Resource Book I: Costing for Hospital Management -...

ResourceBookI:CostingforHospitalManagement

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Chap t e r 3

LITERATUREREVIEW&CASESTUDIES

KeyMessages Thereviewofcostingstudiesrelatingtohospitalanddiseasebasedcostingrevealed that significant gaps existed in the available costing data. Thissuggested that thecreationofasystematiccostingprocess thatcouldbeadaptedandadopted fordifferent levelsofhospitalsanddiseaseswouldbeof importance in improvingmacroandmicro leveleconomicefficiencyinthehealthsector.

Thesurveyofmanagementneedsrevealedthatthecarryingoutofregularbudgetingandplanningexercisesdependedontheexistenceofaspecificunit to carry out such activities. Likewise though hospitalmanagementmeetings were held, such discussions were not based on evidence.Systematising management cost accounting would be useful in bothcotexts

The study of the pharmaceutical sector revealed that there were costrelatedproblemsintheentireprocessrangingfromtheestimationofdrugneeds to the disbursement of such drugs to patients. Better technicalprocedures inestimatingdrugneeds,systematicrecordkeepingprocessesandgreater interest instockmanagementwereall identifiedasmeansofimprovingefficiencyandachievingcostcontainment.

Thestudyontheprivatesectorconcludedthattherewasgreat interest incosting,financialandeconomicissuesinprivatesectorinstitutions.Greaterinvolvementbetweenhealth institutionmanagers,cliniciansandaccountswasconsidereddesirableinachievingaccuratecostestimates,whichcouldthenformthebasisofarationalpricingstrategyintheprivatesector.


29

3.1 LITERATUREREVIEWOFCOSTSTUDIESThisstudysoughttoexaminetherangeofexistingcostingliteratureinSri Lanka as it related to hospital and disease costs. In addition, anattempt was made to evaluate different costing methodologiesadopted in these studies given the constraints on data in the SriLankancontextwithaviewtoidentifyingappropriatemethodology.

This literature review of cost studies began by classifying the SriLankan cost studies by study topic, costingmethodology and datasource. The different costing methodologies adopted in this studywereevaluated,intheSriLankancontextusingaSWOTanalysis.

In the caseofhospital costs, since theempiricalwork for this studyfocusedonthreehospitals inSriLanka:SriJayawardenepuraGeneralHospital,TeachingHospitalKurunegalaandBaseHospitalKuliyapitiya,theliteraturesurveytoofocusedonsimilarhospitalcategories.Inthecosting of diseases similarly, studies reviewed were limited to fiveselected diseases: asthma, hypertension and heart diseases (NCDs),anddiarrhoealdiseasesandviralfever(communicablediseases).

Cost studies conducted in Sri Lanka in the period post 1990 werecategorizedunder threedifferentheadings:by studyareaand topic,costingmethodologyandbysourceofdata.Suchcategorizationwasimportant in identifying coverage and trends relating to the costingmethodologyasadoptedintheSriLankancontext.

3.1.1 COSTINGMETHODOLOGY

Thereseemtobefourcostingmethodologiesthatcanbeconsideredasseparatetechniqueseventhoughstudiessometimescombinetheseprocedures. These are: a)retrospective accounting; b) retrospectivesurveys;c)scenariobuilding;andd)econometricanalysis.

A. RETROSPECTIVEACCOUNTING

Thisreferstocostingconductedforapastperiodbasedonledgerentries maintained by the hospital at central or ward level.Informationusedinsuchanexerciserangesfromflowoffundstothehospitalfromthestate,recordsof institutionalearnings,andexpenditure at hospital and ward level. Two approaches arecommonlyused:Costingbycostcentres(i.e.costingwardbyward,laboratoryetc.)andactivitybasedcosting(ABC).

B. RETROSPECTIVESURVEYS

Thesesimilarlyestimatecostsbasedontheresponsesofasample,relatingtoapreviousexperienceofhealthcareexpenditureoveraspecifictimeperiodoroveranepisodeofillness.


C. SCENARIOBUILDING

ThetechniqueofScenarioBuildinginvolvesfoursteps.Thefirstisto list out all the known relevant physical or personalcharacteristicsrelatingtothefacility,thediseaseorthetreatmentprocedureunder consideration. Secondly the listof assumptionsadopted has to be explicitly stated. These assumptions can bebasedonempiricalevidence, theoreticalknowhowor theviewsofexpertsbutneed justificationand supportingevidencewhereever possible. The third step involves combining empiricalinformation and assumptions to reach cost estimates. The finalstep involves validation of the cost estimates derived in thismannerandtheunderstandingofthe limitationsarisingfromtheuseofassumptionsintheScenariobuildingtechnique.

D. ECONOMETRICANALYSIS

Thismainlyinvolvescrosssectionanalysis,andcanrelatetoeitherthe use of international or national/regional information inextrapolating costing estimates for the country or specificinstitutions.

Moststudiescarriedout inSriLanka involvingsystemiccostsarebasedonacombinationofretrospectiveaccountingandscenariobuildingtocoverthegapsinthereadilyavailabledatabase.Somestudies, however, underestimate costs by ignoring capital costssincethesearenotfreelyavailable.Retrospectivesurveysarethemain basis for indirect and household cost estimation. Scenariobuilding techniques have been adopted in some studies forcalculatinglostearnings.

3.1.2 SWOTANALYSISOFSTUDIES

Component 2 involved costingmethodologies that corresponded toretrospective accounting and scenario building methodologies. TheSWOTanalysiswascarriedoutonallfourestimationtechniques.

SWOT analysis of studies relating to the selected hospitals anddiseases has identified certain areas for improving costingmethodology. The areas for improvement under the differentmethodologies to be incorporated in the EBM study are discussedbelow.

