PATAN JANTA HOSPITAL:

Activity Based Costing and Healthcare sector

Case Abstract:
This case is an attempt to understand the needs of Activity- base- costing (ABC) and how far it is difficult to implement in healthcare sector. ABC acknowledges that you cannot manage costs, you can only manage what is being done and then costs will change as a consequence. In traditional cost accounting, however, the underlying assumption is that costs can be managed, but as most managers have found out the hard way - managing costs is most difficult.

The issue of pricing for healthcare deliverables has been a contentious issue for long in India where consumers pay out of pocket. Experts feel that providers must do costing of all new services and review the fee for existing ones periodically. They are also of the opinion that activity-based costing (ABC) should replace market-based costing. For Healthcare, main purpose of ABC is not only to allocate common cost to treatments but also to measure and then price out all the resources used for various treatments. Identification of cost drivers and activities are difficult job in healthcare sector. Facility level drivers used for healthcare sector are not related to product at all.

Patan Janta Hospital is one of the best-equipped hospitals in north Gujarat in the heart of patan city. It was established in 2001 by Jivan Jyot Charitable Trust which has been in the field of providing medical relief to the poor and needy patients since 1962. It is an independent, fullservice, non-profit organization. Presently there is no cost concentration in hospital. Service costs are not allocated to each types of treatments.

Authors: 1. K. K. Patel, Lecturer Lecturer S.K. School of Business Management, Management, Hemchandracharya North Gujarat University, Patan. 3. Mr. Nishith H. Bhatt (Reader) S.K. School of Business Management, Hemchandracharya North Gujarat University, Patan. 1 2. Harischandrasingh Rathod, S.K. School of Business Hem. North Gujarat University, Patan

Activity Based Costing and Healthcare sector States like Gujarat, Maharashtra, Kerala, Tamil Nadu, Karnataka and Orissa have surplus hospital beds whereas Punjab, Haryana, Rajasthan, Uttar Pradesh, Madhya Pradesh and Bihar face acute shortages in this respect. In India, approximately 60% of the total health expenditure comes from self- paid category as against government's contribution of 25-30%.

PATAN JANTA HOSPITAL:

Patan Janta Hospital was established in 2001 by Jivan Jyot Charitable Trust which has been in the field of providing medical relief to the poor and needy patients since 1962. It is an

independent, full-service, non-profit, organization. It is modern and upgraded hospital at Sardar Road in the heart of Patan city. The hospital building has a total build up area of 55000 square feet and has capacity to accommodate 200 beds. The hospital is equipped with latest machinery for providing the modern medical facility. The total investments now exceed Rs. 3.5 crores. In fact the hospital is now one of the best-equipped hospital in North Gujarat and is well reputed for providing utmost patient care with personal touch. During year 2004, the hospital has provided following medical services:

1. 2. 3. 4. 5.

Total OPD Patients Dialysis X-Ray Cardiology & medical Laboratories Total income (In Rs.)

23194 548 4020 2200 2044 2313485

Above facilities are made available at extremely low and reasonable rates such as: (a) Rs. 40 for OPD (b ) Rs. 80 for X-Ray (c) Rs. 550 for dialysis with complete accessories (d) Rs. 300 per day for ICCU including doctors services (e) Rs. 40 for EGC (f) Rs. 250 for echocardiography These rates are at least 40 to 60 % less than other hospitals in the patan city and much lower than the prevailing rates of charitable hospitals in Ahmedabad and Mumbai.
The case has been prepared by Mr. K. K. Patel (Lecturer), Mr. Harishchandra Singh Rathod (Lecturer) & Mr. Nishith H. Bhatt (Reader) , S.K. School of Business Management, Hemchandracharya North Gujarat University, Patan as an attempt to describe the cost management context, only for the purpose of classroom analysis and learning and not to discuss either correct or incorrect handling of the situation.

