As the management accountant of a local NHS hospital this report has been written for the senior management to help identify, explore and analyse some of the issues raised by Gordon Brown in comments surrounding ‘poor management’ within the NHS. These comments were made in response to the varying range of costs involved in various procedures within the NHS. This report will begin by analysing the costing methods employed and giving a breakdown of the method. Costing is vital to the success of any organisation and the NHS is no exception. Costing allows us to budget, compare and contrast which allow us to benchmark and measure efficiency. The report will then move on to tackle possible causes for the variation in costs and finally look to offer some possible improvements based on the report’s findings.
Terms of Reference Below are some terms that will appear throughout the report: Direct costs – These are in relation to any cost that has a direct link with a procedure e.g. a specific piece of equipment, direct labour (heart surgeon, neurological surgeon) etc. Indirect costs – These are costs which cannot be directly assigned to one procedure e.g. indirect labour (nurses, admin staff etc.), Utility bills (Heating, electric, water), maintenance etc.
Cost drivers- The activity that drives the cost to be incurred. Costing in the NHS “Healthcare systems face pressures to deliver cost efficient care in the face of escalating demands” (Lapsley, Irvine 2005) It is important, before trying to explain the possible reasons for the varying costs within procedures that we understand what costing methods are being employed by the NHS. The NHS faces increasing scrutiny and pressure from the media, government and stakeholders in regards to its financial and efficiency levels, across the organisation. In the past ABC was only found in the private sector however, the increased spotlight from the government, media and general public has meant the public sector being viewed in a more ‘business like’ manor, hence the promotion of ABC into NHS.
The traditional costing method was seen as inefficient with particular scrutiny placed on proportioning indirect costs efficiently. Activity-based costing was first conceptualized by the academics Kaplan ; Burns in the late 80’s and they described ABC as a method in which indirect costs could be more accurately reported when dealing with a range of products or service.
Within each individual hospital in the NHS there is a wide and varied range of procedures being carried out. To use a traditional costing method would see the emergence of some of the problem previously listed i.e. dis proportionate allocation of indirect costs. Issues occur within the traditional costing method when dealing with a wide range of activities as volume is used as the only cost driver. A traditional approach to costing would simply divide the indirect costs by how many procedures have been performed. Below is a simple example which shows the traditional costing method and a brief explanation of ABC.