A. WITHREGARDTORETROSPECTIVECOSTACCOUNTING Understanding the importance of preplanning ofaccountingprocedurestosupportretrospectiveaccounting Systematizingtheaccountingproceduresinhospitals Regularrecordingofdata Detailedrecordkeepingincludingoncapitalcosts

B. SYNTHESIZINGRETROSPECTIVECOSTACCOUNTINGAND


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SCENARIOBUILDING

Carryingout scenariobuildingexercisesat the selectedhospitalscould(i)revealhowwellscenariobuildingperformsingeneral(ii)drawonscenariobuildingtovalidateapportioningtechniques(i.e.utilities).

C. OTHERRELATEDISSUES Training/familiarizationofhospitalstaff Familiarization of all hospital administrators with costingmethodologyanditsuses Trainingofaccountants Disseminationofcostinformationtothegeneralpublic

3.1.3 REVIEWOFSELECTEDSRILANKANCOSTSTUDIES

A. HOSPITALCOSTING

Attanayakeetal(2005)clearly illustratesthe importanceofstepdown cost accounting but argues that such a procedure is onlypossibleafterundertakingan indepth reviewofall theactivitiesoftheinstitution.

De Silva, Samarage and Somanathan (2006) conclude thatoutpatienthospitalcosts in tertiarycaresettingsarehigher thanforlowerlevelhospitals.

Costing studies done on the specific hospitals where costingprocedures were implemented, the Teaching Hospitals of SriJayawarenapura(SJH)andKurunegala(KTH)andtheBaseHospitalKuliyapitiya,arelimited,sothisreviewofcoststudieswideneditsscopetoconsiderstudiesdone inallTeachingHospitalsandBaseHospitalsincludingtheabove.

With regard to inpatient care, Kasturiratne (2003) finds thehospital hotel costs (without considering treatment costs) thatrelate to themaleand femalewardsof theProfessorialMedicalUnitoftheColomboNorthTeachingHospitaltobeRs.505.70perpatient day. Costs of treating specific diseases (medication,investigations and therapeutic procedures) at this hospital perepisode range fromamediancostofRs.4919.20 foranaverage5.2daystay forMyocardial infarction toRs.678.40 fora2.7daystay for Asthma,with the average length of stay and costs forIschemicHeartDisease,StrokeandCirrhosiscominginbetween.

B. DISEASECOSTING

In Disease Costing, the five diseases examined in Attanayake(2005) were considered. Bias due to the non homogeneity ofpatients,useofmultiplesourcesoftreatment,complexityarisingfrompatientscomorbidity,difficultyoffindingpatientsamplesinthe private sector hospitals for diseases such as asthma and


Note:A :Asthma H :HypertensionVF :ViralFever HD :HeartDiseaseD :DiarrhoeaNCMHWGF:NationalCommissiononMacroeconomicsandHealthWorkingGrouponFinancing

diabetesanddifficulties inaccuratelydetermining indirect costs,particularly inthesubsistencesectorweresomeoftheproblemsencountered. The Costs estimated in each study and themethodologyadoptedaresummarisedinTable31.

StudyCost

EstimatedMethodology A H HD D VF

Attanayake(2002a)

SystemicCost Costingofprotocols + + + +

Attanayake(2002b)

Householdcosts

Householdsurvey(respondentsselectedfromthoseseekingpublicOPDcareandsnowballingtoincludeprivatecare)

+

Attanayake(2005)

Direct/Indirect Householdsurvey(respondentsselectedfromthoseseekingpublicOPDcare

+

+

+

+

+

Kasturiratne(2003)

Treatmentcost

PatientsatProfessorialUnitofCNTH

+ +

de Silva(1995)

SystemicCost HospitaldataatLadyRidgewayHospital

+

NCMH WGF(2006)

Costtohouseholdsofclinicattendance

ClinicattendeesatNCTHChannelpatientsDurdans

+ +

The study of these diseases is complex, and resulted in theresearchers having to restrict their focus and/or adopt certainmodifications to the costing procedures. Some of the problemsidentified in the context of these studies (often cited by theresearchersthemselves)arelistedbelow:

In patient surveys avoiding bias due to non homogeneity ofpatientsdifference in intensityof illness,ageorevenmeredifferences inpersonality canaffect theexpenditurepattern(e.g. distinction between ischemic heart disease andmyocardial infarction in Kasturiratne, 2003; spending onspecialfoodsinAttanayake,2005);

TABLE31:COSTSESTIMATEDINEACHSTUDY


33

Useofmultiplesourcesoftreatmentthiscreatesproblemsatthestageoffillingoutthequestionnaire(needforensuringthat the patient understands what costs one is trying tocapture)andinpresentingtheresultsindisaggregatedformasin public outpatient, public inpatient, public outpatient andinpatient,publicplusprivateetc.Inadditionaneedalsoexists,as recognized in Attanayake (2002b and 2005) to considerinformaltreatmentandselftreatmentexpenditure;1

Complexity arising from patients having more than onedisease(i.e.HypertensionandDiabetesMellitus;Asthmaandrespiratoryinfections);

Difficulty of finding patient samples in the private sectorhospitalsfordiseasessuchasAsthmaandDiabeteswhichareoften treated by Consultant Physicians. Community surveyswouldhoweverbeextremelycostlyifusedtodeterminecostsofNCDs, as large sampleswould have to be interviewed togain sufficient sample size. This has encouraged the use ofhospitalOPDandinpatientsasrespondents;

Difficulties in accurately determining indirect costs,particularlyinthesubsistencesector;and

Lackofdisaggregationofhospitalcostrecords (i.e.electricityand water bills, cost of administration) has necessitatedcertain assumptions being incorporated in the costingexercises.

1AttanayakeN.,2005,AttanayakeN.,2002


3.2 MANAGEMENTNEEDSSURVEY

3.2.1 SURVEYMETHODOLOGY

During the period between December 2005 to January 2006, aquestionnairewassent to themanagementexecutives in the26 lineministry hospitals (Directors,DeputyDirectors), and their responsesweresoughtregardingtheirperceivedneedsforthe improvementofhospital management. This was done partly with the intention ofselecting pilot hospitals for the project. The main content of thequestionnaireswere directed at finding out the problems faced byhospital managers and their utilization of basic information withspecial reference to the linkage between financial and clinicalinformation.

