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The development and evaluation of a uniform hospital cost accounting information system

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The development and evaluation of a uniform hospital cost accounting information system
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Fane, Gary R., 1940-
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English
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x, 229 leaves. : illus. ; 28 cm.

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Subjects / Keywords:
Capital costs ( jstor )
Cost accounting ( jstor )
Cost allocation ( jstor )
Cost analysis ( jstor )
Direct service costs ( jstor )
Health care costs ( jstor )
Hospital costs ( jstor )
Hospitals ( jstor )
Insurance expenses ( jstor )
Nursing ( jstor )
Accounting thesis Ph. D ( lcsh )
Cost accounting ( lcsh )
Dissertations, Academic -- Accounting -- UF ( lcsh )
Hospitals -- Accounting ( lcsh )
City of Jacksonville ( local )
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bibliography ( marcgt )
non-fiction ( marcgt )

Notes

Thesis:
Thesis -- University of Florida.
Bibliography:
Bibliography: leaves 222-228.
General Note:
Typescript.
General Note:
Vita.

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University of Florida
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University of Florida
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Copyright Gary R. Fane. Permission granted to the University of Florida to digitize, archive and distribute this item for non-profit research and educational purposes. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder.
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THE DEVELOPMENT AND EVALUATION
OF A UNIFORM HOSPITAL COST ACCOUNTING INFORMATION SYSTEM






By



GARY R. FANE


A DISSERTATION PRESENTED TO THE GRADUATE
COUNCIL OF THE UNIVERSITY-OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
\ DOCTOR OF PHILOSOPHY


UNIVERSITY OF FLORIDA
1974

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AC KNO WL EDGMENTS


A dissertation could never be accomplished without the encouragemerit, guidance, and assistance of many individuals. For guidance and assistance I am indebted to my dissertation committee, Dr. D. D. Ray, Chairman, Dr. Ralph H. Blodgett, Dr. John M. Champion, and Dr. W. W. Menke. An especial note of gratitude goes to Dr. D. D. Ray, Chairman,

-for the many extra hours of counseling he provided, and to Dr. John M. Champion whose expertise in the health care field was most beneficial to the completion of this work.

To Mrs. Etta Cashwell, Mrs. Janice Hawley, and Miss Becky Medlin, a note of appreciation is extended for the technical assistance provided concerning table design, and the many hours of typing and retyping.

Finally, for all the encouragement, patience, and quiet acceptance of the most difficult situations during the whole period of graduate study, I will never be able to find words to express my gratitude to Sandy, Greg, and Mitch.

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TABLE OF CONTENTS


ACKNOWLEDGMENTS ii


LIST OF TABLES vi LIST OF FIGURES .vii


ABSTRACT . viii


Chapter
I. INTRODUCTION .1


Purpose of Research Statement of General


Problem


Statement of Specific Problem 5
Justification for the-Study 8
Related Literature 9
Summary 14
Notes 16

II. THE COST ACCOUNTING SYSTEM 19


Introduction Definition of Terms Current Industry Cost Accounting Current Hospital Cost Accounting
Uniform Cost Accounting System Summdry
Notes


System Model Model


Illi. DEVELOPMENT OF THE UNIFORM COST ACCOUNTING SYSTEM. 33

Introducti on 38
Method Used to Develop the Uniform Cost
Accounting System 38
Evaluation and Results of the System
Development Method 44
Summary 58
oAeo t e 59

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TABLE OF CONTENTS--Continued


IV. COST ACCOUNTING SYSTEM EVALUATION 60

In production 60
Method Related to Procedural Aspects and
Discussion of Results 61
rMethocd Related to Output Evaluation and
Discussion of Results 81
Evaluation by Hospital Managers 81
Requirements of External Users 87
General Cost Information Requirements
Compared to System Output 103
Summary 105
Notes 106


V. CONCLUSIONS AND RECOMMENDATIONS FOR FUTURE RESEARCH

introduction
Conclusions
Recommended Future Research


108

108 108
114


Appendixes

A. PRELIMINARY LIST OF COST CENTERS . .

B. GENERAL FUNCTIONAL QUESTIONNAIRE ALL COST CENTER
AND SPECIFIC FUNCTIONAL QUESTIONNAIRES .

C. PARTIAL LIST OF FINAL COST CENTERS .

D. COMPARISON OF PARTICIPATING HOSPITALS' CHARTS OF
ACCOUNTS (SELECTED ACCOUNTS) .

E. RECOMMENDED CHART OF ACCOUNTS (SELECTED'ACCOUNTS).

F. SELECTED COST CENTERS BY CATEGORY .

G. EXAMPLES OF DATA COLLECTION FORMS .

H. STEP DOWN PROCEDURE .

I. COST SYSTEM OUTPUT (REPORTS) .

J. EVALUATION INTERVIEW GUIDE WITH RESPONSES .

K. SELECTED INFORMATION REGARDING PARTICIPATING HOSPI
AND COST ACCOUNTING SYSTEM EVALUATORS .


117


* . 122 . 142 . 145

* . 150

* . 177

* . 180

* 192

* . 195 . 216


IALS


2i 9

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TABLE OF CONTENTS--Continued

SELECTED BIBLIOGRAPHY . 222


BIOGRAPHICAL SKETCH 229

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LIST OF TABLES


bi e
1. Direct Expense Comparison. . . . 2. Adjusted Direct Expense Comparison. . . 3. Full Cost Comparison. . . . .

4. Hospital Cost Summary Report. . . .

5. Comparativie Hospital Cost Summary Report
Direct Expenses. . . . . .

6. Comparative Hospital Cost Summnary Report
Adjusted Direct Expenses. . . . .
7. Comparative Hospital Cost Summary Report
Full Cost. . . . . . .

8. Selected Information About Participating Hospitals.


. .77

. . 79


*.203 . 205 209 .213 .220


I a

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7 LIST OF FIGURES

Figure
I. Simplified manufacturing cost accounting system model .25

2. Expanded manufacturing cost accounting system model 26 3. Complete manufacturing cost accounting system model 27 4. Programatic cost accounting model 31

5. Cost accounting data uses 34

6. Proposed hospital cost accounting system model 35 1. Example of step-down cost allocation procedure 65 8. Example of a completed Hospital Cost Report 67 9. Example of a completed Comparative Hospital Cost Report .71

10. A partial copy of the Hospital Cost Summary Report 76 11. Example of a completed Hospital Cost Report 196 12. Example of a completed Comparative Hospital Cost Report . 199

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Abstract of Dissertation Presented to the Graduate Council
of the.University of Florida in Partial Fulfillment of the Requirements
for the-Degree of Doctor of Philosophy- e / THE DEVELOPMENT AND EVALUATION
OF A UNIFORM HOSPITAL COST
ACCOUNTING INFORMATION SYSTEM

By

Gary R. Fane

March, 1974

Chairman: D. D. Ray
Major Department: Accounting


Purpose

The purpose of this research project was to develop and to evaluate a uniform hospital cost accounting information system. The system developed will generate cost accounting and statistical data based on comparable information provided by the individual hospitals which can be used to aid community-or area-wide hospital planning.

Rising health care costs have been a najor problem in recent

years. A suggested approach to solving the problem has been to develop regional or area-wide health care planning groups. Several recent investigations have concluded, however, that the comparable cost accourtirng data required to make regional decisions are not available. The findings of the American Accounting Association's Committee on the Accounting Practices of Not-For-Profit Organizations indicated the lack of cost accounting throughout the not--for-profit sector generally. That committee suggested an attempt be made to apply cost accounting techniques as used in the profit-sector of the economy to the


viii

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not-for-profit sector. This research attempts to do that through the development of a cost accounting system for a major segment of the notfor-profit sector, the hospital industry, based upon the type of cost accounting systems employed in the profit-sector. Additionally, such a cost accounting system would provide comparable cost data to aid in health care decision making.


Procedure

in order to accomplish both objectives, the research was divided into 4 major sections. First, models of cost accounting systems presently used in the profit-oriented sector and the hospital industry were reviewed, compared, and contrasted. A new cost accounting system model was proposed for the hospital industry.

Second, the elements necessary to make the proposed cost accounting system operational were defined and developed.

Third, data were collected from a group of community hospitals and processed through the proposed cost accounting system.

Finally, the output of the system was evaluated to determine the

ability cf that output to aid decision making internally and ext'_rnaliy. This was accomplished by providing cost reports to a panel of evaluators consisting of hospital administrators and financial managers. Further, the requirements of those external groups who use cost data were examined, and the ability of the cost accounting system output to meet those requirements was evaluated.


