Introduction
Massachusetts Eye and Ear Infirmary (MEEI) is a non- profit organization which for the past decades has had problems in its evaluation on the way the cost are being evaluated and appropriated to patients. The system that was being employed in the hospital was insinuated to be ineffective in the sense that it did not put into consideration all the necessary measures that are required before allocating costs. According to the executive director, Mr. Charles wood, there is a need to change the traditional method used in evaluating the costs and instead embrace the new method. Central to his thoughts, the director of the hospital was not quite sure whether the old method actually provided a proficient representation of the true picture of the actual costs that were incurred within the hospital.
Problems that arose with the old costing system
The old method of evaluating the costs that were being used in the hospital had become so lose in that there was a need to change the system that would incorporate all the hospital requirements. .Charles Wood, the executive director of MEEI had become convinced that the old system that was being used was not favorable. The old system could not accurately measure the costs incurred for health. Another drawback associated with the old method of cost accounting was that it was very clumsy and outdated. Furthermore, the old method even failed to identify the mechanism of patient’s costs. Instead of relieving the patient from the unfair burden of costs, the method doubled the burden. According to the executive director, the method was leading people into using awkward and ineffective methods, at the public costs (Zyla, 2009, Pg 440-443).
How would the new activity Based Costing system (the split costing accounting system) remedy these problems?
According to the executive director, Charles Wood, the new system would come hand in hand with appropriate measures which will be used to remedy the challenges encountered through the use of the old method. The Split cost accounting method deployed by the hospital was set up under two concepts. One of the concepts that the system would look into was that, not all the days care in the hospital were equivalent. Also in remedying the problems brought in by the traditional method, the new system would ensure that, for any particular patient, the ascertainment of the costs on routine services would be determined though three distinct paradigms. They comprise of the costs on hospitalization, the daily costs and the intensity of service costs. The latter are referred to as the clinical costs by the MEEI (Zyla, 2009, Pg 339-440).
How might it affect the management’s decision in respect to patient mix?
In respect to the patients mix, the new cost accounting method will have profound effects on the decisions that are initiated by the staffs or the management. Therefore before, the old method was never consulted or reviewed when the management wanted to carry out any function within the hospital. This is therefore different with the new method that ought to be absorbed by the hospital. Each activity that ought to be undertaken must be sort out from the accounting method. For instance, any addition or increase of the staffs- a decision by the management should be in line with the new costing method. The method will also help the management to in determining the staffing needs for required by the nursing department. The determined requirements are out of the estimates undertaken which will identify the much a nurse can handle within a given period of time (Zyla, 2009, Pg 440-443).
In essence, the new costing method will allow for the costs to be updated on periodical terms. In addition to that, the new accounting method will also lower the time it takes for the management team to agree on a decision. In other words, it will eliminate conflicts in the management decision making. The adopted method will also have some impact on the short –stay patients. However, the new method is considered as being equitable, in the sense that the apportionment of the incurred loses rare in-discriminatory regardless of the age.
What would be the difference between the budgeted 1977 routine care cost of the following procedures under the old accounting method and under the Split-cost accounting system?
A great difference is noted between the budgeted 1977, routine care cost for diverse procedures under both the old accounting method and under the split-cost accounting method. The old accounting method takes into account the three accounting categories that are mentioned in the case study. The accounting categories in this matter comprise of the infirmary hospitalization cost charges amounting to $ 212. The second category denotes the daily room rates which amount to $ 31.50 and the third category denotes the clinical care costs which accounts for $ 5.25 per each unit. By using such a description, MEEI was in a better position to account for the costs that pertains to each patient from the day the patient is admitted to the day the patient is discharged. The old accounting method would be different it treatment of the following procedures as compared to the split accounting method (Stickney, Weil, Schipper, 2009, Pg.934-936).
The old accounting method does not specify on the day of admission neither the day of discharge. Instead the costs incurred on these two days are given in general. This is quite different from the Split accounting method. For instance as indicated from the exhibition provided in the case study, a patient suffering from a cataract operation is admitted on 15th and the date of surgery is on 28th. The days that the patient stays in the hospital are also accounted and costs determined. In the last column, the total numbers of days that the patient stays in the hospital are also determined, and in this case the patient takes 69 days.
Such a procedure would be easy in allocating the costs from the admission to discharge without making estimations as in the old accounting method. The second procedure is tonsillectomy / adenoidectomy procedure, the patient is admitted in the 3rd day and the day of surgery is to take place on 24th day. The total number of days that the patient ought to spend is 32 days. The third procedure is the laryngectomy and radical neck dissection. The procedure requires that if a patient is admitted on the fifth day, the date of surgery should be on the 6th day but the total amount of days that the patient ought to spend in the hospital should total to 269 days.
What accounts for the difference? Are they significant?