Ofasampleof26,18responded(9from16TeachingHospitals,6from7GeneralHospitalsand3from3BaseHospitals).

3.2.2 KEYFINDINGS

A. MANAGEMENT

The questionnaire dealt with different aspects of managementincluding financialmanagement.Thequestionsweredesigned toanalyze the management skills and innovative thinking of theexecutives.Majority(80%)indicatedthatthebiggestproblemtheyfaceisthelackofhumanresources,followedbyovercrowdingandalackofbuildings/equipment.

Problems thatpertain tohuman resourcesarenotonlydue toashortage of the workforce but also due to weakness ofmanagement as revealed in the high absenteeism of hospitalemployeesandlowmotivation.Strategiestotacklesuchproblemswerenotproposed. Insteadmany responded that itneeded theMinistrysauthoritytochangethestatusquo.Thisshowsalackofinitiativeonthepartofhospitalmanagement.

B. INFORMATIONMANAGEMENT

Approximately80%ofthehospitalexecutivesansweredthattheyAlways or Mostly prepared the business plan and budgetsbasedonclinicaland financial information.However,2hospitalsansweredNotcommonly:oneRarely;andoneevenNever.

It was found that the survey results closely related to theexistenceof relevantunits thatare responsible forplanningandbudgeting.Thefourhospitalsthatprepareneitherabusinessplannorabudgetplanroutinelydidnothavesuchunitsatthetimeofsurvey.


35

In a separate question, approximately 40% of the hospitalsanswered that no reports were routinely prepared updatingpatientstatisticssuchasbedutilizationrateetc.

The survey found that 90% of the hospitals either distributecirculars/notices among the staff members or place suchdocumentsonthemessageboard,orusebothmethods.

C. MANAGEMENTCOMMITTEE

All the targeted hospitals in the survey hold ManagementCommitteemeetings once amonth or every othermonth. Theaveragenumberofcommitteemembersis10.Thisnumbervariesfromhospitaltohospital,rangingfrom6and13.Inmosthospitals,employeerelated matters and physical development arecommonly discussed. Other subject matters differ amonghospitals, depending on the composition of the committee.


3.3 STUDYOFPROCEDURESANDISSUESRELATINGTOPHARMACEUTICALSUPPLYATCENTRALANDPROVINCIALLEVELS

Pharmaceutical supply is a major share of hospital costs, themeasurementofwhichisthecentralobjectiveofthisJICAEBMStudy.ThissectionprovidesanoverviewoftheproceduresandissuesrelatedtopharmaceuticalsupplyatCentralandProvincialLevelswithregardto Line and Base Hospitals. Understanding the complexities of thecurrent pharmaceutical supply system will provide insights intoimproved methods of recording drug related cost and quantityinformationandsuggestionsforimprovementsinmanagementthatinturncouldmakethehealthcaresystemmorecosteffective.

The researchmethodologyadopted for thispurposes ispresented insection3.3.2.This study focuses inparticularon theNorthWestern(Wayamba) Province as the hospitals being studied: the TeachingHospitalKurunegalaandBaseHospitalKuliyapitiya,areinthisprovince.It focuses in detail on both hospitals as procedures for drugdisbursementvarysignificantlybytypeofhospital:TeachingHospitalscome under the LineMinistry and BaseHospitals are controlled byProvincialHealthMinistries.

The next two sections (3.3.3 and 3.3.4), therefore, focus on thefunctioningoftheMSDandtheRMSD(seethePharmaceuticalSupplyreport for details of other institutions involved in the supply,distributionandmonitoringofpharmaceuticalsinSriLanka).

Section 3.3.5 examines pharmaceutical supply management byfocusing on the different activities involved in such a process:estimation,financing,procurement,storage,distribution,monitoringandqualityassurance.Thelastsection(3.3.6)criticallyexaminestheproblemsrelating to thedifferentstrata involved inpharmaceuticalsupply management, and the recommendations for improvingprocessesatthedifferentlevels,withspecialattentionbeingpaidtothe financial implications of current weaknesses in thepharmaceutical distribution system and the more appropriateresourceallocationpatternsthatcouldbeachievedbyimprovingthemanagementsystem.

3.3.1 OVERVIEWOFSUPPLYSYSTEM

Under the current system theDirectorGeneralofHealth Services isthe authorized officer to ensure the continuous availability of allmedical requirements of all government hospitals in Sri Lanka. Inkeepingwith theCosmetics,Devices andDrugsActNo.27of1980,with the approval of theMinister of Healthcare and Nutrition, thisauthorityhasbeendelegatedtotheDirectoroftheMedicalSuppliesDivision(MSD).TheCosmetics,DevicesandDrugsActNo.27of1980(asamendedbyActNo.38of1984)providethelegislativeframework


37

tocontrol theuseofdrugs in thecountry.Theactcontrolsactivitiessuch as registration, manufacture and importation of drugs in thecountry.

Sri Lankahas eight provinces, and eachprovince is subdivided intohealthregions.TheRegionalDirectorofHealthServicesadministersallhealth activities in the region. In each region, there is a RegionalMedical Supplies Division (RMSD) through which all medicalrequirementsoftheprovinciallycontrolledhospitalsintheregionareadministered,storedanddistributed.Somehospitalscomeundertheadministrative purview of the CentralGovernment and themedicalrequirements of these hospitals are supplied directly by the MSD.Similarly,thefivespecializedcampaign institutions,undertheCentralGovernment,receivetheirmedicalrequirementsfromtheMSD.

