Profitability and Cost Management Solution for Hospitals

Do you have good Hospital Management system?

Does the system have Cost centre accounting? Do you use the functionality?

Does it have integrated Stores Management system?

Do you get the profitability information at the Speciality unit level? (For Example: Paediatrics, Cardiology, Orthopaedics etc.)

Possible scenario – Most of the major hospitals use one or the Hospital Management System (an ERP for Hospitals). This includes the expense management as well as used for billing the patient as per the services utilized. Though this system has a facility to define various cost centres, the users may not use the facility and cannot collect the expenses as per various cost canters. If this cost centre accounting is not done, then

·         The basic and high level profitability at the Speciality units (For Example: Paediatrics, Cardiology, Orthopaedics etc.) is not available

·         The cost of general shared services like HR, Admin etc. or operational shared service like Laundry, Equipment maintenance are allocated like ‘peanut butter spread’

·         It is highly impossible to get the Procedure level cost or patient level costs

·         The cost of items provided for procedures like valves, stents etc. or consumables to various specialities cannot be allocated

Do you know, how the services like HR, Administration, IT, Laundry, Maintenance etc. are consumed by others?

Possible Scenario – As the Activity Based Costing (ABC) methodology is not adopted by the Hospital it is not possible for them to get information on this. The ABC methodology would provide them the information on

·         What are the different services provided by the shared service departments

·         What is the cost of each service?

·         Can the non-core and high value service be outsourced?

Do you know the cost of Procedures within each speciality area?

Possible Scenario – The hospital may be calculating those costs at a very high level by collecting in the information of the cost that is directly attributable to the procedure like specialist fees, external services hired, consumables etc. This may not the total cost of the procedure as all other indirect cost are not known or cannot be allocated accurately.

The ABC methodology can calculate the cost of each procedure based on the activities performed by the speciality department or any other shared services. This would lead to accurate information of procedures and find the profitability of the procedures. If there are multiple hospitals in a group

then the cost of procedures can be compared across various hospitals and the reasons for the differences can be identified. It can also lead to the understanding of the ‘non-value added’ activities in the procedures and can be eliminated to improve profitability.

Do you know the profitability by patient?

Possible scenarios - The hospital may know the services provided to each patient and at the end, billing done by each service. The hospital may not know the cost of each service and hence, what is the profitability by each patient. The ABC methodology provides the cost of each service loaded with the shared service cost which in turn provides accurate information on patient level profitability. Though for hospitals the patient may not repeat this information of patient level profitability can be used by groping the patients by their demographic information available like age, disease, procedures provided, life-stage, income group etc. This profiling would help the hospital to find which patient segments are profitable across which speciality areas and then try acquire them preferentially.

Do you know the utilization of various speciality areas?

Can you plan your resource requirement for the future?

Possible scenario – The hospital has to invest heavily in the infrastructure to provide various special services to the patients. Not all the service areas are utilized completely. The hospital may know the capacity of the speciality area at a very high level and the utilization also would be known at a gross level. ABC methodology can possibly define the capacity of the infrastructure at a detail level. The same can help the hospital to predict the resource requirement in future based on the expected demand for various speciality areas.

Do you know the cost of acquiring a patient using multiple channels?

 Possible scenario – The hospital may be using various channels to acquire the patients. Those could be

a) Hospital OPD (Outpatient department)

b) Referrals

c) Direct (Generally called ‘walk-in’, but may not be the same case hereJ)

·         Accident

·         Criminal

The cost of acquisition for those patients may not be known to hospital, except for the direct services charged paid.

The ABC methodology can provide the cost of running those channels as well as total cost for acquiring a patient using this channel. Like cost of acquisition, there may be a possibility the cost of closure (payment and discharge activities) different for the patients acquired. The same can be identified and used for providing the direct or indirect benefits to the channel partners.

Integrated thinking for Enterprise Performance Management (EPM)

The simplest definition of ‘Performance Management’ I have learnt from Gary Cokins (An internationally recognized expert, speaker, and author in performance improvement systems and advanced cost management) is ‘how am I doing, on what is important?” This has got two components: 1) What is important 2) how am I doing. Both are important, but the one has to track the progress on the important issues.

The next point is ‘Enterprise’. The term enterprise here means, it is enterprise wide. It is not only for few departments or set of people, but for each department. It also means that it is the performance of the enterprise, so the overall effect should be better for the enterprise. In this some of the departments may have compromise their targets/performance.

