1.1. Back groundOperating Costing is a method of costing applied in ascertaining the cost of rendering services. It is not applicable for entities manufacturing tangible goods. The main objective of operating costing is to compute the cost of the services offered by the organisation.The information concerning the business enterprise is very helpful to the management to control it in an efficiently way .As the other branches like financial accountancy and management accountancy, the cost accountancy also serves the important information to the management regarding the operating efficiency of the business. It becomes very easy for management to lay down management policies, to guide management decisions or evaluate operating management performance with the information provided by cost accounting. The term operation in business terminology refers to an activity of the business. It is very important to study the operations of the business in detail because depends on the operations, which hit performs. The management should always concentrate on the efficiency of the operation and also the costs associated to the operations. It is very important to control the costs associated to the operations for the enterprises like manufacturing companies, companies engaged in the process of extraction of materials from earth like, coal mines etc. Generally, the above mentioned business enterprises depend on the operation that it has to be performed in to produce into produce the final output. The costs associated with such operations are generally higher. These costs are called as operating costs. The costs, which are incurred to perform the operation of the enterprise, are called as operating costs.These costs are to be accounted for in order to arrive at the total costs of operation or process, which helps in determining the price of the final product. Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and to the presentation of suitably; arranged data for the purposes of control and guidance of management.It includes the ascertainment of the costs of every process, operation, services or contrast as may be appropriate. It deals with the cost of production, selling and distribution. It thus, the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted (i.e. the value of material used, the amount of labour and other expense incurred) so as to control and reduce the cost.Operating costs are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an Organisation just to maintain its existence.Businesses have to keep track of both operating costs and costs associated with non- operating activities, such as interest expenses on a loan. Both costs are accounted for differently in a company's books, allowing analysts to see how costs are associated with revenue-generating activities and whether or not the business can be run more efficiently.Expenses associated with administering a business on a day to day basis. Operating costs include both fixed costs and variable costs. Fixed costs, such as overhead, remain the same regardless of the number of products produced; variable costs, such as materials, can vary according to how much product is produced.

CONCEPT OF OPERATING COSTINGOperating costing is an accounting method used to allocate costs of similar products that are manufactured in batches. It combines two other popular costing methods to get a more accurate picture of how a particular company's manufacturing process works. It simplifies the accounting process by only differentiating activities that cause a variation in cost between products. Similar items are allocated in batches that reflect the actual cost involved in creating that group. Service (Operation) CostingService Costing is method applied in such industries, which provide services. It is applied in restaurants, power supply companies, hospitals, hotels, transport, colleges etc. This method is used to ascertain the cost of services provided.Typical cost units used in service costing is given below:Service Possible Cost UnitsTransport Tone-Mile, Passenger-Mile, Miles TravelledHospitals Patient-days, number of operationsElectricity Kilowatt-hoursHotels Occupied bed-nightsRestaurants Meals servedColleges Full time equivalent studentEach organisation will have to decide what cost unit is suitable for them. Once the cost unit is agreed, it will be helpful for the organisation to compare their cost with the competitors or similar companies. Whatever the cost unit decided upon, cost calculation can be done as per the formula given below:

Method of costing are as follows:a) Utility Services: canteen, hospital, restaurants b) Distribution Services: Electricityc) Transportation Services: Railways, Bus etc.d) Other Services: such as Management Consultants, courier services etc.Transport CostingUnder this method, the operating cost of each vehicle is determined. The common unit of service is tonne kilometer in case of goods transport, and passenger kilometer in case of passenger transport. While, calculating the unit ofservice, the weight and/or passenger and the distance should be calculated.In transport costing cost are classified under following three heads. Fixed cost / Specific cost: Garage charges, Insurance, Taxes, license, time-based depreciation, wages of drivers and cleaners, establishment cost of workshops, general service cost.Semi-variable cost / Maintenance cost: Expenditure on repairs, maintenance, tyres, tubes, accessories and spares.