3.3.2 STUDYMETHODOLOGY

Understandingthepharmaceuticalsupplysystematcentral,provincialand hospital level would allow the designing of more efficientrecording and management systems that would result in costcurtailment.No systematic studyexistedof theoverallprocedureofpharmaceutical supply: estimation, procurement and drugmanagement so this report fills that lacuna. Appropriate resourceallocation is particularly important in the context of ensuringcontinuousavailabilityofdrugsforpatients,sincethecurrentsystemresultsinshortagesbroughtaboutbybudgetarygaps.

Theoverallobjectiveofthisstudy istopropose improvements inthesupply system of pharmaceutical items, by analyzing the existingsystem.Inordertoachievethisobjectivethestudyattemptedtogainan overall understanding of the procedures of estimation,procurement, storage, distribution and accounting; to identify theissues affecting the operating of the present system and remedialactionsforimprovingthepharmaceuticalsystem.

Medical items are procured, stored and distributed by theMedicalSuppliesDivision (MSD)of theMinistryofHealthdirectly toCentralGovernment Hospitals and through Regional MSDs (RMSDs) toProvincialCouncilHospitals.Here theanalysis is limited to theMSD,the RMSD for Kurunegala, one central government institution(Teaching Hospital Kurunegala) and one Provincial Counciladministeredhospital(BaseHospitalKuliyapitiya).

Primary data in this study were collected through interviews anddiscussions with relevant officers in the system such as hospitalpharmacists,storekeepersatMSDandRMSDs,accountantswhoarethe keyofficers involved in financialmanagement and theAssistantDirectors at theMSDswho are involved inmanagement. Secondarydata were obtained from records maintained at MSD, RMSDKurunegalaandKurunegalaTeachingHospital inordertoanalyzethe


pharmaceutical supply management system. Guidelines andprocedureswereextractedfromcirculars,manualsandhandbooks.

Data and information analysis sought to address the followingresearchquestions:

How does the existingmethod of estimation of drugs byhospital/regionwork? How does the existing method for ordering the nationalrequirement of drugs by MSD work? Does it ensure thesupply? Howdoestheexistingprocedureforaccepting,storinganddistributingofdrugsbyMSDwork? Howdoestheexistingprocedureforaccepting,storinganddistributingofdrugsbyRMSDwork? How does the existingmonitoring system of drugs supplyworkinhospitals/regions? Howdoes theexistingprocedureofaccepting, storingandissueofdrugstowardsworkathospitals? Howarerecordsmaintained?Howefficientisthesystem? What are theproblems faced in carryingout the activitieslisted above and what suggestions could be made forimprovement?

The limitation of this study is that the sample includesmerely oneTeachingHospitalandoneBaseHospital.

3.3.3 MEDICALSUPPLIESDIVISION(MSD)INTHEMINISTRYOFHEALTH

The Medical Supplies Division (MSD) is the main pharmaceuticaldivision under the direct administrative purview of the CentralGovernment,where national requirements of allmedical items areprocured,storedanddistributed.InadditiontosupplyingtheRMSDs,thereare37majorhospitalsundertheCentralGovernmenttowhichmedical itemsaresupplieddirectlybytheMSD. TheMSDconsistsoffourunits,storesandawharfsection.

MainFunctions:

Studying the consolidated annual requirementsofmedicalitems Placing indents for annual requirements ofmedical itemswithStatePharmaceuticalCorporation(SPC) ReceiptofmedicalitemsfromSPCandstorage Distributionofquarterly requirementsofmedical items toRegional Medical Supplies Division and the institutionsundertheCentralMinistry Maintenanceofaneffectivedrugmanagement informationsystem Monitoringofconsumptionpatternofmedicalitems Qualityassuranceofmedicalitems


39

AttendingDrugReviewCommitteemeetingsofhospitals Coordinating with sectoral and intersectoral agenciesconcernedwithmedicalitems Managementofdonatedmedicalitems Inservicetrainingforstaffatdifferentlevels Organizing and attending SPCMSD meetings to discusssupplyofoutofstockmedicalitems Support, review, revise and disseminate rules, regulationsandprocedurestoensurescientificmanagementofmedicalsupplies

MainUnits:

Themainactivitiesoftheunitsarelistedbelow: Stock ControlUnit: responsible for estimating drug needs,ordering pharmaceuticals,monitoring and controlling drugsupplies,negotiating transactionswith SPC andoverseeinglocalpurchaseofdrugs Stores:inchargeofreceiving,storingandissuingitems Computer Unit: activities include developing software,maintenanceof recordsof supply, storageanddistributionofmedicalitemsandthemaintenanceofcomputersystems.TheMSD has a Local Area Network to support inventorycontrolfunctionsandMIS Supply Branch: This section oversees the certifying ofvouchers for payments to SPC and other suppliers,preparationofannualpricelistsandpurchaseandsupplyofcancerdrugsfromPresidentsFund PurchasingUnit: responsible for local purchase ofmedicalitems and certifying of vouchers for payments to localsuppliers Dispatch Unit: Works in tandem with the stores inmaintaining records relating to drug distribution, overseesthedistributionofdrugstodifferentinstitutions Wharf Section: responsible fordonationsofmedical itemsfrom internationalagencies, internationalNGOSanddonorcountries involving activities such as documentation,port/airfreightclearanceandstorage

3.3.4 REGIONALMEDICALSUPPLIESDIVISIONS(RMSD)KURUNEGALA

In the supply system, there are 26 RMSDs under the ProvincialCouncilswhich distributemedical items to hospitals in the regions:numbering 36 Base Hospitals, 159 District Hospitals, 90 PeripheralUnits,158RuralHospitals,75CentralDispenseswithmaternityHomesand389CentralDispensaries.

