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‘Cost management is like the spine of the healthcare industry’

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BLK Super Speciality Hospital recently bagged an Excellence Award from the Institute of Cost Accountants of India for its unique costing and business analysis systems. Latesh Sen, GM, Costing and Business Analysis, Radiant Life Care, which redeveloped BLK Super Speciality Hospital at a cost of Rs 3500 million explains to Viveka Roychowdhury why cost management is the spine of the healthcare industry

What are the peculiar features of hospitals that make it challenging when it comes to conducting a costing and business analysis, vis – a – vis establishments in other sectors?

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Latesh Sen

Out of 18 years of my career, I have spent ten years in the hospital industry. In my view, the hospital industry is still far behind in establishing costs of resources utilised as against many other industries. The reason may be vast number of services, complexity involved and  various permutations and combinations of such services provided to a patient. Way back in 1998, Donald Shepard in a book titled, Analysis of Hospital Costs: A Manual for Managers, had written, “A hospital cannot set rates and charges which are realistically related to costs unless the cost-finding system accurately allocates both direct and indirect costs to the appropriate cost centers.” Incidentally, while the statement has been relevant all these 18 years, the concept of cost management has come into focus only recently for hospital managements in India. At BLK Super Speciality Hospital, we have been among the first few in the country to have done so, and a recent award by The Institute of Cost Accountants of India only affirms our conviction.

Hospitals have large number of specialities and each speciality has many services. Each patient (even for the same procedure) goes through different processes of the treatment cycle wherein the cost of resources and material may vary. Let us take an example of angioplasty: Two patients going for angioplasty with different clinical complications will have different treatment/ recovery plan.

Healthcare, being a service industry, is manpower intensive. The spectrum of manpower is very large from highly skilled doctors to helpers. Costs involved in each segment is high and requires very efficient and effective cost management.

The Ministry of Health & Family Welfare has recently approached the Institute of Cost Accountants of India (ICAI) to establish costing methods of various procedures and surgeries to make it more viable for hospitals as well ensure affordable healthcare services to people. How will this change the dynamics of healthcare delivery in India? And how should healthcare facilities prepare for this era?

In 2014, maintaining and submission of the cost records by hospitals became mandatory under the Companies Act, but the effectiveness and scientific methods to capture the various cost elements was not achieved. Later in May 2015, in a meeting with Dr B D Athani, Special DGHS, it was decided to explore the possibilities of the institute to extend its expertise in fixing the range of costing rates for some key medical procedures decided by DGHS.

At the same time, ICAI tied up with two medical groups – Association of Healthcare Providers (India) and Delhi Medical Association. Under the arrangement, ICAI would provide expert advice to hospitals for having a system to manage and control costs in a more efficient manner.

Effective procedure costing and cost management can play very large roles in changing the dynamics of the healthcare industry. Efficient cost management is beneficial for both – the service provider as well as those who avail of the services.

For patients, accurate costing of procedures and services will lead to competitive pricing, which will make high-end and quality healthcare services affordable to large sections of the masses. This is more relevant in India due to low penetration of medical insurance.

For corporate hospitals, high capital investment and continuous upgradation of technology along with expensive resources makes the pricing of treatment in private sector unaffordable for the masses. For hospitals to provide affordable services while maintaining the quality and financial viability, effective cost management and optimum utilisation of resources are certainly essential. Only then can they take the services to a larger section of society, thereby increasing volumes and further save on costs.

Government/ NGO-run medical facilities have limited resources in terms of availability of funds and have to prioritise the same for different essential programmes. Optimum use of resources can be achieved with efficient cost management. It can help to take quality healthcare to the masses and in areas where private facilities are not available.

On the whole, efficient cost management and business analysis can change the scope and dynamics of the healthcare industry for all the stakeholders. The new era of the industry will be data driven, and cost management will work like the spine to the industry.

From a cost analysis and business analysis point of view, what are some of the essential tools that need to be deployed to ensure that optimum performance is achieved in hospitals?

Essential tools for effective cost analysis include time-based and activity – based costing. They mean to capture the cost of each and every effort and process as well as provide the impact of underutilised resources. Kaizen costing i.e. cost control efforts without compromising on the quality of healthcare delivery will lead to providing quality healthcare services to the society at affordable prices. Another tool is standard costing, which is the standardisation of consumption and time in various services and activities. Variance analysis also helps in optimum utilisation of resources and in enabling control over the cost of the procedures.

Various approaches of management accounting include tools of management accounting such as capital budgeting, Net Present Value (NPV) and Internal Rate of Return (IRR) analysis, zero base budgeting, etc. They provide insights for strategy planning.

For instance, at BLK Super Speciality Hospital, we provide the costing of each and every service, procedures and packages with respect to various combination of services. This offers insights to the management for decision making.

How can data analytics be leveraged to help in the cost and business model revamp of healthcare facilities?

Earlier, bed occupancy was the yardstick to measure the performance of a hospital but with the advancements in medical technology, the average length of stay (ALOS) is reducing and hence, bed occupancy is not the main measure of performance. Increased utilisation of costly resources, for e.g. equipment in operating theatres, ICUs, cath-lab, radiology, pathology lab, manpower planning, deployment of nurses etc, are the key to success in hospitals.

The data analytics help to measure the performance of various resources. This, in turn, enables the management to take corrective actions at the right time. Trend analysis and quantifying efforts can change the perspective of any decision.

Adequate and accurate knowledge on breakeven of any investment or any additional resource deployed; in various specialities will help achieve the desired profitability.

How should hospitals respond as patients become more price sensitive, particularly in India, where most of the healthcare costs are out-of-pocket and insurance penetration is still poor?

Hospitals should effectively allocate their resources. The outcomes and various parameters must be analysed in real time to take corrective measures. The pricing of services must be done on the basis of costing. Only then can the hospital provide the most competitive price to the patient as well as maintain its financial sustainability.

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