Variable cost / Running expenses: Such cost depends on the trips made and the distance run by the vehicle. These cost include cost of fuel, lubricating oil, depreciation based on run, wages of driver and cleaner etc.Boiler Costing / Power House costingWhere steam is used for the purpose of generating electricity, It is possible to compute the cost of electricity generated by aggregating the steam production costs with other related cost of electricity generation.A cost unit is generally in terms of kilograms.The main heads of expenditure for a boiler house are as follows:Water: Cost of supply, purificationIndirect Materials: service materials and small toolsFuel: Coal or oilLabourSupervisionMaintenanceOverhead cost: Rent, rates, depreciation, insurance and interest on capitalCanteen Costing Hotels, restaurants employ operating costing. The total operation of a hotel is divided into number of cost centers. Restaurant-cost unit is number of meals served Housekeeping-cost unit is no. of rooms cleaned Laundry-cost unit is number of clothes washed The important heads of expenditure is: Provisions: Vegetables, fruits, meat . Flour, milk , oil, sugar Labour: Salary of cooks, kitchen assistance, supervisors service : steam, gas , electricity, power and light Consumable stores : crockery, glassware Misc. overheads : Rent , rates, depreciation , insurance Credit: Charges of meals. Tea and other salesHospital costingThe hospital services can be divided into the following categories. Outpatient Department Wards General Services

Two Steps in Operating Costing:I. Cost Unit: It is necessary to decide the unit of cost. The cost units vary from industry to industry. For example, in goods transport industry, cost per ton kilometer is to be ascertained while in case of passenger transport, cost per passenger kilometer is to be ascertained. Costs units may be single or composite.a) Single cost unit:EnterpriseCost UnitTransportPer ton, per Km, per passengerHospitalPer bedWater SupplyPer gallon

b) Composite Cost Unit:Passenger TransportPer passenger-kmGoods TransportPer ton-km, ton mileHotelPer room dayCinemaPer seat per showElectricityPer kilowatt hour

II. Identify costs: The next step is to identify various costs under different headings as below:a) Fixed or standing chargesb) Semi-fixed or maintenance chargesc) Variable or running charges

2. Hospital & Health Care cost accountingCost accounting is a critical part in hospitals and in health care management. The cost and benefit of the cost accounting information has been challenged due to the uniqueness of the hospital operation and the perceived inability of managers to demonstrate how the costs of implementing and maintaining cost accounting systems are offset by new revenues or cost reductions. Cost accounting is an essential element of financial management that generates information about the costs of the organisation. Cost accounting is the process which determines the full and incremental costs of providing services and goods to patients and customers. To determine the full cost of providing a service, it must insured that all costs have been included. For example a number of departments, which do not provide direct patient or customer services, are absolutely essential to the operation of the institution. The overhead departments of the health care organisations must be allocated to the using departments. To make sound management decisions in any organisation, costs must be known at the procedure, patient, and department levels.The costs of the organisation may be determined based on historical methods of charging for services, such as patient days and procedures. The products or product lines are also defined for cost analysis. Finally to health care organisation determines full and incremental costs within the structure of our organisation (revenue center or department). The cost of each procedure and the product line is essential to financial stability of every healthcare institution. If the organisation does not have accurate cost information, hospitals are at financial risk when making decisions considering current operations as well as long-term plans. The cost of providing services is one of many considerations. However accurate costing has been a major missing component of the decision-making process.