The study focused on the Regional Medical Supplies Division inKurunegala, thearea inwhich thehospitalsunderstudyare located.The RMSD Kurunegala is under the administrative purview of theDeputyProvincialDirectorofHealthServicesKurunegala.Thesupply


of all medical items to government hospitals coming under theprovincialcouncil in thedistrictarehis/herresponsibility.Thesupplyanduseofdrugs is routinelymonitoredby theDivisionalPharmacistand ingeneralby theRegionalDrugReviewCommittee.He/shealsodirectly supervises theactivitiesof the storeswith respect todrugs.The Divisional Registered Medical Officer directly supervises theactivities of the stores regarding surgical/laboratory items. Suppliesare sent from theMedical Supplies Division (MSD), EpidemiologicalUnitand theFamilyHealthBureau.Chiefstorekeeper is inchargeofthestoresand isassistedbytwootherstorekeepersandsupportingstaff.

TheRMSDintheKurunegaladistrictsupportstheactivitiesof2BaseHospitals,13RuralHospitals,18DistrictHospitals,18PeripheralUnits,2CentralDispensarieswithMaternityHomes,50CentralDispensaries,aChestClinic,a STD clinic,MunicipalCouncil clinic inKurunegala,6AdultDentalClinicsand35SchoolDentalClinics.

The Regional Drug Review Committee is responsible formonitoringpharmaceuticalqualityandusage intheregion.Themembersofthiscommitteeare:

RegionalDirectorofHealthServicesChairman DivisionalPharmacistSecretary RegionalDentalSurgeon OfficerinChargeofRMSD DivisionalRegisteredMedicalPractitioner AllOfficersinChargeofinstitutionsintheregion Accountant/RDHS.office RegionalMedicalOfficer/AntiMalariaCampaign MedicalOfficer/RespiratoryDiseasesControlProgramme MedicalOfficer/LeprosyCampaign

Many problems faced by the RegionalMedical Supplies Division inKurunegala (and common tootherRMSDsaswell)are listed in thelastsection.

3.3.5 DRUGSUPPLYMANAGEMENT

The different activities related with drug supply management arebrieflylistedhere.

A. ESTIMATION Estimationofdrugneeds

InkeepingwiththeAnnualWorkPlanoftheMSD,computerdisketteswitha listingofallHospitalFormularyDrugs (StockItems) are distributed to all hospitals in May in order toestimate the annual requirement of drugs for the followingyear.

Twomethodsofestimatingdrugrequirementsare:


41

The patientmorbidity standard treatmentmethod: this isbased on the idea of rational prescribing (standardizedprotocols)andrealisticmorbidityrecords The adjusted consumption method: based on previousconsumptionpattern adjusted for any known variations inepidemiological/prescribingtrends

Regional drug needs estimation involves the aggregation ofinstitutional estimates. The estimates are prepared by theDivisional Pharmacist on the basis of institutional estimates.However,the financialallocation isnotknownat thetimeofthe preparation of this list. Institutional estimates have tothereforebescrutinizedandadjustedinconsultationwiththeofficersfromthe institutions. Institutionalestimatesarethenconsolidated to arrive at the regional estimate. They arecomparedwithpreviousestimatesandadjustedaccordingly.The current RMSD stock is not considered. Monthlyconsumptionisarrivedatbydividingtheregionalestimateby12. This procedure has many weaknesses and contributessignificantlytotheproblemofdrugshortagesandwastage,inturn affecting both patient welfare and cost of healthcareadversely.

Thenationalestimateofdrugneeds ispreparedby theMSDas a consolidated estimate of all central governmentinstitutions (hospitals and special campaigns) and ProvincialCouncil regional estimates. In addition requirements of themedical units of theMinistry of Defencewhich also obtainsuppliesfromMSDhavetobeincluded.

Inthecaseofstockitemsthatarebasicneedsforanyhospital,supplementary estimates are accepted and complied with.However, institutions are asked to only submit theirsupplementaryestimatesafteramidyear revision in July. Incase of special drugs institutions have to remainwithin theestimatessubmitted.

EstimationofCosts

Activitybased Costing (ABC) analysis for Categorization isadopted in estimating costs of pharmaceuticals andmedicalcareitems.

B. FINANCINGOFMEDICALSUPPLIES

The following procedures are followed with regard to thefinancingofmedicalsupplies:

In March Year 1, Ministry of Health informsSecretary/Provincial Councils to prepare and forward thefinancialrequirementsformedicalsuppliesforYear2. Similarly Directors of Central Government Institutions arerequested to prepare their financial requirements for


medical supplies for Year 2 and forward it to theSecretary/MinistryofHealth. Directors/TeachingHospitalsandspecializedinstitutionsarerequestedtoindicateseparatelylocalpurchaseandmedicalgasrequirements. InAprilYear1Secretary/ProvincialCouncilsprepares thefinancialestimateformedicalsuppliesforYear2andsendsittoSecretary/MinistryofHeath. A consolidated statement is prepared by theSecretary/Ministry of Health and sent to the DirectorGeneral/BudgetGeneralTreasury InNovemberYear1thebudgetisdiscussedandapprovedinParliament. Director General/Budget General Treasury informs theMinistryoftheapprovedfinancialallocationforYear2. Secretary/Provincial Council is informed by the SecretaryMinistry ofHealth of the approved allocationwith a copybeing sent to the Director/Medical Supplies division inFebruary/MarchofYear2. Secretary/ProvincialCouncilinformseachProvincialDirectorofHealthServicesoftheirfinancialallocation,whichisthenreallocatedbyregion. Directors of Teaching Hospitals and specialized campaignsareinformedoftheirallocationwithacopytotheDirector,MedicalSuppliesDivision. Based on the estimates prepared by Director/TeachingHospitalsandSpecializedcampaigns for localpurchaseandmedical gases, Ministry allocates funds and informsaccordingly. Director, Medical Supplies Division supplies the medicalrequirements, and prepares monthly financial statementsandsendsthesetoallinstitutionsconcerned.