Free camp organized by patan Janta hospital: 1. Ophthalmic IOL camp with rotary club, Patan 2. Super-specialist check up camp with Shrey hospital A bad 3. Cardiology camp with SAL Hospital A bad 4. Cardiology camp with Rotary club, Patan 5. Diabetes camp 5 Asthma & Respiratory Diseases camp Operations: There are various units on the basis of treatments in the hospital like, Dialysis unit, laboratory department, X-ray, ICU, orthopedic division, cardiology& medical department.

Hospitals department of Orthopedics provides most competent and professional treatment. The department specializes in latest techniques and treatments such as minimal invasive surgery, cartilage and bone transplantation, spine surgery and limb sparing surgery. All kinds of musculoskeletal problems ranging from Arthritis to sports injuries, to complex broken bones, and childhood conditions like scoliosis are treated most effectively. The Department of Orthopedics is equipped with the most modern equipment for treatment. At Janta hospital, critical care service is driven by a commitment to promote a safe and effective environment. It is support unit to medical unit. From heart attacks and strokes, to severe respiratory problems, infections, burns and other life-threatening illnesses, Janta recognizes the unique needs of critically ill patients of any age, infant to elderly, and strives to secure the highest quality care for them. Hospital's Critical Care Unit takes a multidisciplinary approach in caring for patients with illnesses that require close monitoring and immediate response to rapid clinical changes. To do this effectively, it has an excellent combination of suitable infrastructure, a team of critical care professionals, specialists, trained nurses and other support staff. The Critical Care Unit is technologically advanced and strongly believes in a multidisciplinary team approach. The Critical Care Unit is strategically located within the hospital and accommodates over 20 beds. 24hour support services, including imaging & laboratory services and pharmacy are located in the vicinity of the Unit and staffed by committed personnel. The Unit's strength is its staff that endorses the importance of teamwork in caring for critically ill patients. Round the clock Laboratory services provide a wide range of investigations and comprise the various disciplines like Transplantation immunology services, Microbiology, Biochemistry, and 3

Genetics According to estimates, every year about a million people in India lose their lives due to heartrelated diseases and disorders. While the figure sounds alarming, more threatening is the fact that the country has very few professionally managed and well-equipped hospitals to cater to the everincreasing number of heart patients. The Cardiology Department of Janta hospital provides patients with the full breadth and depth of cardiovascular care. Conditions operated on include: Heart attacks. Valvular diseases, Arrhythmias, Coronary artery disease, Hypercholesterolemia, Heart disease symptoms. When it comes to providing the best health care, Jantas Cardiology department is comparable to the best heart care hospitals like Apollo and Sterling hospital of Ahmedabad. Janta Hospital includes a well-equipped x-ray unit to provide doctors with accurate data to aid prompt diagnosis and treatment. Dialysis division of hospital is connected special expensive equipments to perform the dialysis. To service and support ever expanding customer base they employ a team of specialist dialysis trained personnel. Income statement:(Year ended 31st March 2004)1 Income Amount Expenses Cardiology and medical exp. 271155 Cardiology & Medical fees Dialysis Dep. Expenses 286450 Dialysis Unit Laboratory Dep. Expenses 511225 Laboratory income X-ray department exp. 321623 X-ray Hospital General & Maintenance exp. 826891 Orthopedic unit Staff uniform expenses 75141 Ambulance charges Nurses salary & Administration 21000 Body check-up charges Dr. residential electricity & Rent Ortho division 677177 Access of Exp. Over income Total 2990662 Amount 51448 59673 318814 160648 481580 10000 1581000 25003 302460 2990662

Activity based costing: Mr. Vikas Barot, Chief financial officer of hospital, has recently attended a seminar, in which a professor had talked about a new concept called activity based costing (ABC). The professor has argued that, hospitals should focus on activities performed by the indirect and support resource of the hospital and try to link the cost of performing these activities directly to the treatments for which they are performed. Mr. Vikas has obtained several books and articles on ABC and tried to put in to the practice. First of all Mr. Vikas (CFO) has concentrated on some selected treatments and identified divisions on the basis of treatments. He identified five divisions on the basis of treatments and allocated direct costs associated with each division. Then after he prepared Division-wise revised income
1