Conclusions

The conclusions are grouped into 3 major categories. The first group of conclusions is concerned about the overall cost accounting

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system. The system as proposed was developed. Cost data were processed through the system in the manner indicated. All evaluators agreed that the output was as anticipated and provided costs by products and by program.

Second, comparable output could only be achieved with comparable

input, and that was dependent upon proper definition of the elements of the proposed system. All evaluators found that the activities for which costs were collected were properly defined, and that the activity

measures selected properly reflected the output of each activity. Further, where cost distributions were necessary, those distributions were found to be appropriate.

Finally, the ability of the cost output to meet external user requirements was reviewed. From published materials, a group of 4 requirements of cost data for external users was developed. Those requirements were: 1) specificity, 2) verifiability, 3) comparability; and 4) consistency. The proposed cost accounting system output was determined capable of meeting the 4 requirements, and as such capable of being useful for external decision making, including area-wide planning.






Chairman

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CHAPTER I


INTRODUCTION

Purpose of Research

The purpose of this research project was to develop and to evaluate a uniform hospital cost accounting information system. The system developed will generate cost accounting and statistical data based on comparable information provided by the individual hospitals which can be used to aid community- or area-wide hospital planning.


Statement of General Problem

Health care expenditures in the United States have been increasing dramatically over the past few years. In total dollar amounts the figures have grown from $12 billion in 1949-50 to $75 billion in 1970-71.1 During the same period, total health care expenditures, as a percentage of the gross national product, have risen from 4.6 percent to 7.4 percent.2 Even though some of this increase may have been brought about by welfare legislation which made it possible for people to pay for services which previously had been, to some extent, rendered

without charge, the rate and amount of growth is still substantial. This upward trend is expected to continue and it has been estimated tha-t by the early 190's health care expenditures will have reached $200 billion.3

Perhaps this steady increase in costs would not seem out oF line if the major portion of the increased outl3y had been to provide more

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2


or improved health care service. There is some doubt that such has been the case. According to one researcher, 47 percent of the increase in health care spending between 1949-50 and 1970-71 was consumed by rising prices.4 While the cost-of-living index was rising by 61 percent during this period, the index of medical care prices was rising twice as fast: 125 percent.5 Even more significant was the increase in hospital daily charges at that time: 398 percent.6

Another recent research study indicates that this rapid rise in

hospital charges may be attributed to price increases, the addition of newer and more advanced technical services, and an expansion of already existing services.7 This study indicates also that as much as 40 percent of the price increase may be due to "increased services per discharge."8 Even allowing for this factor, hospital daily charges have increased approximately 200 percent during the period 1950-70, a rate far in excess of the price increase of the general cost-of-living index and the index of medical care prices. Since almost one-half9 of all health care expenditures are paid directly to hospitals, the importance of controlling costs in the hospital becomes significant.

The rapid increase in hospital costs has generated considerable

interest at the legislative, community, and individual level regarding programs aimed at controlling costs. One manifestation of this concern is the area-wide regional planning groups that have been formed. It is the intent of these planning groups to oversee the entire "pool" of health resources within a given geographical area and attempt to plan for the orderly and economical growth of medical service within that area. To date, most efforts at regional planning have been through volunteer agencies. Somers, however, has suggested that the planning

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groups be made regulatory agencies with extensive administrative powers.10 Some states have already recognized the importance of regional planning groups through "certificate of need" legislation.1I This approach means that area planning groups must issue a "certificate" indicating a "need" for a proposed addition to medical facilities before a hospital may embark upon an expansion program. For a hospital to expand facilities or services without the certification would mean incurring the risk of losing all state and Federal moneys, i.e., Medicare and Medicaid payments. Recent amendments to the Social Security Act

have strengthened the planning groups' position in this matter.12

The area-wide planning concept is a basic philosophical change

concerning the way in which hospitals finance both their daily operations and their capital expansions. Historically, individual institutions determined their resource requirements and obtained them in the best manner possible, regardless of the effect on the total community's health resources. This individual approach had, at its base, hospital

goals that were not always compatible with efficient operations. A recent study indicates that the 4 major goals of a hospital's administration are to: 1) remain solvent; 2) maintain or increase the quality

of service; 3) promote harmony within the institution; and 4) promote growth of services and facilities.13 The research concluded, in part, that until recently, demand and ability to pay for hospital services

were severely limited. This results in a constant struggle to keep costs in line with income ceilings. Today, however, with a rising standard of

living and third-party-payers, hospitals can meet solvency goals and improve their Financial positions. This in turn has allowed the administrations to concentrate on the quality, harmony, and growth goals, and

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in each case to carry out actions that have enhanced the individual hospital's position, but have contributed to the rapid rise in costs

noted earlier.14

Many health economists, politicians, and consumer groups support some form of area-wide health planning as a solution to this problem. Various plans have been proposed. Each plan considers the total health resources of a community as a "pool" from which to meet total health needs. Even the plan causing the least change frcm existing practices would result in severe curtailment of the individual hospital's autonomy. It would mean that a single hospital management would: 1) no longer be singularly responsible for its future since all expansion plans would require review and approval; 2) new services could not be provided unless approved; 3) the ability to generate additional working capital might be impaired since no new profitable service could be implemented without demonstration of need for such service. This is an extreme

change from present practice.

At the other end of the spectrum, the individual hospital would

cease to exist as an entity. It would become part of a national health organization. The only input the hospital would have would be to submit

an operating and capital budget to a regional director. The budget would be considered along with all the other hospitals from the same designated area and funded according to the manner in which that individual hospital contributed to the overall plans for the area.

Regardless of whether either one of the 2 extreme plans or some compromise plan is instituted, there is a growing concern that control of rising costs and proper allocation of resources can be accomplished only through better area-wide resource management.

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5


Statement of Specific Problem

With a more comprehensive view of health care planning, cost

accounting and statistical information are necessary to help facilitate decision making on a community or regional basis. Virtually all studies completed to date, however, have concerned themselves with the cost information needs of individual hospitals.15

While the cost accounting systems developed are useful to internal management, several investigative committees have concluded that there is not enough comparability among available data to make valid judgments concerning the problems of effective utilization of resources com itted to a group of community/area hospitals. One of the earlier studies which concluded this was the New York Governor's Committee on Hospital Costs. That committee concluded:

.the financial and statistical reporting of
hospitals is insufficiently detailed, clear and uniform to permit the identification of
the components of cost analysis of the causes
of rising costs, and to serve as dependable
bases for evaluation and planning.2 .

in 1967, the Secretary of Health, Education, and Welfare,,

John W. Gardner, appointed an Advisory Committee on Hospital Effectivehess (Barr Committee) to examine the evidence and advise him of actions that might be taken to improve performance in 4 principal areas of health service involving hospitals. Recommendation 7 made by the Barr Committee reads:

(a) In every state there shall be a
state agency with specific responsibility for setting up a system for accumulating,
processing, and publishing detailed information on the operations of health care institutions; taking into consideration
the kinds of data that will be most useful
to third-party-payers and most useful to institutional managements in judging comparative performance [emphasis added] 7

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The Barr Committee continued by stating:

The recommendation for state and national systems for reporting operating data from
health care institutions is based on the
conviction that pressures for improved
management performance can be produced by
making comparative data on managements
visible throughout the community [emphasis
added]."

More recently, the United States Chamber of Commerce released

its study on health care problems and made several policy proposals.

Policy proposal VI-(l) states: "All hospitals, extended care facilities, and nursing home facilities [should] adopt uniform accounting

practices, financial reporting and cost-finding systems."19 This

recommendation was supported by the comment that:

Discussions with top flight hospital
administrators revealed that there is a real need for all community, nonprofit hospitals to follow uniform accounting practices and reporting techniques and
cost-finding procedures. Cost perpatient-day varies widely among hospitals
in the same community. Many nonprofit
hospitals report sizeable net income.
At present, business, the largest single
private purchaser of health care services,
does not know what it is getting for its
money, and the only way to find out is to
get a look at the figures.2"

The current criticisms of the nonavailability of necessary cost

data should not be unexpected if the environment in which the hospital

has been operating is briefly considered. Hospitals recently have been

abla to secure the resources needed, due to beneficial reimbursement

arangements,. Virtually all third-party-payers have allowed hospitals

to pass all cost increases through by perpetuating rate schedules that

al owed recovery of full costs regardless of what the full costs might

be. G,,seqjertly, hospital administrations generally did not have to

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review cost increases nor was there much incentive to attempt to contain those cost increases. Only after July 1, 1966, the effective date of the Medicare legislation, did it become necessary to try to define costs. Controlling costs was still not necessary until mid-1972, when Phase I! economic regulations became effective.