The recent years have seen great change in social and political scenario all over the developing world due to the liberalisation in economic and trade practices. Their impact permeated to the health and medical care delivery system resulting in import of high technique equipment and medical practices. thus leading to escalation in cost of medical care.In health care systems, hospitals provide primary care, serve as referral institutes for higher-level care, and train health care workers. Those benefits are costly, however: hospitals require more human and financial resources than any other institution in the sector. A major World Bank study found that the share of public sector health resources consumed by hospitals in developing countries ranged from 50 to 80 percent. In both developed and developing countries, hospitals are viewed as vital and necessary community resources that should be managed for the benefit of the community. Hospital managers, who must provide health care services that the community needs at an acceptable level of quality and at the least possible cost, therefore need information on the actual cost of the services they provide.Information about hospital costs is also needed to inform many types of policy decisions. For example, cost information can help health planners allocate resources to facilities and services, introduce or set user fee, assess the comparative efficiency of health care services across settings, and determine budgets to run health services. In developed countries, hospital costs are important for establishing repayment rates; in low- and middle-income countries, cost information is important for determining reimbursement by social security systems. Nevertheless, very few detailed studies have been carried out on the economics of hospitals in low- and middle-income countries, Recognising the need to make unit cost information available on a country-specific and hospital-level basis, WHO collated data on unit costs from countries and hospitals as part of its WHO-CHOICE project. The study revealed a dearth of unit cost data for health care services, especially in low- and middle-income countries.In India, government health care services are organised into several levels. Primary health care is provided through a network of 146,036 health subcenters, 23,458 primary health centres (PHCs), and 4,276 community health centres (CHCs). The subcenters are the most peripheral health units and the first contact point between the health care system and the community. They provide basic drugs for minor ailments and meet peoples essential health needs. PHCs are the first contact between the village community and a medical officer. They act as referral units for six subcenters and have 4 to 6 beds for patients. The CHCs have 30 inpatient beds with one operating theatre, plus x-ray, labour room, and laboratory facilities. At the district level, the government maintains a 150-bed civil or district hospital in the main town and a few other hospitals and dispensaries spread over other towns and larger villages. Tertiary care is specialised consultative health care, usually provided for inpatients following referral from primary or secondary health professionals, in an institution that has personnel and facilities for advanced lab work and imaging as well as highly skilled clinical management. Apart from the government facilities, a significant part of health care is provided by the private sector. Currently, the private sector delivers about 80 percent of all outpatient care and about 60 percent of all inpatient care.Cost studies exist in India for different levels of health care services and providers but are either specific to a particular disease (e.g., typhoid) or based on a specialty (e.g., paediatric care) or service provider (e.g., primary health centre). For example, Anand et al. (1993) estimated the cost incurred by a primary health care centre in northern India during 199192 . Krishnan et al. (2005) tried to estimate the cost of outpatient and inpatient paediatric health services provided by the All India Institute of Medical Sciences at all three levelsprimary, secondary, and tertiaryfor 1999 . Treatment cost of typhoid fever at two hospitals in Kolkata was estimated by Sur et al. (2009). Mathur et al. (2010) determined the unit cost of curative care provided at primary health care centres in Ahmedabad.Why are hospital costs important?Hospital cost information is derived by relating the inputs of resources in monetary terms to theoutputs of services provided by the hospital. Cost information is part of the basic informationneeded by managers and policy makers for making decisions about how to improve theperformance of a hospital, where to allocate the resources within or among hospitals, or tocompare the performance of different hospitals to one another. Some of the basic reasons forwanting cost information are to improve efficiency, increase effectiveness, enhancesustainability, and improve quality.What are the uses of cost data?Cost data can be used for two primary purposes, relative to time: for the present and for thefuture. It can be used to assess the current situation of a hospital, such as for assessing itsefficiency, determining the effectiveness of the hospital, reviewing its priorities, and setting ofprices. Cost information may also be used for the future: making cost projections, budgeting,and scenario planning with what if? situations.Information on the costs and outputs of hospitals can provide considerable information formanagers of hospitals, regional coordinators of health services, and policy makers overseeing theissues of the national health system. The information can be used to assess the internaloperations and performance of a single hospitalsuch as helping assess the utilization of healthpersonnel in different departments of the hospital in providing servicesand to makecomparisons of the operations and efficiency of different hospitals. Some of the specificpotential uses of cost information for a health care administrator are: q comparison across facilities to identify those that are efficient from those that are not, q comparison of costs with fees, q development of a cross-subsidisation strategy, q evaluation of the financial requirements of a new program, or q analysis of the effect of changing the use of staff, equipment, and supplies in providing services in an existing program.

