cost accounting by diagnosis in a japanese university hospital

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Journal of Medical Systems [joms] PP1264-joms-489772 August 10, 2004 14:51 Style file version June 5th, 2002

Journal of Medical Systems, Vol. 28, No. 5, October 2004 ( C© 2004)

Cost Accounting by Diagnosis in a JapaneseUniversity Hospital

Koji Tanaka,1,4 Junzo Sato,2 Jinqiu Guo,1 Akira Takada,2 and Hiroyuki Yoshihara3

Cost accounting according to diagnoses covering approximately 600 inpatients with64 diseases in 20 departments of Kumamoto University was carried out. The reportsof these results were automatically generated and used for individual departmentalmeetings with participating delegates. The administration of each department as wellas the management of diseases was discussed at the meetings, and all departmentswere requested to provide a report of their discussions. We are planning to increasethe number of patients in the sample group and to perform more comprehensive andaccurate hospital cost accounting.

KEY WORDS: hospital management; hospital cost accounting; cost accounting by diagnosis.

INTRODUCTION

Historically, the role of research, education, and advanced medication wereprioritized highly in Japanese national university hospitals. In recent years, cost ef-fectiveness and profitability have been added to these priorities. The boards of man-agement of the hospitals are not only required to run their establishments efficiently,but they must also convince both patients and taxpayers of the rationality of theirenterprises.(1) In the case of our university, the income of its hospital absorbs morethan half of the entire budget allocated to the university.(2) To improve the fundmanagement of university, an improvement in profitability of its hospital is thereforeessential.

BACKGROUND

In recent years, cost accounting trials in hospitals have become relativelycommon, and certain account calculation methods have been, and continue to be

1Graduate School of Medicine, Kumamoto University, Kumamoto, Japan.2Medical Information Technology, Kumamoto University Hospital, Kumamoto, Japan.3Medical Information Technology, Kyoto University Hospital, Kyoto, Japan.4To whom correspondence should be addressed; e-mail: [email protected].

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0148-5598/04/1000-0437/0 C© 2004 Springer Science+Business Media, Inc.

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438 Tanaka, Sato, Guo, Takada, and Yoshihara

implemented.(3,4) To date, the financial reports of the Japanese national universityhospitals have shown only the overall accounts of the hospitals. The accounts are, infact, categorized by item, rather than by departmental expenditure. Thus, it is dif-ficult to break down the accounting information which would, in turn, allow moreeffective management decisions.

During the initial stages of the management analysis, the accounts of KumamotoUniversity Hospital were examined by department. To calculate more detailed hos-pital costing, a “Hospital Management Data Entry System”(5) has been used inKumamoto University Hospital since the year 2000. This software allocates the over-all cost of the hospital to the various departments according to a set of previouslydefined criteria. This system originated from a project entitled “The Data Programfor Management of Hospital” in Miyazaki Medical College in 1998. This project wasinitiated by Yoshihara, Araki, et al. as a pilot study of what was known then as theMinistry of Education. This software has evolved into a common cost accountingapplication for Japanese national university hospitals.

The main function of the “Hospital Management Data Entry System” is tosubdivide the total expenditure of the hospital according to the various departments.Expenditure is broken down into the following categories:

Year—monthsHospital—departmentsback-office sections—direct departmentspatients—inpatients and outpatientsmonth—daysdepartment—patients

Several subdivisions of expenditure, based on the number of beds, covering area,amount of budget, number of patients in each department, etc, are included in thesystem. If further expenditure subdivisions are required, users can define new criteriain the system.

Data related to income and expenditure in the hospital as well as master tablesare required. Income-related information mainly includes data related to medicalinterventions. Expenditure-related information is based on salary data and hospitalcosts categorized according to major expenses. The master tables are mainly used forclassifying data and subdividing costs for further analysis. Output data are itemizedaccording to income and expenditure, as well as information related to insuranceand diagnosis. These data are written in standardized XML or CSV format. Thedata structure is compliant with Financial Analysis Information foRmat (FAIR)(6)

designed for electronic data exchange between HISs and hospital financial analysissystems. The FAIR screen has a 3-level hierarchical structure for budget and expen-diture; results can be viewed according to this structure.

Thus far, departmental accounting has been calculated by means of cost ac-counting software already present in the hospital. This system allowed an analysisof accounts to be carried out according to daily expenditure in each of the depart-ments. However, as no accurate diagnosis for individual patients were stored in thecomputer systems, cost accounting according to disease was not possible. So a moredetailed breakdown became desirable.