Second, hospitals have attempted to offer, as quickly as possible, the services which have been developed by the nation's vast health research industry. Given the legal and social structure of the medical care industry, the physicians generally have been able to exert major pressure in order to install the latest techniques and equipment. As a result, many expensive and underutilized facilities have been duplicated within a community in order to placate the medical staffs of the various hospitals.

Even if understanding the environmental factors just mentioned would somewhat temper the earlier criticisms, the fact remains that the environment is changing. Along with that change comes the need to understand cost patterns and attempts to control costs. Governmental regulatory agencies and consumer groups are requiring more information to allow them to review adequately and to compare hospital costs and rates on a com.munity-wide basis. The problem, however, stems from the fact that no information system presently available can provide the comparable data required.

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'JUstification for the Study

Based upon the preceding discussion, there is a need to provide

comparable cost information for area-wide planning purposes. Additionally, there is a more general problem.

The American Accounting Association's Committee on Accounting for Not-For-Profit Organizations was critical in its recent report of the efforts made by the accounting profession to provide meaningful guidance in the adaptability of accounting practices and techniques used in the proFit-oriented sector to the not-for-profit sector.21 One of the areas of accounting practice scrutinized by the committee was cost accounting. More specifically regarding cost accounting techniques

the committee stated: "Cost accounting has long been recognized in the profit-oriented environment as a useful tool in promoting efficiency. This committee emphasizes that it (cost accounting) can be used to plan future and control current operations of not-for-profit

organizations."'22 In the group's summary of recommendations it stated: "The potentials of cost accounting techniques have scarcely begun to be realized in the not-for-profit field."23 Later in a detailed list of recommendations the committee concluded that: "Cost accounting system(s) be designed to provide for the collecting and reporting of costs by management responsibilities, by budget programs, and by appropriately determined units of service outputs. The system should permit determination of total operational expenses for appropriate accounting periods. "24

Over the years the hospital industry has generally been considered

nonprofit. Of the 7,123 hospitals in the United States, 6,265 are nonprofit institutions.25 In fact, the earlier cited committee report

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recognized hospitals as a major segment of the not-for-profit sector and devoted several paragraphs to discussing the particular problems of hospitals. The report states: "The larger hospitals have developed costs for determining prices for services but have seldom developed those (costs) necessary for control by hospital management. The emphasis has been on 'easy' or 'acceptable' methods rather than on the best methods of cost calculations."26 This study will help resolve this particular problem relating to hospitals, and at the same time provide insight into the larger, more general problem of applying proven accounting techniques of the profit-oriented sector to the notfor-profit sector.

In summary, there are 2 major reasons for undertaking this study. First, to resolve the problem resulting from the lack of an area-wide cost accounting information system that can generate comparable data for area-wide decision making, and second, to demonstrate that accounting practices and techniques as developed for use in the profitoriented sector of the economy can be successfully adapted to the not-for-profit sector.


Related Literature

There is an expanding body of literature concerning hospital costs. For purposes of this study the majority of the pertinent research studies and publications have been completed by accountants and/or professional hospital organizations. Before reviewing the accounting literature, it is necessary to differentiate between "cost accounting" and "cost-findi g," the 2 principal methods used for collecting cost information. The latter refers to a procedure used to rearrange past financial accounting information into the desired

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configuration through Special studies called cost analysis or costfinding. The former method refers to a system which allows for the continuous collection of accounting data in the desired configuration as part of the financial accounting system. This method is called cost accounting. It is the purpose of this study to develop such a system. The understanding of the difference between the two is important in evaluating the literature.

What accounting writers have contributed to the subject under

study is limited. Several writers have attempted to treat the entire not-for-profit field in a single publication, and as such have been very limited in their discussions of the special problems related to the hospital. Tenner,27 Mikesell and Hay,28 and Kerrigan,29 follow this pattern. The subject of hospital accounting is treated rather superficially and the emphasis upon hospital cost accounting is negligible. The few discussions of costs are relegated only to limited mention of cost-finding and analysis.

Seawell,30 Taylor and Nelson31 and Hay32 have written exclusively upon the subject of hospital financial management and control. Seawell and Hay both deal primarily with cost-finding techniques, however, and only mention the development of a cost accounting system in a general manner. Taylor and Nelson dealt at length with the problems of developing a cost accounting system. Their work seems superior to the others in that a system is devised that integrates the cost accounting system with the general financial system so that "costs and operating results are determined in an efficient manner and are reported currently when they are of value and can be readily used for management control."33 All of these works, however, fall short of solving the

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problems which prompted this study because the system they recommend is designed for use by managers of individual institutions and do not deal with interinstitutional comparison of cost accounting data. The studies by Seawell and Hay have the added problem of relying on cost analysis as a basis for their cost information. To date there have been no standards developed defining acceptable cost analysis work. Vatter34 has made the only known attempt to develop-standards for cost analysis in the not-for-profit sector. The system developed by Taylor aid Nelson has many of the basic elements of an integrated cost accounting system but it is dated. The work was completed prior to the enactment of Medicare legislation. As a result, their system needs to be reviewed in light of present cost requirements.

.It can be seen that the earlier cited criticism of the American Accounting Association's Committee on Accounting Practices of Not-For Profit organizations is well justified. What accountants have contributed to the subject matter is not significant. In particular, those works related to the hospital accounting problems are dated and appear to need substantial review before they can be applied to current problems. In fact, the systems recommended in the majority of the accounting works are based upon the earlier work of professional organizations, and especially that of the American Hospital Association.

The major portion of the work accomplished to date has been by professional and regulatory organizations. Those organizations include the American Hospital Association, state hospital associations, nonprofit service corporations sponsored by state hospital associations, joint state hospital associations, state Blue Cross associations, and certain state regulatory agencies.

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The first efforts exclusively in the field of hospital accounting were made by the American Hospital Association in 1922 with the publication of its first chart of accounts. Since that time the Association has been the leader, on the national level, of developments in hospital accounting. Their work has culminated in 3 recent publications: Chart

of Accounts for Hospitals,35 Uniform Hospital Definitions,36 and Cost Finding and Rate Setting for Hospitals.37 These 3 works are used as the basis for most hospital accounting today. Problems have arisen, however, in attempting to define accounts uniformly. Also, different responsibility structures within various hospitals have caused differing reporting patterns even though the same basic chart of accounts has

been implemented by all.

This particular weakness became apparent when the American

Hospital Association initiated a new program entitled Hospital Administrative Services.38 That particular program attempted to collect accounting data classified as per the Association's chart of accounts. The information collected was then measured using certain "activity bases" and the resulting indications were used as a broad type of

standard allowing for interhospital evaluations. Each hospital's individual changes to the basic chart of accounts has caused the actual results to fall short of expectations.

As a mechanism for an individual hospital to use as the basis of

its accounting system, the American Hospital Association's publications have provided basic leadership. As a tool for interhospital comparisons, the results have been less than successful. In addition, the American Hospital Association has adhered to a cost analysis approach, not a cost accounting approach, i.e., the only publication in the area

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of costs has been the cost-finding manual. Hence, their work does notc extend into the cost accounting area, which is the major thrust of this research study.

There are an increasing number of state organizations attempting to cope with the hospital cost problem. Those states which have cost collection systems such as Connecticut,39 New York, and Pennsylvania have adhered to the American Hospital Association's basic chart of accounts. Certain modifications have been made for each of the programs, but the approach has been basically the same as the national organization's approach. Other state programs, of which Florida and California40 are examples, have dealt with the application of industrial engineering techniques to individual hospital problems. Primarily,,man-hours, not cost data, are generated for each subscribing institution within the state. Often such information, as in the case of the Florida Program, is not used for interhospital comparisons. Finally, other programs such as the MICHA programs used by the Mental Health Institute of Michigan and Rhode Island, deal only with indirect cost allocation problems.41 Very little of the information regarding these systems has been formally published. Where not referenced in the preceding discussion, information concerning any of the state programs can be obtained by writing to the various State Hospital Associations.

The literature of the practicing professionals has done nothing to advance the knowledge of cost accounting techniques within the hospital industry. While many recognize the necessity of such systems, none have indicated a method by which one could be implemented. There have been attempts at discussing cost accounting practices for individual departments within hospitals, but nothing concerning an

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institutional system or a system that can be applied to all hospitals

within a community.

Generally, it can be concluded that the related literature does virtually nothing to explain how a cost accounting system can be developed and implemented within a group of community hospitals.


Summary

This chapter had indicated that the problem of rapidly increasing costs and decreasing availability of resources confronts the hospital today. In an effort to more efficiently utilize the limited resources and justify increased resources, a new system of review, the regional management, and/or community level review, is gaining prominence. In order to accomplish this type of review, a new cost accounting system is necessary that can provide the required information. It was then stated that the purpose of this study is to develop and evaluate such a cost accounting system.