Who can use cost data?Cost data on a series of hospitals, within an area or country, may be used by national, regional,and provincial managers to compare the performance of similar types of hospitals. They mayalso use such information to establish standards of performance and efficiency for hospitals.The managers or administrators of hospitals may also use the cost data on their individualhospital. This information can be used toq measure performance of different departments, wards or units within the hospital;q examine composition of costs: staff, supplies; andq assess revenue generation to costs of various services.

Bending the cost curve for hospitalsIn tough economic times, where rising general and medical inflation rates have taken a toll on the financial viability of hospitals, healthcare providers are struggling to bend the cost curve. Raelene Kambli identifies ways to reduce operating cost in order to make hospitals financially viable

How do hospitals strike a balance between their operating cost and revenue?This is the one of the most frequently asked questions to healthcare financial experts, especially during times when hospitals find it hard to augment their revenues. Reasons to this are numerous, some due to economic pressures like rising inflation rates as well as changing government policies and others being misallocation of funds, and technical and managerial inefficiency. All of these factors often make this balancing act a complicated affair. Virtually, all hospitals work towards obtaining a good profit margin without compromising on quality healthcare delivery. The challenge here is to reduce operating cost in order to increase revenue saving but at the same time maintain high quality and efficiency.Another misconception that hospitals these days live in is that, improvement of quality calls for an increase in operational cost. In fact, these two factors do not directly comprehend with each other. While operational cost is a amalgam of medical consumables, manpower, regular repairs and maintenance expenses as well as hospital services like housekeeping expenses, F&B, laundry, medical gases etc., that hospitals have to incur for their day to day affairs; quality is a result of high intention, sincere effort, intelligent direction, and skillful execution of work. In the wake of such circumstances, striking the balance between operating cost and revenue is quiet meticulous.

Explaining the challenges faced by hospitals on this aspect, Narendra Karkera, Director Operations HOSMAC reckons, Cutting back on operations cost is a challenge for hospitals as they are driven by human resources. Reducing benefits and wages might have an impact on the brand value as well as loyalty of employees to the organisation. Adding to this Dr Rashi Agarwal, Director- Praxis Healthcare Consultancy says, In an effort to reduce operational costs through optimum staffing, or reduction in overtime etc., it may lead to higher staff turnover which in turn leads to increase in operational cost in another department like HR for recruitment and also declines patient clinical outcomes thereby affecting quality of care. On similar lines, Deepak Samant, Director Finance, PD Hinduja Hospital admits that shortage of skilled manpower and rising competition is the major factor that makes cutting operating cost a tall task. Among others are ever-rising inflationary pressures on all other cost components, Government policies related to the sector and taxation etc. The hospital management can do little to influence these external factors.

High operating cost and its implicationsFactors that are responsible for the increase in operational cost are mainly high attrition rates within the hospital, constant up-gradation of technology, forex associated materials cost raise and high costing of fixed expenses. Says, Ratan Jalan, Principal Consultant, Medium Healthcare Consulting, It is very critical to keep an eye on the operating costs and understand their impact on the overall profitability of the hospital. For instance, the cost may be high because of high resource utilisation or it may be high because of under-utilisation. These high cost components act as a barrier for healthcare providers to strike a balance between its operating costs and revenue.