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Cost Accounting by Diagnosis in a Japanese University Hospital 439

MATERIALS

“Hospital Management Data Entry System,” Version Created in 2000

Hardware: Fujitsu FMV (IBM PC/AT clone, Pentium 4 1.7GHz singleprocessor, 512MB memory, 100GB HDD)

Software: Microsoft Windows 2000, Intersystems Cache’ Version 4

Materials for Unique Analysis

Software: Wolfram Research Mathematica 4.2,(7)

Adobe SVG Plug-in(8)

METHODOLOGY

Cost Accounting Processes

Firstly, we calculated the expenditure of Kumamoto University Hospital in theyear 2000 by department, using the standard facilities in the “Hospital ManagementData Entry System.” Secondly, an analysis of diseases was carried out. To correlateeach of the output data with a certain disease or diagnosis, target patients werechosen. In cooperation with the departments, the top three diseases were selected foreach department. Ten inpatients with typical disease characteristics were extracted.Patients who suffered from complications or who underwent additional treatmentswere omitted from the calculations. Approximately 600 inpatients, 64 diseases, and 20departments (all hospital departments except for the psychiatry and general medicinedepartments) were covered.

Daily expenditure per patient was calculated; expenditure was then totalled andaveraged according to disease. The results were tabulated and charted as “expendi-ture by disease,” “expenditure by patient,” and “daily expenditure by disease.” Whenextracting the data, we often had to access the Cache’ database with SQL queriesbecause the standard I/O equipment of the system lacked sufficient functionalityto do this. Finally, HTML reports including charts were generated, and uploadedto a particular http server in the hospital. Graphs and charts were written in SVG;Scalable Vector Graphics were also automatically generated in Mathematica.

Meetings With the Departmental Delegates

At departmental meetings, departmental expenditure and expenditure by dis-ease were discussed. The head physician and head nurse on the ward of each depart-ment as well as staff engaged in managerial analysis participated in the meetings. Thefollowing, in particular, were highlighted:

– It was recommended that staff members would not hold particular depart-ments accountable for inadequate funding.

– As it was impossible to determine the actual cost of certain items, expenditureon these items was calculated by means of certain cost allocation methods.

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– Certain cost allocation criteria remain unspecified and the results of calcula-tions are therefore provisional.

– Treatment for diseases, which resulted in budgetary deficits, should not merelybe discontinued; rather treatment should be administered in light of the im-portant social function of the national university hospitals and the socialaspect or importance of the diseases themselves.

Finally, all departments were requested to report back on their discussions andreflect on how their conclusions might impact on the clinical procedures in theirdepartments.

RESULTS

Results examples, consisting of automatically-generated HTML pages are shownin Figs. 1–4. HTML pages including “departmental income and expenditure” (Fig. 1),“distribution of income and expenditure by disease” (Fig. 2), “distribution of incomeby disease”(Fig. 3), and “daily income and expenditure by patient” (Fig. 4) are shown.Figure 1 shows departmental income, expenditure, and balance. Figure 2 shows thedistribution of balances (vertical axis) and the duration of hospitalization (horizontalaxis). The size of circles indicates the average income per disease. In Fig. 3 the amountof money (vertical axis) and duration (horizontal axis) of patient hospitalization for

Fig. 1. Result example: Departmental income and expenditure. Departmental income, expenditure, andbalance are shown in bar charts. The data of inpatients and outpatients are plotted on separate charts.

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Fig. 2. Result example: Distribution of income and expenditure by disease. The distribution of balances(vertical axis) and the duration of hospitalization (horizontal axis) are shown. The size of circles indicatesthe average income for single hospitalization per disease.

a particular disease were plotted. In Fig. 4, daily income, cost, and balance wereplotted. The horizontal axis represents time in days while the vertical axis shows theamount of money. Hospitalizations necessitating operations were matched with theday of the operation.

• Result example: Departmental income and expenditure (Fig. 1).• Result example: Distribution of income and expenditure by disease (Fig. 2).• Result example: Distribution of income by disease (Fig. 3).• Result example: Daily income and expenditure by patient (Fig. 4).

DISCUSSION

Daily Expenditure by Disease

With regard to hospitalizations requiring operative treatments, major surplusesare recorded on the day of the operation; on other days, however, the accountsalmost balance. These tendencies are seen also in cases involving the other diseases

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Fig. 3. Result example: Distribution of income by disease. The amount of money (vertical axis) andduration (horizontal axis) of patient hospitalization for a particular disease were plotted.

in Kumamoto University Hospital and in the previous reports from other hospitals.(9)

If the days before and after operations are shortened, this would result in increasedprofitability of the ward. In regard to these diseases, an effort to shorten the durationof hospitalization can prove economical. On the other hand, the account balancesfor hospitalizations without operations, like most admissions in the internal medicinedepartments, showed no clear-cut characteristics. Improving the balances for thesediseases is less straightforward.

Meetings With Departmental Delegates

Expenditure by department and expenditure by disease were the primary top-ics of discussion at the departmental meetings. Thus, comprehensibility and contentare both important when making presentations to the various occupational and spe-cialty groups. Above all, given that the majority of university hospitals have morethan 20 discrete departments and, on average, in excess of thousand employees, inter-departmental communication is difficult between the various disciplines. Therefore,graphical imagery and nontechnical terminology formed the basis of the variouspresentations.

