and outcome information to express costs relatives to outcome of program
goals.
7. Compare cost outcome information for each goal to present cost effectiveness analysis
Breakeven analysis:
Breakeven analysis determines the volume at which a program or service is just
financially self sufficient. At lower volumes, losses would occur at higher volumes, profits would
be earned. Breakeven analysis is a managerial tool that is based on the relationship among cost,
volume and profit. The Breakeven analysis technique provides managers with information
regarding the financially viability of proposed and existing program and services.
The focus of breakeven analysis in health care has typically been based on the number of
treatments, visits or patient days.

Cost accounting:
Cost accounting is a process that supports the budget reporting system and agency efforts
for cost containment.
Cost accounting is a set of techniques for associating cost with the purpose for which in
cured.
In accounting the only facts recorded are those that can be pressed in monitory terms.

Advantages of Cost accounting:

1. The accumulated data enable a head nurse or divisional nursing director to assess the cost
of cost extra demand imposed on the nursing unit, such as abortion, oral surgery.
2. It enables a manager to identify the interaction between different expenditures.
3. Through Cost accounting a manager can determine whether hiring additional operating
room or clinical care employees. Increase the unit expenditure for scrub clothes, sterile
supplies and bed linen.
4. It enables the manager to identify popular services program that receive hidden founding
in the form of voluntary time contributions by professionals from the other units.
5. In some health care agencies, in house clinical nurse experts who are assigned to various
clinical specialty units, serve as volunteer teacher for in service programs.

Disadvantages of Cost accounting:

1. it is difficult to associate some cost with particular program

2. A cost incurred at one point in time may facilitate service programs over an
extended period.
3. It is the fact that it is difficult for a manager to justify the cost of a nursing care
program. When quantifiable measures of all patients outcomes of not variable.

Cost reduction:
Cost reduction means spending less for goods and service. The amount of reduction
depends on the size of the agency, previous efficiency, and skill of manager and cooperation of
employees. Safety programs that reduce the costs of workers, compensation and safety programs
that reduce the costs of workers compensation and absenteeism program that reduce sick time,
absenteeism and turn over reduce costs.
Factors influencing need for cost reduction:

The capital funding availability for hospitals is not as attractive as industry. No doubt, the
financing institutions are ready to finance the hospitals today to the tune of several croups, but
the hospital project can never be as financially available as an industrial project.

Inability to generate finds through donation:

The tax benefits available to a donor for making contribution to the hospital are not at par
with the tax benefits for donations to religious, educational, and other programs or institutions.
Therefore, it is difficult to attract donations.

Demographic factors:
Due to uncontrolled population there is an increased demand for services for longer
periods. This is more critical for public hospitals, public sector industrial hospitals, and
missionary hospitals. Of course, private sector would benefit.

Inflation:
Due to higher inflation there is an erosion of purchasing power. Financial resources of the
country are tight. The budgets of the public hospitals are not going, increased appreciably for few
years. The administrators would have to manage with tight budget. As a result, there would be
limited materials and equipment.

Increased demand and expectations.:

Due to health education and awareness, there is an increased demand and expectations on
the [part of the pubic and employees in industrial hospitals. Since there is greater possibility of
treatment of chronic and degenerative diseases, open- heart surgeries, organ transplantations,
dialysis treatment, there is great demand and expectations for treatment.

Capital cost of building and materials:

The capital cost of construction of buildings and materials have increased considerably
even the maintenance of the buildings require higher budget.

Maintenance of equipment, materials and vehicles:

Cost of spare- part, serving of the equipment, diagnostic and therapeutic materials,
maintenance of the vehicles are continually increasing. The above are some of the factors
influencing the increased cost necessitating cost reduction.