So what happens if a hospital's operating cost remains high for a long time? Experts analyse this situation as critical for a hospital's sustainability; high operating cost within a hospital tends to hampers the financial viability of that hospital. Explains, Karkera, If operational costs remain high, the hospital will incur losses for a long time. In order to run the hospital, the management might have to rely on banks loans, which means they have to pay interest for the money borrowed. All operating cost ingredients need to be kept under tight control. Any increase in any of these ingredients would reduce the operating profits/ increase operating losses and would put the organisation into a financial turmoil. This impairs the capacity of the organisation to sustain operations or to grow, chips in Samant.Moreover, high operating cost often compels hospitals to focus on increasing patients' stay at the hospital and increasing overall tariffs or resource addition. According to Dr Agarwal, though rising healthcare cost can be attributed to several other factors like inflation, lack of skilled manpower etc., increase in operating costs has a direct co-relation with increasing prices. In such circumstances, the hospital's focus turns towards increasing the revenue to offset the cost. Instead, the focus should be on analysing the high cost items and arriving at ways and means to address it.On the other hand, Ashish Bhatia, COO, Fortis Healthcare has a different perspective. He says, While there is a surge in demand for quality healthcare, yet it comes with a cost. The cost here means cost associated with smooth functioning of the hospital, which is primarily very patient centric. Increasing cost of consumables, cost associated with quality manpower considering the demand for skilled manpower in this industry, substantial hike in the fuel cost in last few years combined with increase in power tariff and maintenance of hospitals as per the desired standards has been diminishing the profit margins. Owing to increasing operating cost in the last few years, people have witnessed rise in healthcare cost. Given the fact operational cost reduction effort a daunting task, it is critical to prepare an effective cost reduction plan and execute it.Tackling the tall taskStriking this balance isnt rocket science; it is just a matter of preparing a clever plan and executing it effectively. For this, senior finance managers within hospitals need to change their perspective. The first step towards reducing operational cost is to analyse the cost components that have remained high over a period of time. For instance, assigning a certain cost head as a percentage of the overall revenue or Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) margins is not an analysis; instead it should be driven by a more thorough understanding. For example, the order cycle for consumables or the ideal electricity load, light intensity requirements for a particular type of OT. There are numerous such items which when added together can make a cumulative difference in the overall cost. This should be followed by implementation of some initiatives and close monitoring to arrive at the overall cost savings. Today, hospitals across different specialities and capacity will have the EBIDTA margins ranging from 12-13 per cent to almost 25 per cent. A lot depends on how the hospital has ensured maximum resource utilisation by driving volumes, keeping Average Length Of Stay (ALOS) down and monitoring manpower and material costs. For some of the well-known hospitals, consumables and personnel cost together accounts for almost 50-60 per cent of the overall revenue. Recent analysis of the finances at a few major brands in India showed personnel costs anywhere between 18-46 per cent with the rates of spending on consumables in the range of 23-33 per cent. Hence, a critical evaluation of these costs coupled with higher resource utilisation could lead to much better EBIDTA margins. In fact, some of the more focused facilities, which tend to limit to one or two specialities and are relatively smaller in size, have managed to achieve much better financial performance and that too, in a quicker time frame due to better planning and hence high resource utilisation. The EBIDTA margins over time could be as high as 40-45 per cent, informs Jalan.