A review of the related literature indicated few hospitals have attempted to install cost accounting systems, primarily implementing cost-finding techniques as suggested by the American Hospital Association and/or various state level organizations. Nothing has been done toward establishing a comrunity-wide cost accounting system. In addition, accountants, who have the necessary skills to provide leadership in this endeavor, apparently have failed to do so.

The next chapter will compare and contrast the types of cost

accounting systems presently used by industrial concerns and by hospitals. A cost accounting system will be proposed for hospitals along the same lines as the industrial model. The balance of' the research will be divided into 2 major sections: system development and system eval uationi.

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Chapter III will outline the system development procedure. The procedure outlined was completed for the participating hospitals by Health Systems Management, Inc. The researcher provided guidance in developing the procedure and assisted in performing a substantial portion of the various procedural steps. For that effort the researcher was reimbursed by Health Systems Management, Inc. Personnel of Health Systems Management, Inc. assisted in the activity analysis step, and the activity definition phase of the data analysis step of the system development procedure. The cost accounting system developed is the property of the participating hospitals.

Chapter IV will discuss the system evaluation phase of the project. That portion of the research project was completed entirely

by the researcher.

Finally, Chapter V will indicate conclusions reached and recommended areas for future research.

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Notes


1. Alfred M. Skolnik and Sophie R. Dales, "Social Welfare Expenditures, 1929-71," Social Security Bulletin, December, 1971,
p. 11.

2. Ibid., p. 11.

3. Edmund K. Faltermayer, "Better Care at Less Cost Without
Miracles," Our Ailing Medical System, (New York: Harper &
Row, 1969), p. 16.

4. Dorothy P. Rice and Barbara S. Cooper, "National Health Expenditures, 1969-71," Social Security Bulletin, January, 97'', ". 9.

5. U. S. Department of Commerce, Statistical Abstract of the United
States. Washington, D. C.: U. S. Government Printing Office,
1972.

6. Ibid., p. 63.

7. Richard A. Elnicki, "Effect of Phase II Price Controls on Hospital
Services," Health Services Research, Summer, 1972, pp. 106-117.

8. Ibid., p. 113.

9. Dorothy P. Rice and Barbara S. Cooper, "National Health Expenditures, 1929-71," Social Security Bulletin, January, 1972, p. 7.

10. Anne R. Somers, Health Care in Transition: Directions for the
Future, (Chicago: Hospital Research and Education Trust,
1971), pp. 121-122.

11. John F. O'Leary, J. D., "Certificate of Need Legislation: The
Case For and Against," Viewpoint, 1971, pp. 1-8. This particular article gives a good overview of the certificate of need
legislation questions and a concise summary of what states have
enacted certificate of need legislation and those states with
legislative action pending.

12. Commerce Clearing House, Medicare and Medicaid Guide, H.R. 1,
Social Security Amendment of 1971, Number 42, June 1, 1971,
pp. 78-80 and pp. 302-305.

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17


i3. Rockwell I. Schulz and Jerry Rose, "Can.Hospitals be Expected to
Control Costs?" Inquiry, Volume X, Number 2, June, 1973, p. 3.

14. Ibid., p. 4.

15. For recent hospital accounting information system studies and
models which deal primarily with internal management decisionmaking, see: C. T. Andrews, Financial and Statistical Reports
for Administrative Decision-Making in Hospitals, Unpublished
Doctoral Dissertation, Indiana University, 1968.
M. W. Veuleman, An Inquiry Into the Adequacy of Cost Information Systems of Selected Arkansas Hospitals, Unpublished
Doctoral Dissertation, University of Arkansas, 1971. CarnegieMellon Institute and Washington University of St. Louis are
both working independently on information systems for a model
hospital. Searle, Inc., has a model information system, called
Medidata.

16. Report of the Governor's Committee on Hospital Costs, Marion
Folsom, Chairman (Albany, New York, Office of Public Health
Education, New York State Health Department, 1965), p. 9.

17. Secretary's Advisory Committee on Hospital Effectiveness Report,
John A. Barr, Chairman, (Washington: Government Printing
Office, 1968), p. 22.

18. Ibid., p. 23.

19. Improving Our Nation's Health Care System: Proposals for the
Seventies, (Washington: Chamber of Commerce of the United
States, 1971), p. 17.

20. Ibid., p. 18.

21. Committee on Accounting Practice of Not-For-Profit Organizations,
"Report of the Committee on Accounting Practice of Not-ForProfit Organizations," The Accounting Review; Supplement to
Volume XLVI, 1971, pp. 80-163.

22. Ibid., p. 125.

23. Ibid., p. 92.

24. Ibid., p. 134.

25. Hospitals Guide Issue, Part II, August 1, 1971, p. 487.

26. Committee on Accounting Practice of Not-For-Profit Organizatiens,
"Report of the Committee on Accounting Practice of Not-ForProfit Organizations," The Accounting Review; Supplement to
Volume XLVI, 1971, p. 130.

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27. Irving Tenner, Municipal and Governmental Accounting, 3d Edition,
(Englewood Cliffs, New Jersey: Prentice-Hall, Inc.), 1955.
See especially Chapters 19 and 21.

28. R. M. Mikesell and Leon E. Hay, Governmental Accounting, 4th
Edition, (Homewood, Illinois: Richard D. Irwin, Inc.), 1969.
See especially Chapters 20 and 21.

29. Harry D. Kerrigan, Fund Accounting, (New York: McGraw-Hill),
1969. See especially Chapter 20.

30. L. Vann Seawell, Hospital Accounting and Financial Management,
(Berwyn, Illinois: Physicians' Record Company), 1964.

31. Philip Taylor and Benjamin 0. Nelson, Management Accounting for
Hospitals, (Philadelphia: W. B. Saunders Company), 1964.

32. Leon E. Hay, Budgeting and Cost Analysis for Hospital Management,
2d Edition, (Bloomington, Indiana: Pressler Publications),
1963.

33. Taylor and Nelson, op. cit., p. 30.

34. William J. Vatter, "Excerpts from Standards for Cost Analysis,"
Federal Accountant, September, 1970, pp. 64-87.

35. American Hospital Association, Chart of Accounts for Hospitals,
Chicago, 1966.

36. American Hospital Association, Uniform Hospital Definitions,
Chicago, 1960.

37. American Hospital Association, Cost Finding and Rate Setting for
Hospitals, 1968.

38. American Hospital Association, Hospital Administrative Service
(HAS), Guide for Uniform Reporting, Chicago, July, 1972.

39. Connecticut Hospital Association, Connecticut Hospital Association
Accounting Manual, (New Haven, Connecticut: Connecticut
Hospital Association), 1970.

40. California Hospital Association Commission for Administrative
Services in Hospitals (CASH), Management Leadership in an
Age of Chanqe, Sacramento, California.

41. For details concerning MICHA, see Andrew McCosh, "Computerized
Cost Finding Systems," Hospital Financial Manaement, November,
1969, pp. 18-21, or send inquiry to MICHA, Incorporated,
Ann Arbor, Michigan.

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CHAPTER II


THE COST ACCOUNTING SYSTEM


Introduction

According to the comments of one of the American Accounting

Association's Committees, "cost accounting, coupled with performance standards, has made much of modern management possible."1 Initially used to accomplish only the function of product costing for inventory valuation and income determination, cost accounting today encompasses the more general aspects of management control and has been titled managerial accounting. Product costing is only one of many uses of cost accounting information today. Benninger2 indicates the level of sophistication of current cost accounting when he enumerated the uses to which cost data are put. They include: 1) planning and budgeting; 2) cost control'. 3)) employee motivation; 4) financial statements preparation ,5) management motivation; 6) product pricing; 7) special decisions; and 8) uniform industry pricing.3 Additionally, the cost accounting systems have been fully integrated into the financial accounting systems.

While industry has been developing and refining such accounting

systems, the nonprofit sector has lagged far behind. The health Care industry has a need for cost data as the previous chapter indicated. It has probably done more than most segments of the nonprofit sector

to provide some such cost information through -the efforts of the

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American Hospital Association. Those efforts have been cost-finding, however, not cost accounting. As a result, cost data are collected and analyzed, usually only annually, after the year has been completed. There has been no effort to integrate existing cost systems with financial accounting systems. The Committee on Accounting Practices of the Not-For-Profit Organizations recommended:

1. Each NFP organization incorporates into its
information system appropriate cost accounting
records, techniques, and accounts so that
information useful to management and external
users will be produced and reported on a timely
basis.

2. The cost-accounting systems be designed to
provide for the collecting and reporting
of costs by management responsibilities, by budget programs and by appropriately
defined units of service outputs.