Area of cost reduction in hospitals

There are 4 input variables in health care

1. physicians – professionals – technical inputs
2. patients and relatives of the patients as consumers
3. therapy- drugs, super equipment, ect- raw materials
4. Para-medical and administrative staff-support services
Cost avoidance:
Cost avoidance means not buying supplies, technology or services, supply and equipment
cost should be carefully analyzed. Cost and effectiveness of disposable and labor and processing
cost of reusable items are part of the analysis. The least expensive should be identified and
expensive and less effective item avoided.

Cost centers:
In hospitals, nursing units are typically considered cost centers. Cost centers is desired as
the smallest area of activity within an organization for which cost are accumulated. Cost centers
may be revenue producing, such a environment services and administration. Nursing managers
are commonly given the responsibility for cost incurred by their department, but they have no
revenue and if their final performance is measure in terms of profit, then the manager are
responsible for a profit center.

Conclusion:
Nurse Managers control the spending of major portion of a health agency resources.
recourses are best concerned. When the manager of each cost center prepare administrations.
Zero base programmed budgets for the unit. A zero base budget requires the prediction of nursing
service needs. The justification of nursing services needs. The justification of appropriate
performance.
Measures: after the nursing unit budget is approved and funds are appropriated, the manager
should always monthly budget variances report to evaluate spending patterns, and adjust
disbursements to meet changing circumstances.

Journal Abstract

Hospital Organizational Change and Financial Status: Costs and

Outcomes of Care in Philadelphia

Jefferson Medical College, and Office of Health Policy and Clinical Outcomes, Thomas
Jefferson University, and Technical Advisory Group, Pennsylvania

Two recent changes in Philadelphia-area hospital organizations are consolidation into systems and acquisition of
2 medical school hospitals by a for-profit chain. This study explored whether such consolidation and conversion
affected costs and outcomes of care. The analysis included 1,617,581 discharges from 49 acute-care hospitals from
1997 to 1999. Analyses within and between medical school hospitals examined trends in discharges, case mix, length
of stay, and mortality. The study addressed 2 questions: whether, as hospitals consolidate into medical school
hospital-based systems, volume, severity, length of stay, and mortality increase in those hospitals; and whether for-
profit conversion redistributes complex, high-cost admissions to nonprofit hospitals. The 2 medical school hospitals
that became for-profit experienced decreases in volume and resource intensity, coupled at one with an increase in
severity. However, these patterns were produced more by the system's financial instability than by consolidation or
conversion.
Cost Analysis of Reproductive Health Services in PCEA Chogoria
Hospital, Kenya
Description:

Presbyterian Church of East Africa (PCEA) Chogoria Hospital is a faith based non-
governmental organization providing a wide range of healthcare services. The organization
faces a number of challenges related to sustainability: declining donor support (especially
for reproductive health services), low cost recovery levels, and increasing poverty levels
among its clientele. In response to these concerns, a team from Chogoria Hospital attended
a one-week workshop held in Ghana on financial sustainability and developed a small scale
operations research project to determine the cost of providing a selected number of
reproductive health (RH) services and to evaluate their cost recovery levels. The results of
this assessment will guide the management in the setting of appropriate prices for RH
services in the hospital

Bibliography:

 C.M FRANCIS, DSOUZA”HOSPITAL ADMINISTRATION JAYPEE BROTHERS

MEDICAL PUBLICATION , EDI. 12TH 1991 PP;208-216.
 BESSIE .L.MARQUIS; CAROL J. HUSTON “MANAGEMENT DECISION MAKING
FOR NURSES” JB LIPPINCOT COMPANY .PHILADELPHIA 2 ND EDI. 1994, PP 501-
506.
 DEE.ANN, GILLES, NURSING MANAGEMENT .A SYSTEM APPROACH. 3 RD
EDI;WB SAUNDERS COMPANY, 1994 PP180-187.
 STEVEN. FINKLE, “ ESSENTIAL OF COST ACCOUNTOING FOR HEALTH
CARE ORGANIZATIONS”, AN ASPEA PUBLICATIONS, 1994, PAGE NO.
103-106.