C. PROCUREMENT ProcurementPolicy

Considering financial constraints, nature of drugs, lack ofstorage facilities, short shelf life, high variations in annualdemand,price factorsetc thepresent systemof supply is toprocuretheannualrequirementofadruginoneconsignmentwithdeliveriesbeingmade from January thatyear. TheSPCservesastheprocurementagentfortheMSD. The leadtimerequiredby SPC is eleven (11)months. Procedure varies forstockandnonstockitems.

For stock items forecasts are made based on nationalestimates and national issues in the previous period andstocksinhand.Inthecaseofspecialdrugs(termednonstockitems)hospitalsestimatetheirannualrequirementsbasedonpastconsumptionpatternsandprocurementsaredonebasedontheserequests.LocalpurchaseofdrugsatMSDoccurson


43

the basis of tenders, as does the purchase of surgicalequipment and laboratory items. Technical evaluationcommitteesreportontheproductspriortothetenderboardmaking their decision on the source of procurement.Composition of the tender board and its chairmanshipdependsonthevalueofthetenderbeingcalled.

D. STORAGE

Twomainactivitiesareinvolvedinthisprocess:

1. Documentation2. Storage:itemsmaybestoredbyexpirydate,batchnumber

orasperlabelconditions.

E. DISTRIBUTIONOFDRUGS

Distribution of drugs is done on a preplanned quarterlyprogramme basis with information relating to distributionschedulesbeingsenttoallinstitutionsinadvance.Howeverissuesarealsomadeonsubmissionofintermediaterequests.

F. MONITORING

Monitoringofdrugusagehastobecarriedoutatallthreelevels:national,regionalandhospital levelonasystematicbasis ifdrugshortagesandwastagearetobeavoided.Thefollowingmeasurescanbetakeninthisregard:

PreparingmonthlyoutofStock,LowStockreports Holding a SPCMSDmeeting once amonth to discuss thesupplyofoutofstockitems AweeklyvisittobemadebyMSDofficerstoSPCtofollowuponthedecisionstaken MidyearAnalysisofsupply/distribution

G. QUALITYASSURANCE

TheDrugInformationCentremaintainsandupdatesadatabaseondrugs,accessibletomedicalstaff.Reportsofadversereactionsareexamined by this centre with the Pharmacist of the DrugInformation Centre functioning as the Secretary of the AdverseDrugReactionMonitoringCommittee.

TheNationalDrugQualityAssurance Laboratory (NDQAL) undertheMinistryofHealthcareandNutrition is involved inthetestingofqualityofdrugsandadvocatesthenecessitytowithdrawdrugswherequalityisfoundtobedeficient.

TheAdverseDrug ReactionMonitoring Committee comprises ofthefollowings:

DeputyDirectorGeneral(LaboratoryServices) DirectorMedicalTechnologyandSupplies


DirectorMedicalSuppliesDivision DirectorNationalDrugQualityAssuranceLaboratory Professor of the Department of Pharmacology, Faculty ofMedicine,UniversityofColombo

Thiscommitteemeetsonceamonthtodiscussreportsofadversereactions todrugs.Complaintsofadverse reactionsare receivedby Director/MSD and all members are informed accordingly.Immediately on receipt of a complaint samples available at theMSD are sent to NDQAL for testing. Immediate measures aretakentowithdrawdrugssuspectedofsevereadversereactions.

3.3.6 CRITICALANALYSISOFPHARMACEUTICALISSUES

Theinadequaciesandshortcomingsoftheinstitutionsatthedifferentlevels involved in thepharmaceutical supplyprocess arehighlightedtogetherwith suggestions for improving the process of drug supplymanagementinthetablesonthenextfewpages.

Such reforms in documentation and recording procedures andprocessesareofimportanceinthecontextofthisstudy,asimprovingefficiency and quality of pharmaceuticals can enhance patientoutcomesandcontributetocostcurtailment.

45

Estimation

FinancialManagement

Supply/Procurement

NationalLeve

Estimatesareprepayearsfinancialalloc

Estimatesfortheprpricesfromtheprev

Actualconsumptionconsumption

Institutionsgiveinsprepareaccuratees

Errorsininstitutiona

Supplementaryestisubmittedontime.

FinancialallocationprovincesandcentronlyinFebruary/Ma

Financialpositionisaccountantsinregio

Pricingdoneonlyon

Pricingformuladoe

Pricingoflocallyprolocalmarketbasis

Longleadtimerequofdrugs(11months

Poorresponsebysudrugs

Lackofguidelinesfospecialdrugs/replacdrugs/emergencyd

Itemsnotsupplieda

Toomanybatchesin

Poorinformationflo

el(MOHandMSD

aredconsideringprevcation.

resentyearareprepaviousyear

ndiffersfromforecast

ufficientinformationstimates

alestimates

matesofinstitutions

foryear2006isinforralgovernmentinstituarch

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45

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47

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47

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49

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51

3.4 COSTINGOFPRIVATEHOSPITALSERVICES

3.4.1 HOSPITALCOSTACCOUNTING

A. IMPORTANCEOFCOSTINGHOSPITALSERVICES

Both public and private sector health care institutions, needaccountingsystemsthatenablehospitalmanagerstoproduceananalysis of cost by service (product). Hospital services costingcouldbeassimpleascalculatingperpatientcostbydividing thetotalcostforpatientcarebytotalnumberofpatientstreated.Thiscrude method however will not provide any comprehensiveinformation on treatment costs, due to the differences andcomplexityofeachtreatmentprocess.Inafeelevyingsystem,thismethodcouldnotbejustifiedatall.

Someessentialfeaturesofacostingsystemare:

the processes should be simple yet comprehensive andshould be consistently adopted over long periods of time,withanychangesincostingmethodsclearlypublicized; theservicesshouldbeclearlydefinedsothatcostestimatescouldbepreparedforeachandeveryservicevariation(evenifitisnotalwaysdoneinpractice); the costing system shouldnot complicate thepatient careprocessesorcompromisepatientcareinanyway; theadministrationcostofthecostingsystemshouldnotbea burden to patients or service providers: for the formerwould impact on the hospitals competitiveness while thelatterwouldadverselyaffectitsprofit;and the accounting methods of costing must be based onverifiableandquantifiable informationsothatathirdpartyshouldbeabletoverifyandunderstandthecosts.