3. The cost-accounting system be integrated
into the over-all accounting system and
employed on a continuing basis.

It has been noted that a major problem in developing cost accounting systems for nonprofit institutions has been the inability to identify output. One research group has indicated that "the problem is one of identifying meaningful concepts of cost association and allocation so that assignments of administrative costs become something more than an exercise in arbitrary calculations."5 Horngren calls this

the identification of a "cost object" and states: "He (the manager) needs the cost of something. It may be a product, a group of products,

a plant, a territory, a machine-hour, a labor-hour, an operating division, a customer, an order, or a project."6 These are easier to

define for prcduct-oriented concerns. It is somewhat more difficult for service-oriented agencies but it can be accomplished. Since nonprofit organizations deal with both products and services, the

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principles as established in -the profit-oriented sector of the economy should be applicable to the not-for-profit units as well.

The foregoing discussion indicated the organization of this

chapter. First, the general cost accounting system as presently used by industry will be reviewed. Second, the current cost-finding system employed in the hospital industry will be discussed. Finally, a cost accounting system model will be developed for the hospital industry that is similar in nature to the one presently employed by industrial firms. Before turning to the cost accounting system discussion, terms frequently employed throughout this study will be defined.


Definition of Terms

The following terms will have the indicated meaning when used throughout this study.

Cost Center

A cost center is defined as the smallest segment of activity or area or responsibility for which costs are accumulated.7 Since the cost center is the basis of the system developed, some concepts which are useful in understanding the -full implication of the cost center approach, are listed below.

First, physical size of area has nothing to do with the establishment of cost centers, i.e., one supervisor might be responsible for a large area of space and numerous employees while another supervisor is only responsible for a small space and a few employees. An example might be the comparison of the Housekeeping Department cost center responsible for cleaning all floors, and the Laundry and L.inen Department cost center responsible for mending torn linen. The former would

have a large number of personnel working in a large area while the

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latter would require only a small room and 2 or 3 employees. Both, however, would be considered cost centers.

Second, a cost center is not identical with a department. In some cases it may be, but in others the department may be so large and complex that it would be divided into several cost centers, Nursing Services Department would be an example. It is divided into smaller organizational groups such as Nursing Services-Medical, Nursing Services-Surgical, Nursing Services-Pediatrics, and Nursing Servic.".Operating Suite.

Third, cost centers should not overlap. There should be no function jointly managed by 2 different supervisors.

Fourth, different cost centers may or may not include similar

operations. If an organization is so large that one function is accomplished by 2 identical groups, each group under a different supervisor, then there are 2 cost centers.

Finally, cost centers are not strictly distinguished according to the supervising individual, but according to the supervisory occupation. An emergency room is a single cost center, yet it may be supervised by a different individual on each shift.8

ActivitL Base

This term indicates the unit ofIt measure for the level of activity that takes place within a cost center. The activity base relates to and approximates resource utilization within a cost center based upon the output of that particular cost center. Examples are laboratory tests for clinical laboratory cost centers, hours of housekeeping service provided for housekeeping cost centers, and patient days for nursing cost centers.

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F


Patient Service Cost Centers

This term defines those cost centers that provide services directly to the patient. There are 2 types of direct patient service cost centers.

Patient location cost center. Those cost centers where the patient. is physically located for the receipt of services. This includes nursing areas, outpatient clinics, emergency rooms, and operating rooms.

Primary service cost centers. Those cost centers that provide professional support services to the patient location cost centers. They include such cost centers as clinical laboratory, radiology, inhalation therapy, and physical therapy. These cost centers represent those activities that distinguish a hospital from a nursing home or other such types of "maintenance" institutions. Support Service Cost Center

Those cost centers that provide supportive services to the patient services cost centers. There are 2 types of support service cost centers.

Professional support service cost center. Those cost centers

that provide support to the professionals delivering health care at the patient location cost centers. These include such cost centers as medical records, admitting, and nursing supervision.

Hotel support service cost center. Those cost centers that provide institutional set-vices. These include such cost centers as housekeeping, dietary, maintenance, and administration. 9 Distribution Method

Costs of the support service cost centers within the hospital

must be distributed to the direct patient services cost centers if an

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approximate full unit cost of the patient service is to he determined. In order to accomplish the reapportionment of costs from the support service to the patient location cost centers, some factor common to both the amount of service used by the patient location cost center, and to fluctuations in support service cost center costs, should be selected as a basis for the distribution.10 Each direct patient service cost center should absorb its share of the support service cost center costs, based upon the amount of services it used. In the case of housekeeping, the direct patient service cost center would be charged based upon the number of hours of housekeeping services required to clean the direct patient service cost center.

With these basic terms defined, it will now be possible to turn to a discussion of the cost accounting system to be developed during the course of the research.


Current Industry Cost Accounting System Model

In its simplest form, manufacturing firms today generally employ some version of the model represented by the schematic in Figure 1.

Stage I is an acquisition process. Raw materials needed to make the product are purchased. At Stage II those raw materials are converted into a product as a result of operations performed by laborers working directly with the raw materials. Assisting the direct 'laborers are various employees performing indirect activities. These indirect activities are commonly referred to as overhead.

The simplified model infers that there is only one type of material converted into a single product by direct laborers performing only one' operation, aided by one indirect service. In reality, the process is much more compl icated. Various products may be manufactured by using

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Stage I Stage II Stage III


Fig. l.--Simplified manufacturing cost accounting system model.

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many different materials and performing numerous operations upon the materials. An expanded schematic might appear as follows in Figure 2.


Stage I Raw Materials Purchase
of Goods

Direct
FLabor ceS_ 1. Machinists
Stage II Work-in-Process 2. Assembly Purchase
3. Painters of Goods &
Services
Over

IteIdhead Stage III I Finished Goods


Fig. 2.--Expanded manufacturing cost accounting system model.

In the expanded model, the multiple lines from raw materials to work-in-process indicate many types of materials being moved into production. At Stage II, the purchases of labor services are indicated for the various types of labor services required to convert the materials into products. Finally, the multiple lines from work-in-process to finished goods represent a diverse number of final products manufactured. In the expanded model, all indirect services used to support the conversion process are lumped together.

The identification of the various indirect services and the addition of thAn to the expanded cost accounting system model transform the expanded model into the complete model. It might appear as Figure 3.

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Stage I Stage II Stage III


Fig. 3.--Complete manufacturing cost accounting system model.

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The evolution of managerial accounting from cost accounting can be traced through the 3 models. The simplified version allowed for only the costing of product at a gross level. The expanded model produced information that could be used to plan, control and evaluate, in detail, the direct or prime costs involved in the manufacture of various products. A better product costing method also was achieved. Finally, with the addition of detailed information concerning the indirect services, full product costing was achieved. More importantly, the model now provided data that could measurably aid management planning, control, and evaluation. Since each of the labor operations and indirect services is normally supervised by a different individual, a responsibility accounting system evolved. By being able to collect costs in a detailed fashion, planning and control functions are placed upon a responsible individual who is later evaluated based upon adherence to the plan. At the same time, by aggregating data, product costing is achieved.

Being able to define the responsibility centers within an organization, those individuals who supervise them, and the costs of operating each has made modern cost accounting an executive control device.


Current Hospital Cost Accounting Model

Presently various types of cost data are required by external

parties. Usually that information is required annually. Consequently, hospitals generally have tended to wait until year-end, then rearrange the 'Financial accounting data by means of cost analysis to accommodate the cost requesting agencies. The result of this annual cost-finding exercise is the assignment of all costs to one of several programs.

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While there may be many ways to classify the various programs, Berman and WeeksII have developed a programatic format that seems to be all inclusive and which will be used as the basis for this discussion. Accordingly, the activities of a hospital are divided into 4 major programs which are listed below.

Basic production. This program component includes all direct and indirect costs of producing a service. This includes labor, materials, depreciation, and the appropriate portion of support service cost center costs. The cost of providing a service may be calculated departmentally or on a per diem basis such as daily room charges. The sum of all such service production costs represent "Basic Production Costs."

Nonproduction. This program component includes all direct and indirect costs associated with providing activities not related to service production. This includes labor, materials, depreciation, and the appropriate portion of support service cost center costs which are required to support such activities as community health programs, education programs, and research programs.

Capital needs. This program component includes interest paid for monies required to provide either working or plant capital. Also included are those expenses which are necessary to complete the fi-nancing transactions such as legal fees and other debt service charges.

Revenue reduction. This program component includes all bad debts written off, discounts allowed, and all direct and indirect costs of free services provided.

For this research, the Basic Production program is divided into
2 programS. One is called Routine Service and consists of those direct

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and indirect costs associated with providing room, board, and nursing services. The second component is the Professional Support Service which is required to provide patient care.

When the various program components are summed, the following is the result.