Operating cost componentsExpense HeadTotalFixedVariableSalaries and wages40 per cent20 per cent20 per centMaterials35 per cent15 per cent20 per centElectricity10 per cent10 per cent Maintenance2 per cent2 per cent Laundry, food services and housekeeping10 per cent10 per cent Printing, stationary, travel and communication1 per cent1 per cent Insurance, legal expense and audit fee1 per cent1 per cent Business promotion1 per cent1 per cent Courtesy: Narendra Karkera, Director Operations HOSMACThe second and the most critical step to prepare a proper cost reduction plan that includes proper budgeting. A hospital which has well planned OPEX budget with clear focus on cost efficiency and productivity can run the hospital efficiently, states, Dr GSK Velu, Chairman, Medfort Hospitals. C P Tyagi, General Manager-Finance, Indraprastha Apollo Hospitals, adding to this says, Executing a proper budget will enable hospitals to better cost control and containment. Standard deviation and deviations from budget helps in identifying the areas for improvement. Thereby concentrated efforts can be intensified in those areas. Elaborating on how hospitals can regulate their labour cost, Samant goes on to say, Hospital being a 24/7-service industry is necessarily labour intensive hence it is imperative to keep manpower numbers at optimum level corresponding with the capacity utilisation. Most of the costs are related to capacity hence hospitals must invest in capacity build-up only when they are reasonably sure about the utilisation. Unduly large capacity build-ups would put strain of scarce financial resources. Citing an example of cleverly managing cost incurred for pharmacy, Jalan, opines, If spending on consumables or the pharmacy is high, aggressive renegotiations with vendors can bring down some costs. In certain cases, outsourcing these services to external companies that enjoy greater efficiency can increase margins and take advantage economies of scale. Some hospitals in recent past have started taking this approach as well.Sharing some tips for operating cost reducing, Dr Bhatia updates, Hospitals should aim at centralise procurement, which could be aggregated at a company or regional level. An overall transition towards a more variable operating structure by having similar back-ended contracts with suppliers, where payments are linked to the volume of goods consumed or the quantum of services dispensed at a hospital is a good way of reducing cost. Operational costs can be reduced by several measures. Few of them may include appropriate staffing through an accurate method of predicting volume utilisation and staff productivity to arrive at the required staff number and staff mix. Providing accurate job descriptions to staff etc also adds to staff productivity. Use of part time staff, contract staff, overtime are some efficient ways. Energy consumption evaluation and reduction in energy consumption also contributes significantly to cost reduction. Investing in technology also reduces operational costs, Dr Agarwal adds in. Inventory control is yet another way of reducing operational costs, suggests Karkera.

Successful modelsEven as most hospitals struggle to overcome the challenges of reducing operating cost, there are few successful examples that have efficiently bent the cost curve. Referring to some hospitals in India Jalan, points outs, Larger hospitals chains derive significant cost advantage on account of economies of scale and have considerably lower material expenses. In terms of the personnel cost, hospitals, which work primarily on the fee for service model for their physicians, do not gain when the volumes go up. This is one reason, why some hospitals (like Fortis or Dhirubhai Ambani Hospital in Mumbai) are moving more towards a salary model for their physicians. Such hospitals are keen to build the institutional brand and improve margins when the volumes go up. It does not, however, mean that they do not have variable or performance-linked components at all. Some of the hospitals have also managed to reduce expenses on energy (through smart design) and repairs and maintenance (again, through smart negotiation on warranty period and terms of maintenance with the vendors at the time of equipment procurement).However, institutions such as Narayana Hrudalaya or Aaravind Eye Hospital have managed to keep such costs quite low by managing productivity of their physicians. They have also ensured that nursing and paramedical teams get to play a more active role in care delivery, thus reducing the need for physicians, especially in routine interventions. At Aaravind Eye, a single surgeon can perform 15 surgeries per hour, thanks to the highly automated assembly line approach taken. On similar lines, hospitals abroad are exploring ways to make attendants a part of the overall patient treatment cycle. This would lead to a pleasant experience for the patients and their families as well, indirectly increasing operational efficiency, he further adds.

Striking the balanceEvery hospital requires to maintain a balance between liquidity and profitability while conducting its day to day operations. And operating cost being the key component in the daily activities, effective management of this cost will allow hospitals to run a lucrative business. However, hospitals often in the wake of being precautious about wastage of funds tend to block their funds. Organisations block funds in inventory as well as giving credits to corporate clients. Lack of funds can wreak havoc for the organisation. So, hospitals need to ensure that the money flow is not blocked, advises Karkera.