Thefollowingsectionsdiscusshowcostingprocessescouldbeandare adopted in private sector healthcare settings,withDurdansHospitalusedasacasestudy.

B. DIFFERENCESINTREATMENTPROTOCOLANDPATIENTRESPONSES

Developingacostingmodelforahospitalisacomplextask.Asanextremelywide range of services are provided, it is difficult todeviseauniformcostingmodelappropriatetoallservicesandallhospitals. Differences in methods and techniques adopted byclinicians treating similar conditions and individual responses ofpatients further complicate the situation.Therefore,evenwithinthesamehospital,thepossibilityexistsfortheemergenceoftwodifferent costs for the same treatment process. In the private


sector this situation is further complicated by the range oftreatmentoptionsavailable.

3.4.2 COSTINGINAPRIVATESECTORHOSPITAL

A. COSTINGMETHODOLOGY

Establishing a costing methodology and the management ofcosting procedures in private sector hospitals is extremelycomplex.Tostrikeabalanceinpricingwhilefacingthedilemmaofcompetitive market challenges and the provision of qualityCareisadifficulttaskfacedbyprivatehospitalmanagers.

Costingofserviceshasadirectimpactonpricingofservices.Pricecomparison, prior to obtaining hospital services is a commonpractice by patients. Therefore, costing has to be done verycarefully by qualified and experienced financial professionals, inorder to maintain competitive pricing. Inputs of medicaladministratorstocostingcouldbehelpfultofinancialmanagersincomputingmoreaccuratecoststobeusedasthebasisforpricing.

Mostofthetime,Accountantsproposepricinginsuchawayastomaintain a positive contribution. However there are instanceswhentheyproposepricingtheserviceatlessthantheactualcost,leaving a negative contribution, in order to gain an advantagethroughmarketcompetition.Thosestrategicmovesmotivatedbymarketcompetition,providesomebenefitstopatients,toobtainhealth services at competitive prices, and sometimes lead toreductionofpricesultimately.Occasionallyhoweverthismayalsoleadtocompromisingofthequalityofservice,whichisunethical.Thesebadpracticeswillbecarefullyobservedby theeducatedpatients and sometimes theywill reject those services,wherebythe organizations ultimate gain is a loss. Therefore, carefulmanagers of health care services in the private sector arecompelledtomaintainarealisticcostingpolicywhileensuringthequalityof services. Simplified costingmethodology is consideredasakeyfeatureingoodfinancialmanagementandcontrol.

3.4.3 COSTINGMETHODOLOGYATDURDANSHOSPITAL

A. INFORMATIONFORCOSTING

Timely and accurate information is of utmost importance inoperating a proper costing system. Manual operations almostalwaysmakecostingprocessescomplexandinaccurate.Managinglarge healthcare institutions necessitates a StructuredManagement Information System (MIS). A well connected

Actualcost+Netcontribution=Actualprice


53

integrated MIS is essential to administer an appropriate andacceptablecostingsystem.

Certain costs are simple and directlymeasurable. Delivering oftertiaryhealthcare isverycomplexasservicesareprovidedfromvarious departments and units, and manual maintenance ofaccurate cost records is impossible. Therefore, a sophisticatedrecordsmaintenance system is absolutely necessary in order tosupportthecostingofhealthservices.

AtDurdansHospital, EnterpriseResource Planning (ERP) Systemwas implemented 5 years ago andmaintenance of cost recordshave beenmade quite simple for the end user.All the servicesprovided are entered into the system at the point of servicedelivery and the automated cost calculations are done by thesystem. This system is used by the hospital in all its financialoperations including costing. The system is currently beingextended tomanage clinical information aswell.Hencemanualaccountinghasbeenminimizedgradually.This system coversalldepartments of the hospital and final compilation andreconciliationhasbecomequitesimple.

B. CATEGORIZATIONOFCOSTS

There are different costingmethodologies adopted by differentprivate hospitals. At Durdans Hospital, Strategic Business Units(SBU) isusedasthebasicelementofcosting.Theentireservicesof the hospital have been categorized into several SBUs anddependingonthevolumesofoperationsandclinicalrequirementsasingleSBUisdividedintoSubSBUs.

SBU SubSBUs

1 Wards

MaternityPaediatricGeneralCardiac

2 OPDGeneralOPDChannelConsultation

3 CriticalCareUnits

CoronaryCareUnitsGeneralICUNeonatalICUDialysisUnitEmergencyTreatmentUnit

4 RadiologyDept.

XRayDeptCTScanDeptUltraSoundScanDept.MammographyUnit

5OperatingTheatre(General)

InhouseproceduresOPDProceduresDaycases

TABLE34:STRATEGICBUSINESSUNITSATDURDAN,SHOSPITAL


6DurdansHeartCentre(aseparatecompanyunderBOI)

Non invasive CardiacInvestigationCatheterizationLabCardiacOperatingTheatreCardiacSurgicalICU

7

NoninvasiveCardiacInvestigationCatheterizationLabCardiacOperatingTheatreCardiacSurgicalICU

MainLabSateliteLaboratories(eachoneisasubSBU)CollectionCentres

8 Others

EndoscopyIndoorPharmacyOurDoorPharmacyLaundryPantry

TheservicesprovidedbythevariousSBUsarelistedandcostsareestimated foreach subSBU separately.Pricingofeach service isdone according to the actual cost and market price. Certainservicesmayhavetobepricedatlessthantheactualcostinorderto keep the market edge, but the net gain of the SBU ismaintainedasapositivecontribution.