Routine Service
+Professional Support Service
Basic Production Cost
+Nonproduction Cost
Accounting Cost
+Capital Cost
Financial Cost
+Revenue Reduction
Full Cost

The programs have been defined as outlined above for a reason. Under most cost reimbursement schemes, all of the Basic Production costs are reimbursable. Only a limited amount of the Nonproduction and Capital costs are al rlable, however. Research costs can only be recovered to the extent that they relate directly to patient care. Many educational programs such as resident and intern instruction are

reviewed closely before any reimbursements are allowed. Interest expense can only be recovered to the extent that it exceeds interest earned on monies invested. Finally, the items appearing in the

Revenue Reduction component are entirely nonallowable.

A schematic of the programatic model just outlined might appear as Figure 4 below.

Moving from left to right, the program costs become less allowable r subject to closer scrutiny under the various reimbursement schemes, until the final module, Revenue Reductions, is entirely nonallowable. In practice, then, it is the object to include as many costs as possible in the Basic Production component.


F

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Routine Service D direct & ndirect Costs of Providing Room, Board, and Nursing Service


Basic Production


Direct & Indirect Cost of Providing Professional Support Services
Routine Service


Accounting Costs


Nonproducti on
Cost
. Education Research


Basic
Production
Costs


Financial Cost


CapitaI:
Working & Plant
Nonproduction Cost


Basic Production
Costs


Full Cost Revenue Reductions


Capi tal


Nonproduction
Cost


Basic Production
Costs


I. -________________________________


Fig. 4.-- Programatic cost accounting model.


Current hospital cost accounting model.


I - L


I--

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At this point, one exception should be noted. Usually those items representing Revenue Reductions are not considered expenses or expired costs of the current period. This model, however, implies that the costs of operation must be recovered. If some are not so recovered due to a bad account or a courtesy discount, it is incumbent upon the management to raise the necessary resources in some other fashion. Consequently, the model includes a component which recognizes the necessity to recoup the resources which are consumed but for which no reimbursement is received, and calls the model a Full Cost model.

While this method of cost analysis allows for an evaluation of program costs which can be used for rate setting and reimbursement purposes, it fails to achieve the significance of the cost accounting system model which was outlined in the previous section. First, it is an historic evaluation of the operations. Often it is too late to take corrective action once the year has ended. Second, it does not allow for product costing on a current basis. To know what Basic Production component costs are after a year's operation is of little use in helping determine what rates should have been charged during that period of time. Also, unless the historical program costs are manipulated to reflect expected events, there is little evidence to indicate that they can be useful planning tools for future rate setting policies. Third, since the structure is one of a programatic nature, the responsibilitv lines often are blurred and what information is presented is lacking in its ability to provide for the control and evaluation aspects found in the industry model. Finally, this approach is only significant when it is assumed that ultimately total allowable costs will be recouped, as in the case of the year-end Medicare adjustment.

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This approach, however, is being challenged by those who propose prospective rating, a plan whereby hospitals would be reimbursed by

third-party-payers based upon budgeted or anticipated expenses.

As previously indicated, the major difficulty of establishing the profit-sector model in the not-for-profit sector has been the problem of output or product identification. Berki12 explains the various attempts that have been made to resolve this problem in the hospital industry. Of the 6 different approaches outlined, one relates to the identification an! weighting of service outputs. Service outputs are defined in 2 ways. An all inclusive output index is used such as a patient-day, weighted by whether it is an adult, pediatric, or nursery type of day. At the other extreme is the identification of the service or output of each hospital department. In this scheme the weighting is implicit since for the medical departments the units of suggested service is either in terms of the numbers of operations, treatments, or procedures, or the time dimension of service. It is the latter concept that was used in this research to develop the cost accounting system.

Uniform Cost Accounting System

Any uniform cost accounting system needs to allow for the cost data to be displayed several different ways. The current hospital cost accounting model indicates that program costs are needed. To reap the more general benefits of planning and control, the data must be capable of being displayed along organizational lines in order to

allow for responsibility accounting. Finally, the same data must also

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be able to provide information for product costing purposes. Figure 5 is a diagram of the relationships of the basic cost data to the ultimate purposes to which it is put.

BASIC DETAILED COST DATA


SERVICE CENTERS RESPONSIBILITY CENTERS

REPORTS REPORTS
Cost Reimbursement Planning
Rate Justification Control
Pricing Evaluation


Fig. 5.--Cost accounting data uses.


A slightly modified version of the profit-sector cost accounting system model is outlined below in Figure 6. That particular model was

used as the basis for the cost accounting system designed during the course of this research.

-Figure 6 differs froiri Figure 3 in 2 respects. First, the assignment of total overhead is accomplished differently in each model. The hospital model applies overhead on a more detailed basis than the industry model. The latter generally uses 1 rate to apply overhead t products. The former, by virtue of having a separate cost center

-for each overhead item, charges overhead to the various products based upon each supportive service's unit rate times the amount of that

service consumed.

Second, there are no clearly defined stages of production in the hospital model as there is in the industry model. Each hospital cost center primarily provides services, either supportive in nature and to

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1, r"


Stage I Stage Ii Stage III


Fig. 6.--Proposed hospital cost accounting system model.


Indirect Labor
z 'dand Material i
Professional Hotel
Support Service Support Service
Cost Centers Cost Centers

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both patient location and other support service cost centers, or directly to patients in patient location cost centers. If a comparison were to be made, Stage I might be equivalent to the purchase of indirect labor and materials by the Support Service Cost Centers. Stage II might be compared to the production of service by the Patient Service Cost Centers. This service production, however, is made with the aid of the Outputs of the various Support Service Cost Centers and the addition of more direct labor and materials. Stage III might be the same as the provision of the services to the patient or physician. The direct parallel between the two is not easily seen, however.

Summary

In this chapter, the types of cost accounting systems found in the industrial, profit-oriented sector were compared to the cost accounting system currently used by the hospital industry. The weaknesses of the current hospital cost accounting system were indicated. Finally a cost accounting system for hospitals similar to the current profit sector cost accounting system was outlined. It will be the purpose of the remainder of this research to develop and evaluate such a system. as it applies to the hospital industry. Chapter III will discuss the system development phase of the research. Chapter IV will discuss the system evaluation phase of the research. Both will begin with statements about the methods used to develop the system and evaluate the system, respectively. The latter portion of each chapter will discuss the

'Its of applying -the particular method.

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Notes


1. Committee on Accounting Practices of Not-For-Profit Organizations, The Accounting Review, Supplement to Volume XLVI, 1971, p. 133.

2. L. J. Benninger, "Utilization of Multi-Standards in the Expansion of an Organization's Information System," Cost and Management,
January-February, 1971, pp. 23-28.

3. Ibid., p. 25.

4. Committee on Accounting Practices of Not-For-Profit Organizations,
The Accounting Review, p. 134.

5. Committee on Concepts of Accounting Applicable to the Public Sector, 1970-71, "Report of the Committee on Conepts of Accounting Applicable to the Public Sector 1970-71," The
Accounting Review, Supplement to Volume XLVII, 1972, p. 99.

6. Charles T. Horngren, Cost Accounting: A Managerial Emphasis, 3d
Edition (Englewood Cliffs, New Jersey: Prentice-Hall, inc.,
1972), p. 22.

7. Ibid., p. 691.

8. Stanley B. Henrici, Standard Costs for Manufacturing, 3d Edition
(New York: McGraw-Hill, 1960), Chapters 1 and 2.

9. Rictiard Elnicki, "Hospital Productivity Measures," paper delivered
to Committee on Health Services Industry, Economic Stabilization Program, Phase II, Washington, D. C., May 15, 1972.

10. Horngren, Cost Accounting: A Managerial Emphasis, pp. 395-399.

11. Howard 0. Berman and Lewis E. Weeks, The Financial Management of
Hospitals, (Ann Arbor, Michigan: Bureau of Hospital Administration, School of Public Health, University of Michigan,
1971), pp. 148-167.

12. Sylvester E. Berki, Hospital Economics, (Lexington, Massachusetts:
Lexington Books, 972!T, pp. 31-48.

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CHAPTER III


DEVELOPMENT OF THE UNIFORM COST ACCOUNTING SYSTEM


Introdu cti on

The preceding chapter included a discussion of the types of cost accounting systems that are currently used by: 1) industries in the profit-oriented sector of the economy; and 2) by the hospital industry. A new cost accounting system, to be used by hospitals, was developed. The recommended cost accounting system was based upon the industry version. Figure 6, Chapter II, represents the proposed cost accounting

system model.

It will be the purpose of this chapter to indicate how the proposed cost accounting system was transformed from the conceptualized

model into an operating cost accounting system. The first part of this chapter will explain in detail each step of the method used to develop the cost accounting system. The latter part of the chapter will discuss the results of using the method selected.