Almost all of the participants from the departments were surprised at the resultsand showed strong interest in the presentations, particularly given that they had pre-viously had little other than income-based information with which to work. Althoughparticipants remained calm at the meetings, sharp criticism and emotional objections

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Fig. 4. Result example: Daily income and expenditure by patient. Daily income, cost, and balance wereplotted. The horizontal axis represents time in days while the vertical axis shows the amount of money.Hospitalizations necessitating operations were matched with the day of the operation.

were noted in the participants’ response papers turned in after the presentations.Expenditure allocations were the greatest bone of contention, and certain partic-ipants criticized the manner of cost allocation itself. However, all departments re-turned their response papers and none denied the significance of these trials. Althoughlisting various points of concern in relation to certain calculations, departmental rep-resentatives generally displayed a positive attitude regarding the financial issuesdiscussed. Emphasis on medical care for profitable diseases, reduction in the lengthof hospitalizations, enhanced cooperation with support hospitals, more economi-cal use of materials, and the introduction of clinical pathways were all proposed forimplementation. Immediately after the meetings, efforts to implement improved pro-cedures were undertaken by the departments. The average hospital stay has becomeshorter and the capacity utilization of hospital beds has improved, according to the

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monthly reports. Further meetings were planned for Spring 2003 to discuss accountfrom the latter half of 2002.

Cost Accounting Methods

We couldn’t help adopt a modified Ratio-of-Cost-to Charges (RCC) costingmethod in some items of expenditure in spite of its inaccuracy. Expenditure allo-cations based on revenue were strongly criticized for their arbitrary nature in thedepartmental meetings. Alternate criteria for cost allocation are needed, but thisRCC-like costing method will remain to be used in some items for the present. Sev-eral concepts of cost accounting such as Relative Value Unit (RVU) or Activity BasedCosting (ABC) method have been newly introduced in the medical field.(3,10–12) Thesemethods differ in relation to data-processing cost, accuracy, and the quantity of in-formation. With advances in information technology, superior and more accurateinformation-retention procedures tend to be chosen, even if these necessitate con-siderable expenditure on data processing.(3)

With regard to material cost and expense items which were difficult to assessgiven the present state of Kumamoto University Hospital, actual costs can only becalculated if a logistics management system is installed. Whatever the case may be,our aim in making these calculations is to acquire information which will assist indecision-making; this is more an example of management accounting than that of afinancial one. Swift and reasonably accurate calculations must be achieved withoutnecessitating overly complicated methodologies and system implementations.

Problems in the Implementation on the Systems

It is a significant achievement that rapid calculations (using data from the exist-ing system which include HIS at the medical site) are now possible. But a numberof problems have arisen during the implementation of the system. Because the CSVfile format output from “Hospital Management Data Entry System” carries cer-tain disadvantages related to the external systems, we were obliged to operate theCache’ database using SQL queries. Certain system improvements will therefore berequested of the software developers.

The Future

A modified Diagnostic Related Groups-based Prospective Payment System(DRG/PPS) was introduced to all Japanese University Hospitals in the spring of2003.(13) Daily hospital charges of inpatients are now, with few exceptions, calculatedcomprehensively according to patients’ diagnoses. Under this system, diseases requir-ing the greatest medical resources are determined according to individual patients.As the number of sample patients can be drastically increased using this diagnosticsystem, a more accurate analysis of hospital management will be achieved in the nearfuture.

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REFERENCES

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3. Arai, K., Deployment of cost accounting of various services in the departments of hospitals in UnitedStates. Hitotsubashi Ronsou, Tokyo, Japan, 121(5):94–115, 1999.

4. Nakamura, S., and Watanabe, A., Practical cost accounting of hospital. Igaku-Shoin 2000.5. MedXML Consortium. Hospital Management Data Entry System, http://www.medxml.net/

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Wesley, 1991.9. Mitsutake, N., Nishimura, Y., Yasuda, N., Oyama, H., and Takahashi, T., The method and data source

for the feasibility study on the implementation of DRG/PPS. Jpn. J. Med. Inform. 21(Suppl. 2):326–327, 2001.

10. Orloff, T. M., Littell, C. L., Clune, C., Klingman, D., and Preston, B., Hospital cost accounting: Who’sdoing what and why. Healthc. Financ. Manage. 15(4):73–78, 1990.

11. Candy, J. B., IV, Lt. Comdr., Applying activity-based costing to healthcare settings. Healthc. Financ.Manage. 49(2):50–56, 1995.

12. West, T. D., Balas, A. E., and West, D. A., Contrasting RCC, RVU, and ABC for managed caredecisions. Healthc. Financ. Manage. 50(8):54–61, 1996.

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cost accounting by diagnosis in a japanese university hospital

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