Audited financial statements of Janta hospital for accounting year 2003-2004.

statement for hospital. He has assigned traceable supply costs directly to each type of treatment. The service costs however, were not analyzed by type of treatment initially. Total Rs. 2072580 Service cost of Janta hospital is not allocated to any treatment but is under the same head of expenditure. Revised Income statement: Particulars Revenues: No of patients Total Revenue: Direct cost: Service cost; General overhead Nursing cost Excess of exp. Over income Total Lab. Dialysis X-ray Cardiology & medical 2200 271155 51484 Orthopedic Unit 23194 826891 302460

2044 32006 2217344 511225 893079 318814

548 286450 59673

4020 321623 160648

481580 1591000 748315

Activity bases cost analysis: Phase: I For first stage of Analysis financial officer has concentrated only on general overhead categories. The task of financial officer was to further classify general overheads and types of activities, through interviews with appropriate people. And General overheads costs have been classified in to following categories of costs, which were being allocated to each treatment.

General overheads (Occupancy & Administration) Facility cost (Rent & depreciation) . 22,200 Electricity expenses . 125500 Administration and support staff .225000 Hospital & equipment maintenance (Maintenance & depreciation) ...82244 Printing & stationary expenses ..26636 Total481580 The nest step by financial officer was to find out activity cost drivers for each type of costs under general overhead category. He determined that hospital and equipments maintenance expenses

are 9.2% of direct costs, while printing and stationary expenses are 1.2 % of revenues. For all other general overheads he has identified following cost drivers. General Overheads Cost Drivers Facility costs (Rent & Depreciation.Square feet of space Electricity expenses..Kilowatt usage 5

Administration & Support staff.Number of patients

Mr. Vikas visited all the divisions to identify the quantities of each cost driver for the all types of treatments. A summary of analysis is presented below.

General overhead cost driver2 Square feet Occupied Estimated Kilowatt usage No. Of patients

Total 45000 50200 32006

Lab. 5000 7000 2044

Dialysis 1500 5700 548

X-ray 800 12500 4020

Cardiology & medical 27700 15780 2200

Orthopedic Unit 10000 9220 23194

Phase: II In the next phase of analysis Mr. Vikas (CFO) has concentrated on nursing expenses. First he has identified activities in to three resource pools. Nursing expenses includes salary to nurses,

uniform expenses for nurses and nursing administrative expenses. He collected relevant data concerning costs and the physical flow of the cost units among resources and activities. It is found that fifty percent of nursing times are spent in medical division and fifty percent of time for other divisions. The required cost and operational data were collected from accounting staff. Sources of data included the accounting records, special studies and sometimes-best estimates by nursing administrative staff. Nursing expenses: Salary to nurses . 122000 Staff uniform expenses .. 10,000 Nursing administration & support staff361000 Total ..1591000 Nursing salary includes salary to all nurses of the hospital. The cost driver was identified as number of nurses in each division for nursing expenses. Staff uniform expenses are related to uniform of nurses. He identified that nursing administration expenses were 40.42% of direct costs. The following cost drivers are identified for nursing expenses.

General overhead cost driver No. of nurses

2

Total 35

Lab. 02

Dialysis 03

X-ray 02

Cardiology & medical 22

Orthopedic Unit 08

Sources of data included the accounting records, special studies and sometimes-best estimates by nursing administrative staff.

Time spent in each div. 100%

05

10

10

50

25

Questions for discussion: 1. Do an ABC analysis and Prepare the revised Profit & Loss statement for selected treatment units of Patan Janta hospital: i.e. (a) Calculate the cost per driver unit for each activity. (b) Allocate service costs to each treatment and calculate treatment level profit. 2. Interpret above results and discuss how Activity-based costing is useful to Indian health care sector and to Patan Janta Hospital? 3. CFO of Patan Janta Hospital has concentrated on selected treatments, comment on other services by the hospital, which are not considered in ABC analysis.

**********