Method Used to Develop the Uniform Cost Accounting System

A review of Figure 6, Chapter II, shows that at the base of the proposed cost accounting system is the requirement that it be possible to det-.errine costs for each patient service and support service cost center. The locus of cost planning, cost accumulation, and cost control is the cost center. In order to develoo a cost accountinti

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system that would accommodate the required data collection and manipulation at the cost center level, several steps were required. They were: 1) identify cost centers; 2) develop a questionnaire to be used in completing an activity analysis; 3) test the questionnaire; 4) perform an activity analysis; 5) use the activity analysis to develop a system framework, uniform cost distribution methods, and uniform activity bases; and 6) develop report formats. Each step will be discussed in detail below.


Identify Cost Centers

At the core of any accounting system is the framework which allows for the systematic accumulation of the data which are to be analyzed. That framework usually follows organizational lines. The same was true for this study, except it was necessary to divide the hospital organization into extremely small parts. Those small segments have been defined as cost centers.

The first step of the procedure, then, was to identify all the possible cost centers that might be found within a hospital. The recommended charts of accounts of the American Hospital Association and the Connecticut Hospital Association were initially reviewed for guidance in completing this task. Additionally, departmental handbooks published by the American Hospital Association's Hospital Administrative Services Program were reviewed.

identifying what cost centers might be found within a hospital

was just the beginning. It also had to be determined that a hospital had one of the identified cost centers. If so, then it had to be established that the same activities were being performed within the same


F

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cost centers of the various hospitals to insure that the cost data collected would be comparable. The accomplishment of this required a survey of the tasks performed in each cost center. This survey was called an activity analysis. The activity analysis was accomplished by conducting a structured interview with each cost center supervisor. A question aire was to be used as the guide for the interview.

An exhaustive search of the literature revealed that nothing had been published which described such an activity analysis, and that no questionnaire had been developed that could serve as a guide in developing the type of questionnaire needed for this research. The next step, then, was to develop such a questionnaire.

Develop Questionnaire

Since no data gathering instrument was available, one was developed. The Graduate Program in Health and Hospital Administration at the University of Florida was engaged in a research project for which such a questionnaire would also be useful. As a result, John M.

Champion, Chairman of the Graduate Program in Health and Hospital Administration, the faculty, and selected graduate students provided direction and assistance in developing a set of questions for each identified cost center. The questions were divided into 2 groups.

The first group contained questions aimed at determining general information about each cost center. The questions were used to determine such information as staffing patterns, work hours, reporting practices, and reporting frequencies. This group of questions was placed on one questionnaire and titled "General Functional Questionnaire." Every cost center supervisor was required to respond to the general questions.


V

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The second group of questions was aimed at determining what

specific activities were being carried out within individual cost centers. A separate set of questions was developed for each cost

center. This second part of the questionnaire was titled "Specific Functional Questionnaire."

Source materials for this phase of the research included

NcGibbony's Principles of Hospital Administration.1 United States Department- of Labor's Job Descriptions and Organizational Analysis for Hospitals ~nd Related Health Services,2 Goldstein and Horowitz's Restructuring Paramedical Occupations: A Case Study,3 Brown's Hospitals Visualized,4 and various American Hospital Association publications regarding selected departmental activity.5 Test Questionnaire

The purpose of developing the questionnaire was to use it as a

guide for interviews with the supervisors of each cost center. The interviewing would take place in several hospitals. In order to complete the activity analysis within the time frame of this project, a team of 4 interviewers was selected. Prior to sending the 4 interviewers into community hospitals to collect the information, some training of those individuals was desirable. Additionally, since the questionnaire used as the interview guide was new, some testing of it was necessary. Consequently, there were 2 reasons for conducting the test. First, it was necessary for the interviewers to become better acquainted with hospital organizations, personnel, and procedures. The test period enabled the interviewers to attain some degree of proficiency in those skills required to question hospital supervisors

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prior to the actual intervewing that would be required as part of the research. Second, even though an extensive effort had gone into the development of the questionnaire, there was the possibility that a cost center might have been omitted or improperly identified. The test would indicate such problems.

The test was conducted at the Shands Teaching Hospital and

Clinics, J. Hillis Miller Health Center, University of Florida. Shands was selected because its teaching capabilities require a most complex and up-to-date array of services. All cost centers identified in the initial step of this procedure were found at Shands Teaching Hospital and Clinics. The supervisors of those cost centers, by nature of the complex teaching situation, had to remain abreast of current trends in their particular field, and as such were able to indicate potential problems in the construction of the questionnaire. Perform Activity Analysis

After testing the questionnaire and making minor adjustments, the next step was to perform the activity analysis. The Jacksonville Hospital Council, Jacksonville, Florida, which consists of the Administrators of the 9 Jacksonville hospitals, initially volunteered their institutions for the research. The 9 hospitals represented a range of sizes from 66 beds to over 445 beds, and a variety of ownership patterns: 2 were city-county owned, 4 were privately owned, and 3

vere affiliated with religious organizations. Of the latter 3, 2 were Protestant and 1 was Catholic. All 9 were nonprofit institutions.

After extensive meetings with the administrators of the various

hospitals and their respective boards of directors, 4 hospitals decided

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not to participate. Those withdrawing were the 66-bed city-county hospital and 3 of the privately-owned hospitals. Of the private institutions withdrawing, one was a small 160-bed unit, one a mediumsized 325-bed unit, and one a 72-bed specialty (pediatric) hospital. Appendix K lists those five hospitals participating along with selected volume indicators concerning each.

Even though the hospitals remaining numbered 5, they accounted for 72 percent of all beds and 74 percent of all admissions for the city of Jacksonville. The size of this volume coupled with the variety of sizes and ownership patterns represented were felt to be significant enough to make the results meaningful. A system that could meet the requirement of providing comparable data for decision-making purposes among the members of this heterogeneous group should be able to accommodate any mix of hospitals.

The administration of the questionnaires by means of structured

interviews was completed over a 3-month time period. During that time, the supervisor of each defined cost center was interviewed by one of the four members of the interview team. Data Analysis

The information gathered via the activity analysis was studied to aid in the definition of each cost center's activities. The definitions for the cost centers which resulted from the data analysis became the basis for the system framework (chart of accounts), uniform activity bases, and uniform distribution methods. The activity bases were determined after reviewing both the activity analysis and current measurement practices as recommended by the American Hospital Association in

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Uniform Hos ital Definitions 6and the Connecticut Hospital Association Accounting Manual.7 Thle chart of accounts, distribution methods, and activity bases will be discussed later in this chapter. Design Cost Reporting Format

The final step of the system development portion of the research project was to design the forms to be used for collecting the cost and statistical data, and reporting the results. Examples of the forms

will be presented and discuss ed when the results of the method application are reviewed later in this chapter.

All 6 of the steps that were completed to move from the conceptual cost accounting system model to the operating cost accounting system have been outlined in some detail above. The next section discusses the results of completing each step of the procedure.

Evaluation and Results of the System Development Method

Since each of the 6 steps was discussed separately in the preceding section, each will be evaluated separately in the following Comments.


_Identify Cost Centers
Appendix A is a preliminary list of the cost centers identified. Initially, approximately 250 cost centers were identified, but they were consolidated into the 107 shown on the preliminary list. The consolidations were based upon the level and nature of the activity within the cost centers. It was estimated that the cost to collect information for all 250 cost centers would exceed the value of gaining the information, particularly since some of the 250 cost centers were

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small in terms of the expected number of employees and dollar expenditures. The criteria for consolidating were to have a separate cost center if: 1) the expected number of employees in a cost center numbered more than 2; and 2) the expected dollar expenditures were more than $100. There were some exceptions to these guidelines, but the criteria were adhered to generally.

The analysis of which cost centers should or might be found

within a hospital was developed a priori. It would be the purpose of a later step, the activity analysis, to substantiate or refute such an assumption. Having completed the preliminary list of cost centers, the questionnaire development step was next.


Develop Questionnaire

Appendix B contains a copy of the General Functional Questionnaire that was used in the interviews with each cost center supervisor. The same appendix also contains copies of several of the Specific Functional Questionnaires. Those Specific Functional Questionnaries presented are meant to be representative of the type of questions developed and used for gathering information from specific cost centers. The complete set of questionnaires is located in the offices of the Graduate Program in Health and Hospital Administration, University of Florida.


Test Questionnaire

The results of the testing of the questionnaires at Shands

Teaching Hospital and Clinics were encouraging. Only one new cost center was added, Cardiac Catherization Laboratory. All other remained essentially unchanged. The 4 interviewers gained experience &nd were prepared to complete the activity analysis.