C. MARKUPONPHARMACEUTICALITEMS

Patientsaswellassocietyfrequentlyquestionthejustificationofamarkup on pharmaceuticals supplied by private hospitals. Inresponse, one has to analyse the costs involved inmaintainingstoresofpharmaceuticals.Thosecostsare

Stockholdingcost Spaceforstorageandretailmarketing Salariesofstaffofrelevantunits Electricity AirConditioning Maintenanceofspecialconditionsforcertaindrugssuchashumidityandappropriatetemperaturelevels Otherinfrastructure

Inordertoprovideacompletehealthcarepackageafullystockedpharmacy is essential. This is not a visible phenomenon directlyrelatedwith individual patient care but the provider is actuallybearing a huge cost in maintaining pharmacy services andtherefore,itisnecessarytoaddatleastaportionofthesecoststothe price of each pharmaceutical item provided to the patientthroughthehospital.

D. OUTSOURCINGOFSERVICES

Out sourcing is a widely debated and discussed issue in thiscountryandiswidelypracticedindevelopedcountries.Redefining


55

outsourcingofhealthservicestosuithospitalsystems isanotherchallenge facedbyhealthcaremanagers.Considering thecapitalinvestmentanddirectandindirectcosts,outsourcinghasbecomeapopularwayofreducingcertaincosts.

Indevelopingcountriespaymentonutilizationbasisisbecomingpopular particularly for high tech diagnostics and therapeuticequipment. Thiswould ease the burden ofmaintenance of themachineandmanagingmanpowertooperatethemfromtheuser(thehospital)andinsteadbecomejustapaymentonusagebasis.Assuranceofanuninterruptedserviceisthentheresponsibilityofthe supplier,and theultimatebeneficiary is the recipientof theservicethepatient.Notonlyareductionofcapitalcostbutalsothe operational cost could be achieved through a properlydesignedoutsourcingprogramme.

It should be noted that certain high tech diagnostics andtherapeutic equipment available in the state sector are hardlyusedafterroutineworkinghours.Leasingoutthoseservicesafterworking hours and onweekends to the private sector could bebeneficialtobothsectors,followingathoroughfeasibilitystudy.

E. REVISIONOFCOSTS

Generallyacostreview isdoneonceayearandadjustmentsaredoneaccordingtoinflationrates.Netgainsorlossesmadeduringthe previous year are also evaluated prior to the revisions.Sometimesduetounexpectedpriceincreasesduetotheadditionofnew taxes and the significantdepreciationof the rupee, costrevisionsaredoneatothertimes inordertominimize lossesbutthoseinstancesarerare.

3.4.4 CONCLUSIONSRELATINGTOCOSTESTIMATES

Costestimationisroutinelycarriedoutintheprivatesectorinordertomaintain the return on investments and to maintain profitability.Regular review of costs could result in costeffective service to thepatients as well as being beneficial to the hospital. Therefore,establishing a proper costing structure and methodology,maintenanceofpropercostrecordsandscientificevaluationsofcostsisessentialforpropercostestimation.

Itmaynotbeeasytocostaproductaccuratelyinhealthcareservicesasmostof thediseaseprocessesarehighly individualized.A carefulstudyofseveralsimilarcaseshoweverwouldgivebroadguidelinesforcost estimates. Therefore, the close involvement of medicaladministratorsaswellasaccountantsincostingprocessesisessential.

Chapter 3 LITERATURE REVIEW & CASE STUDIES3.1 LITERATURE REVIEW OF COST STUDIES3.1.1 COSTING METHODOLOGYA. RETROSPECTIVE ACCOUNTINGB. RETROSPECTIVE SURVEYSC. SCENARIO BUILDINGD. ECONOMETRIC ANALYSIS

3.1.2 SWOT ANALYSIS OF STUDIESA. WITH REGARD TO RETROSPECTIVE COST ACCOUNTINGB. SYNTHESIZING RETROSPECTIVE COST ACCOUNTING AND SCENARIO BUILDINGC. OTHER RELATED ISSUES

3.1.3 REVIEW OF SELECTED SRI LANKAN COST STUDIESA. HOSPITAL COSTINGB. DISEASE COSTING

3.2 MANAGEMENT NEEDS SURVEY3.2.1 SURVEY METHODOLOGY3.2.2 KEY FINDINGSA. MANAGEMENTB. INFORMATION MANAGEMENTC. MANAGEMENT COMMITTEE

3.3 STUDY OF PROCEDURES AND ISSUES RELATING TO PHARMACEUTICAL SUPPLY AT CENTRAL AND PROVINCIAL LEVELS3.3.1 OVERVIEW OF SUPPLY SYSTEM3.3.2 STUDY METHODOLOGY3.3.3 MEDICAL SUPPLIES DIVISION (MSD) IN THE MINISTRY OF HEALTH3.3.4 REGIONAL MEDICAL SUPPLIES DIVISIONS (R-MSD) KURUNEGALA3.3.5 DRUG SUPPLY MANAGEMENTA. ESTIMATIONB. FINANCING OF MEDICAL SUPPLIESC. PROCUREMENTD. STORAGEE. DISTRIBUTION OF DRUGSF. MONITORINGG. QUALITY ASSURANCE

3.3.6 CRITICAL ANALYSIS OF PHARMACEUTICAL ISSUES

3.4 COSTING OF PRIVATE HOSPITAL SERVICES3.4.1 HOSPITAL COST ACCOUNTINGA. IMPORTANCE OF COSTING HOSPITAL SERVICESB. DIFFERENCES IN TREATMENT PROTOCOL AND PATIENT RESPONSES

3.4.2 COSTING IN A PRIVATE SECTOR HOSPITALA. COSTING METHODOLOGY

3.4.3 COSTING METHODOLOGY AT DURDANS HOSPITALA. INFORMATION FOR COSTINGB. CATEGORIZATION OF COSTSC. MARKUP ON PHARMACEUTICAL ITEMSD. OUT SOURCING OF SERVICESE. REVISION OF COSTS

3.4.4 CONCLUSIONS RELATING TO COST ESTIMATES

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