3.Healthcare Cost Accounting Lessons LearnedTodays pressure to reduce healthcare costs and the increased liability providers have is challenging how healthcare systems address cost accounting. Due to the uniqueness of hospital operations, most healthcare organisations continue to struggle with identifying the costs of products and services by responsibility segments, capturing the full cost of products and services, including inter-entity and department costs as part of full costs, and selecting and consistently using an acceptable costing methodology. Understanding that some of biggest challenges for hospitals are not the desire to generate information about the costs to the organisation and patient care, but rather knowing most hospitals have small budgets needed for the kind of technology needed to truly identify the full cost and their limited ability to improve reimbursement regardless of how much knowledge they acquire. A quick review of the industry shows that healthcare organisations need to both leverage their vendor strategic relationships and optimize their current tools. Many hospitals have already jumped into the cost accounting requirements as they work to cost justify an Accountable Care Organisation (ACA) or provide required information for a merger/acquisition.

Lessons Learned Wasting Time Data Gathering Rather Than Analysing Too much time spent on pulling and scrubbing the data, rather than on actually analyzing the data. Need for a strategic/Enterprise Extract Load and Transform (ETL) tool/engine, leveraging Application Program Interface (API) and a Master Data Management solutions A scalable RDBMS for an Enterprise Data Warehouse (EDW) to serve as a repository for all data (any application and any data structure) Lack of complete integration and understanding of detailed workforce and capital asset management Implementation Costs Hospitals make the painful mistake of purchasing an application without really knowing whats in store. The implementation process takes months, disrupts key people and leads to frustration. Having the wrong people implement the system is a huge error incurred by too many healthcare organizations. If you have the right tools, but set them up wrong, youre likely better off to not having the tools. Hospitals fail to implement cost accounting systems/processes to create value while also incurring a maintenance nightmare. Hospitals get overzealous in the amount of detail built into their process. It makes their implementations long, drawn out, frustrating and expensive. Not leveraging packaged solutions designed for the healthcare industry Shelfware and Underutilization Underutilization comes from not recognizing cost accounting as a bona fide, very specific discipline requiring highly skilled support. It comes in not having the right resources and leveraging delivered functionality that supports a health systems modeling, budgeting, forecasting, monitoring, and analysis requirements Hospitals stumble because they fail to realize the experience and training needed to not only understand the mechanics of the software, but to learn what data, and in what form, it becomes of real value. By not relying on both external and internal help, most do not understanding how to optimize the solutions (software) usefulness, thus many organizations make errors in determining how to allocate, identify and quantify costs. Due to limited sophistication and training, most hospitals dont exact real value from even the best cost accounting software. Training

Key Employees Many organizations rely on people, not experts in cost accounting. Many of these people dont have a clear understanding of how direct and indirect costs, fixed, variable and semi-variable costs apply (and their impact on competitiveness assessment) or how to apply a real world process for cost allocation. Be cautious if you rely on a handful of key people to maintain the system, support the data feeds and structures, operate the system and provide the data for analysis, for you are at risk of key people leaving. Not Getting The Results Building the structures for costing is quite an art. It requires sophistication and a clear understanding of objectives, because understanding how the cost accounting structures should be built depends on how you want to use the data, e.g., Volumes, Net Revenue, Expenses, Flexible Budgets, Reporting Those early steps and associated decisions have implications that are not evident unless you understand the end game on the use of specific data and how to processes it. Spending time pulling data only to find that its really worthless is a painful process. Need for a strategic Business Intelligence (BI) solution for Scorecards and executive Dashboards Improve Financial and Operational Monitoring/Analysis Capabilities Most hospitals still do not have a true cost accounting and decision-support system. Many administrators do not see the benefits or value that true cost accounting can provide. Not leveraging best practices during design and implementation, Data Governance Structures and adoption of an Enterprise Data Dictionary, e.g., physicians information should seriously be evaluated for not being in the standard General Ledger (GL) it gets too close to cost accounting, which can be very challenging in the financial system (ERP). How would you allocate costs to a single physician? Some sort of allocation? How would you allocate revenue?Healthcare organizations have traditionally determined costs based on historical methods of charging for services such as patient days and procedures. Products or product lines have also been defined for cost analysis, such as DRGs or a specific type of day surgery patient. Determining full and incremental costs within the structure of a healthcare organization (revenue center or department) continues to focus on a Decision Support System (DSS) or an EDW. The need to know the cost of each procedure and major product line is essential to financial stability of every healthcare organization. In reality, to make sound management decisions, costs must be known at the procedure, patient, and department levels.Without accurate cost information hospitals are at financial risk when making decisions considering current operations as well as long-term plans. The cost of providing services is obviously only one of many considerations. Accurate costing, however, has been a major missing component of the decision-making process.Now without a deep-dive of vendor Commercial Off-The-Shelf solutions (e.g., McKesson (HPM), Allscripts (TSI), Siemens (DSS), and now the Budget & Planning vendors, Oracle, Kauffman Hall, and a number of Tier II vendors) , here are some practical common sense decisions to consider.Flexible DatasetNot every organization fits neatly into 12 month fiscal years and standard FTE hours, but regardless of whether or not your organization fits, Cost Accounting methodologies apply. As most healthcare organization have varying degree of uniqueness, most will need to customize their aggregate Dataset per the organizations needs, whether typical or non-standard. Seek solutions that allows Data to be represented in quarter, month, year or any period based on the facility needs Seek a variety of default export file types, and export files to email addresses (seek delivered APIs) Seek import capabilities from various file types or directly from key clinical systems Ensure all department needs are met