The difference between these two accounting methods is that the new method closely aligns charges with the “diagnosis, surgical procedures and the identified core”. This is very significant since the costs incurred for each patient for a particular procedure is well exhibited and therefore simple to account for. The difference is also accounted for by the fact that the two methods use diverse approaches in accounting for the costs. The old accounting methods accounts for the costs in general whilst the new system is very specific on each identified procedure (Stickney, Weil, Schipper, 2009, Pg.935-936).
Using the hypothetical data given by Ms. Arndt, how could a hospital using a per diem reimbursement lose revenue and how much revenue would it lose?
As indicated by the hypothetical analyses provided by Ms. Arndt is becomes very clear that extensively, a hospital could lose revenue. As portrayed by the following example, supposing that a particular hospital set up a budget for 10,000 admissions, during a given year, 50,000 are taken to represent days attended by patients, while 700,000 are the CCUs. Supposing the 50,000 days are decreased to say 9, 000, but the admission is kept constant or they are either decreased to say 49,000 while the day does not change. Supposedly, if there was an increase or a decrease in the intensity of care to an extent that more or less CCUs are provided. One would finally draw a conclusion that, those hospitals that use the old method of accounting for costs (per diem system) loses revenues immediately there is fall in the patient days, whilst at the time they may be at the verge of delivering the highest number of services in the intensive care during the remaining patient days. In comparison to MEEI which has adopted the new system of accounting, there will be no loss of revenue (Stickney, Weil, Schipper, 2009, Pg.934-936).
The Split-Cost Accounting System
This system of cost accounting was in use at the MEEI, basing its operation ability on the two fundamental grounds or concepts. These concepts laid its foundation of applicability given that hospital activities are the subject matter. The concepts upon which the Split-Cost Accounting System was based on are that not all days of hospital care are equivalent and that the cost of hospital care and services could be divided into different categories depending on the care or service the patients are in need to access.
There are three categories of costs that constitute total costs of accessing hospital services. These costs include but not limited to clinical care costs, hospitalization fees and daily or routine costs. All these costs oversee the totally of the costs the patients incur in the process of the hospital stay that the patients seek hospital services. All the three categories further enter into the books of account each differently because the MEEI books of accounts recognize the three cost categories independent of each other.
The Split-Cost Accounting System properly outlines what costs are to be accounted for in each and every category of the three. In this system, clinical costs relate to what service or care is needed for which patient. It further considers the extent to which the care required is actualized and performed. The intensity of the service determines the cost, meaning that the high the intensity, the higher the cost and vice versa. Hospitalization costs on the other hand refer to the costs incurred in a bid to access hospital services or the medical care at large. These costs cut across the entire hospital departments ranging from entry to exit from the hospital. Costs that pertain to maintenance of the hospital stature also get into these categorical costs. The main source of financing hospital access fee is the user fees which constitute direct costing of a service or care at that instance when it is needed. The other category of costing that pertains to daily and routine costs under the Split-Cost Accounting System is purely based on the number of days that a patient spends in the hospital premises. An additional day counts additional costs, since more services and care are being instituted from time to time with the observance of the patients’ state and monitoring of their recovery or failure to recover (Hansen & Mowen, 2010, pg. 417).
Comparison across Hospitals
The adoption of the Split-Cost Accounting System by the MEEI can be compared with the operations of other hospitals both in the same line of operation like that of MEEI as well for hospitals that offer differentiated packages of services and patient care. The clinical care unit (CCU) used in MEEI may not be similar in all hospitals across the industry because of differences in the costs of operation of the different hospitals and consequent charges that each hospital apply to the patients when they seek services. In this regard, the operation of each hospital can only be accounted for separately with respect to the design and product package of each hospital (Hansen & Mowen, 2010, pg.459). Consequently, accounting for the activities and financial dealings of each hospital is different from one another because the differentiating factor of operation creates differences in the accounting factor of the hospitals that constitute the industry in that line of services, given that health is demanded directly like any other service but cannot be directly purchased like other services offered through the market model.
The fundamental differentiating factor between hospitals in the same industry is that when some hospitals are specialized, others are general. The conceptual differences associated with specialty or general hospitals comes in the factor input and output of the services and the types of care that each category of hospital is associated with. In this regard, the specialty hospitals are specific in the cases of the care and services they handle. Each specialty hospital caters for specific consultation cases, and is in this category that MEEI falls under. The patients are handled in consideration of their diagnosis. Each diagnosis is handled by expert in the field that the case falls under in the hospital departments. However, not all the hospitals that constitute the industry are specialty. Others are general in both nature and operation, in that they deal with a wide range of health care and services. Many, different, diverse and dynamic diagnoses are handled under the same department in these hospitals. It is important to point out that the general feature of a hospital does render it neither ineffective nor inefficient. This therefore means that these hospitals are as much as performing as the specialty hospitals (Jawahar, 2008, pg.672).