The third important part is ‘Integrated’. This means the various components of EPM are working with each other to improve the performance of the enterprise. Those components could be many, but for our discussion, we will talk about Strategy Management, Integrated Budgeting and Planning, Profitability and Cost Management, Risk Management and Compliance. All those components/concepts should give and take the information from each other.

For all this integrated thinking about value creation in companies is the starting point. Let us see how each component add value and how they are integrated with each other as a concept.

Strategy definition (BSC way)

Once we have laid down the definition, the next step is start walking on the path. The first step is define ‘What is important?” This in other words defining the strategy for the enterprise. This could be based on the methodology of Balanced Scorecard (BSC). In BSC the enterprise defines its Strategic Objectives, Strategic themes, KPIs and Improvement initiatives. As the EPM can be defined as ‘Doing right things and doing things right’. The BSC defines the ‘Doing right things’. The Strategic objectives and KPIs gives the enterprise targets for their department’s performance and alignments also. The initiatives also help the enterprise to decide its investments. This becomes the guideline for other components.

Budgeting and Planning

Once the KPIs and their targets are finalized, the can be flown down to manage customer on one side through the Sales function and the demand side. On the other side suppliers are managed through the operations to manage the supply side. Third angle of the expenses and the fourth one for the Product/service development. The balance has to be managed to get the integrated planning and budgeting based on that. The initiatives flowing from the BSC, will provide the investment budgets. The process will provide the manpower requirements. This information will create the Sales, Expenses, Investments and manpower budgets for the current period. The same has to hand-in-hand with the forecast. This forecast integrates the external environment with the internal strategic initiatives. Based on the current budgets and the vision of the enterprise, the long term planning for 3 years and for 10 years can be extrapolated.  The comparison between the Actual and the Budgeted figures will keep the enterprise on its tows to achieve their performance. The accuracy of the forecast plays a major role here.

Profitability and Cost Management

This is important for every enterprise, whether ‘for profit’ or ‘not for profit’. The BSC gives the targets for the revenue and profits to be achieved. The Sales plan and initiatives gives the information about the what to sale, whom to sale, where to sale, how to sale, how much to sale, at what price to sale. The same has to be plotted into the processes of the enterprise. The shared service departments providing services to the Product, Customer and Channel facing departments. Ultimately the demand is fulfilled passing across the value chain. This entire process creates not only the value add but the addition of costs also. This has to be traced with a ‘Cause-and-effect’ methodology.  This method helps to find the drivers for the cost and the action on improving the cost drivers improves the financial performance of the enterprise.

The budgeted expenses, planned methods provides the information on the expected profitability of the enterprise. This information feedback to the BSC is useful to get information on the profitability targets before the enterprise puts the strategy into action. This feedback is also helpful to change the initiatives that are not working as planned. 

Risk Management

One of the simple definitions of ‘Risk Appetite’ is how much one is ready to spend to achieve the planned benefit. Here the spending is real but the benefit could still be planned, which may or may not be realised. More the information available for various types of risks, more realistic would be the mitigation plan. This helps in deciding the strategic objectives of the BSC. It also helps to define initiatives and in turn the budgets.

Compliance

This is important for any enterprise and the compliance could be internal or external (Statutory). Internal compliance could be for various initiatives with their actions to be performed, the investments to be made, products/services to be launched, reports to be prepared etc. External/statutory compliance could be of the form of financial data to be published, taxes to be paid, quota to be fulfilled etc.

 Reporting

In all those components, the information has to be shared with the right person in right time with right quality and right format. This information can be in various formats for various stakeholders in the enterprise. It also has various forms of visualization and modes of delivery. The reports keep the people aware of their performance, the causes, the trends and of the future of the enterprise. The right design of the reports, their granularity helps the enterprise ‘why’ it is going wrong and ‘where’ it is going wrong. This information provides an action ‘on the platter’ to the enterprise.

Finally….

The technology vendor started with the individual solutions which got acquired by the big players and they formed an ‘EPM suit’ of the products. This EPM suit had some integration of data among themselves. But there are few smaller players providing not a suite but a ‘financial platform’ which is fully integrated set of solutions under the EPM arena. As the product vendors are thinking the users also have to think of those areas in an ‘integrated’ fashion. When the users will understand the business linkage among those areas and use it for their advantage to improve the performance of the organization, it will be a definite value creation in the organization.