Departmental Costing ControlWhether the healthcare entity is large or small, no matter how many beds it services or staff it employs, its individual departments must have their needs met efficiently and effectively. Require management of departmental charge items Seek ability to automatically calculate departmental allocation based on readily available data, or manually definable as required Establish a product group support and explore user communities Seek multi-tiered reporting structures and ability to group departments by those structures Seek ability to define department types in a variety of ways, including by revenue source, transfers, and special cases Seek and then leverage ability to establish department managers (and integration to Workflow tools/email)

Address Product CostingProduct costing and accurate revenue reporting is a challenge; those solutions that provide simple-to-use, in-depth product grouping functionality will become utilized. Seek solutions that assist to summarize product groups according to your unique organizational needs; allow for the creation of many groups to organize like products, one large group with all products, or anything in-between Seek ability to tie products to charge codes quickly and effectively Seek ability to track product volumes for accurate costingOut-of-the-Box ToolsWorking with your organizations costing data requires soundly-designed, flexible tools for the data auditing, import/export, needs of a health system. Seek a solution with powerful and practical utilities to ensure your organizational growing analytics needs are addressed such as: Import assumptions between data (SOA or Rules Based Engines) Import and export costing data with simple interoperability Supports advanced data analysis, identifies discrepancies and keeps your data reliable Maintains users; add, modify, or remove users and passwords effortlessly Creates reports for revenue, department, and facility reconciliation Maintains classification code databases Builds and maintains a costing task list, and check off tasks as theyre completed Provides modeling and advance analytics at the account detailData Modeling for Proactive What If AnalysisAll healthcare organizations perform what if modeling, but todays requirements include the need for modification to large amounts of data. Seek a solution that quickly and easily allows forecast change impacts and associated pros and cons. Seek solutions that allow for the definition and modification of assumptions to evaluate the impact of facility changes such as inflation, new service, equipment purchases, pay raises, union contracts, etc., change impact Seek ability to anticipate and review average revenue realizations Seek ability to review impacts of charge prices and volume changes Seek ability to explore changes in Payor volumes Seek a solution that provide Cost Accounting details

Extensive, Detailed ReportingDetailed reporting is essential to ensure continued smooth day-to-day operation. Any solution must contain a broad selection of built-in reports based on organizational best practices. Summary reports for upper management Item and product reports with multiple sorting and categorizing report variations Departmental reports for managing department costing On-line reports that can be printed or exported to a variety of file types (Excel,PPTx, PDF, HTML, etc.) User defined reports for the patient, doctor, DRG, ICD, and other demographic level, etc