The Split-Cost Accounting System may be adopted differently by the components of the industry, while others may not be in a position to undertake the system. This accounting system is based on the two fundamental pillars aforementioned above. In this regard, not all factors in the industry may have ease in the implementation of the system. Whether the hospital in question is general or specialized, the concept of operating the same accounting design is subject to challenges that are internally born by the activities and the structure of the hospital activities. Some constituents of the industry may experience problems in the implementation of the same system of accounting, but each constituent at the same time can improvise on the system so as to favor its operation abilities. Different hospitals may not therefore face similar design problems of implementing the Split-Cost Accounting System because of the concepts of product differentiation among hospitals, the general or specialty aspect as well as the diversity evident in the hospitals across the industries of interest in this analysis.
Product differentials and the criterion of choosing cost drivers in the Split-Cost Accounting System are fundamental in the analysis of the Activity Based Costing System under which the Split-Cost Accounting System is found. The tastes and preferences of the customers vary with the quality of the service they demand. Higher quality of the services is associated with high costs or rather the charges paid to in order to access them. Quality services are associated with consequent higher performance in terms of the expectations of the customers or the consumer. In this case, the expectations of the patients is to access a health care bundle that is as much as effective as the latter in the entire industry or across given and identified industries (Jawahar, 2008, pg.699). Product definition is therefore important in determining which patient demands what service or health package.
The availability of a product that meets the needs of the patients when it comes to hospital services is further fundamental in the determination of the cost drivers’ criterion. Investment into health is expensive and the Split-Cost Accounting System has made it clear. Cost drivers under this case are based on the applicability of the Split-Cost Accounting System across hospitals and the level or extent to which a general or a specialized hospital has adopted this system. The criterions upon which cost drivers are based upon depend on the health care scheme that the patients have acquired and the consequent adoptability of these schemes by the hospitals. The design of the scheme might not necessary matter in the analysis context because it is purely borne by the individuals who seek health services when need be. The health schemes necessary for the Split-Cost Accounting System analysis cuts across the how costs of the schemes relative to the operations of MEEI is organized.
Cost drivers and the health scheme adopted shape the implicit design of the accounting system. These schemes can range from the use of user fees to the encounters of using insurance in financing hospital services. The diversity that is characteristic in the Split-Cost Accounting System allows for the flexibility in the source of financing across the above mentioned services (Jawahar, 2008, pg.751). The accounting measures incorporated in the working policies of the MEEI has embraced this factor in its operation ability, creating diversity in the factors that relatively drive the costs in the hospital industry.
Procedures Vs Diagnoses, Implementation Problems and Solutions in the MEEI System
Any system of service in hospitals includes both preventive and curative measures. These measures occur under the categories of procedures or diagnoses. Both are services that hospitals offer and are consequently demanded by individuals who seek healthcare services. Medical care services are not only sought for by the sick, but the need to maintain good health also prompts for the need to consume medical care (Jawahar, 2008, pg.803). These are products that yield direct demand.
Demand for health is derived from consumption of services that in return produce health. The difference between procedures and diagnoses is fundamental in determining the appropriate accounting system that a given hospital adopts. Accounting is not only based on the charges that the patients are required to meet, but also the operational costs of the hospital. The book of accounts should balance given the two extremes. The mode of accounting in a hospital can therefore be influenced by the extent to which the procedures and the diagnoses are carried out.
The major problem of implementation of The Split-Cost Accounting System can be traced on the impact it creates on the institution that adopts it and the consequent charges of implementation transferred to the patients. MEEI serves as a good example because the Split-Cost Accounting System adopted has to be spread across three accounting departments. Apart from increasing operation costs, some cost of operation may be borne by the patients through charging high fees to access MEEI services. Conflict of interest may be experienced across the departments given the duties and responsibilities of each department, like in the case where the MEEI Split-Cost Accounting System has its departments divided into three. Consequently, the attitude of “it is not this department’s fault” may be evident pulling down the workability of the entire hospital at large. This can be solved by the formulation and implementation of the appropriate measures and policies that would oversee efficiency in the hospitals, MEEI included as well as zero exploitation of patients in the process of accessing proper services and health care (Hansen & Mowen, 2010, pg. 838).
References
Hansen, R, D and Mowen, M, (2010), Cornerstones of Cost Accounting, Chicago: Cengage Learning.
Jawahar, L, (2008), Cost Accounting, Washington: Tata McGraw-Hill Education.
Stickney, Weil, R, Schipper, K., 2009, Financial Accounting: An Introduction to Concepts, Methods and Uses, 13th, New York: Cengage Learning.
Zyla, M, 2009, Fair Value Measurements: Practical Guidance and Implementation, Chicago: John Wiley and Sons.