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Activity Analysis

The 4 interviewers required approximately 5 working days each to complete the activity analysis in each hospital. By contacting each cost center supervisor a great amount of detail was generated. A repeat of this research might be more efficient, and yield substantially the same results, if the number of interviews were reduced. The activity analysis of all cost centers was important for this initial project, but for future research, it would probably be more

-important to know the activity for those cost centers which .provide unique services, i.e., Central Sterile, Patient Accounting, and Administration are fairly standard. Consequently, using the cost centers defined during this research as a base, the Administrator, AssistantAdministrator, and Department Managers might be able to indicate for which cost centers an activity analysis might not be necessary. As such, a substantial amount ,f timecould be saved during this phase of the research.

Data Analysis

It was during this step of the system development procedure that the elements required for the operation of the system were developed. The elements were I) a system framework (chart of accounts);

2) activity bases; and 3) distribution methods. The development of each will be discussed below, but, first, the effect of the activity analysis upon the number of and definition of cost centers will be ,viewed.

As previously indicated, Appendix A represented the preliminary
Sof ]07 cost centers that were expected to be found within the

..






hospitals. The test at Shands Teaching Hospital and Clinics resulted in the addition of one more cost center. By the time the interviews were completed in all 5 hospitals the changes were of a greater magnitude. Appendix C is a partial list of the cost centers identified

during the activity analysis which needed to be defined and accounted

for separately in the cost accounting system. A comparison of the

total final list with the preliminary list in Appendix A indicates substantial change. The total number of cost centers ultimately identified increased to 252. This was primarily the result of expanding the number

of cost centers recognized within the Nursing Service., the Clinical

Laboratory Department, and the Housekeeping Department. These increases

were offset somewhat by eliminating a few of the original cost centers

and consolidating others. The net effect, however, was the increase cited. The final result of studying the information obtained during the activity analysis was the identification of 252 activities considered significant enough to require separate definition. Each activity so defined became a cost center. After determining and defining the cost centers, the balance of the analysis phase was used to develop the

3 elements of the cost system. The development of each will now be

traced.

System framework. Every accounting system must have a framework

which allows the data collected to be logically organized. That framework is a chart of accounts. Every hospital participating in this

research hid a chart of accounts, and all of the hospital controllers

indi atcd that their charts were in conformance with the American

hospital Association's Recommended Chart of Accounts. As a result,

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it was first planned to use that particular chart as the basis for the collection framework required by this research. A thorough review of each of the hospitals' charts, however, indicated such an action would be impossible. First, the chart recommended by the American Hospital Association allows individual hospitals considerable latitude in the interpretation and adoption of the chart. This resulted in the hospitals assigning the same numbers to different activities, and, conversely, different numbers to the same activity. Appendix D is a partial copy of the analysis of the hospitals' charts which indicates the extent of the problem. If the only difficulty had bee n the latter one, an easy solution could have been reached. The former difficulty, however, rendered the use of that particular chart hazardous at best, since accounting data were being collected for heterogeneous activities in the same account.

Second, some activities of major proportion were not indicated in

the charts of some of the hospitals. For example, a major expense is involved as a result of admitting people to the hospital for care. Hoever, 2 of the hospitals were not collecting costs for that particular activity.

Finally, the charts which were being used did not provide for the collection of detailed enough information to allow for costing at the level of activity indicated. This shortcoming was two-fold. Fir-st. there was not enough flexibility to permit an account for each cost center, Second, the amount of data which could be collected concerning each cost center (activity) was severely limited.

For the 3 reasons indicated above, it was determined that a new chart ofl accounts should be developed. The new chart followed the

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general numbering scheme of the one recommended by the American Hospital Association, but it allowed for the necessary detail. Further, by explicitly defining each activity, the collection of information for heterogeneous activities in the sane account was significantly reduced. Each cost center identified through the activity analysis was assigned a primary account number. There are 252 indicated primary account, with the flexibility to increase that number to 400 if other activities should be identified for which it is deemed necessary to collect cost information.

The chart of accounts constructed here uses a 6-digit number to identify each account and type of expenditure. The first 3 digits are the primary account numbers. They are organized by department and activity within the department. Each identified cost center has been assigned a primary account number from one of the following groups.

600-699 Nursing Services
700-799 Other Professional Services
800-899 General Services
900-949 Fiscal Services
950-999 Administrative

The fourth digit identifies primary subclassifications. They are:

0 Salaries and Wages
I Employee Benefits
2 Fees
3--5 Supplies
6-7 Purchased Services
8-9 Other

The fifth and sixth digits identify secondary subclassifications. They are:

.001-.099 Job Categories
.100-.199 Type of Employee Benefit
.200-.299 Type of Fee
.300-.599 Type of Supply
.600-.799 Type of Service Purchased
.800-.999 Other Subclassifications

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Appendix E contains illustrative material from the recommended

chart of accounts. The format of each account description is standardized and included 6 major items of information. Those items are:

1. Account number and title. Each cost center has been assigned
an account number and title.

2. Function. This indicates the activity and/or activities to
be accounted for in the particular account.

3. Expenses. This indicates those expenses that should be
accumulated in the particular account.

4. Activity Base. This indicates the statistics used to measure
the level of activity within the particular account.

5. Distribution. This indicates the method to be used to
distribute costs from the support service cost center accounts
to the patient service cost center accounts.

6. Sub-Account. This indicates what account number should be
used if a more detailed collection of cost information is
desired.

It can now be demonstrated how the chart of accounts is used to classify cost accounting data. A head nurse who works in a Nursing Service-Medical cost center would have her salary recorded to account number 610.010. The 610 represents the Medical Nursing Service cost center (primary account) and the .010 indicates a head nurse's salary. Group life insurance paid by the hospital for this particular head nurse would be charged to account number 610.110. Any medical supplies used on this head nurse's floor would be charged to account number 610.300. Consequently, the total direct cost of the Nursing ServiceMedical cost center would be accumulated in account number 610. The various subclassifications indicate the type of expense.

Activity base. A common denominator is required in order to

measures the level of activity within an account and to provide comparability of the activity levels for 2 or more hospitals. That common

..






denominator is the activity base. As defined earlier, it is important that it reflect the output of a cost center and fluctuate as that output fluctuates. The latter fact becomes important for cost distribution purposes.

While the activity analysis was helpful for developing the

activity bases, most activity bases selected tend to conform to current American Hospital Association and Medicare guidelines. The base which was selected in some instances, however, represents a statistic that is not currently being collected. For example, the recommended activity base for the laboratory cost centers relative unit values of the laboratory tests performed is a case in point. At present, few hospitals collect this information. Instead, the number of unweighted laboratory tests are summarized without considering the complexity of the various tests or whether those tests were completed manually or mechanically.

The bases selected, when applied consistently and uniformly to the corresponding cost centers, represent a measure of the level of activity which allows for comparative analysis. It also provides a means of internal control for managers. An activity base has been indicated for each cost center. The activity bases for those cost centers (accounts) displayed as part of the standardized chart of accounts format can be seen in Appendix E.

Distribution method. If the full-cost of services rendered is to be calculated it is necessary to distribute the costs incurred by the support service cost centers to the benefiting patient service cost centers. In order to accomplish this it is necessary, first, to identify those cost centers that are support service cost centers, and

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then to distribute costs from them to the benefiting patient service cost centers. Appendix F is a partial listing of cost centers by category which identifies all cost centers by type of service provided.

With few exceptions the method of distribution is a ratio developed from the activity base. For example, the Social Service cost center, Account 752, has as an activity base the "number of consultations" held with patients ar:d patients' families. The distribution method is to spread Social Service costs to patient service cost centers basic upon the -ratio of consultations held with patients and patients' families of each patient service cost center, to total consultations. The costs of generating that output are distributed to the patient service cost centers that supposedly benefit from such activities. The distribution method for each support service cost center follows this pattern with the exception of Medical Records-Research (Account 788), and all Data Processing cost centers (Accounts 936-938). Those 4 accounts require a special analysis in order to accomplish the distribution.

Defining a distribution method for each account does not resolve which of the recognized accounting procedures will be used to allocate costs. There are a variety of ways in which this can be accomplished. The American Hospital Association8 recognizes 4 major procedures. First, there is the direct procedure which closes costs of the support service cost centers directly and exclusively to the patient service cost centers. This entirely overlooks the fact that one support service cost center can provide service to another support service cost center. Second, the step-down procedure provides for the

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recognition of the relationships resulting when one support service cost center provides service to another support service cost center. Those cost centers providing service to the greatest number of other centers are closed first. Once a cost center is closed, nothing more can be distributed to it. Consequently, a cost center being closed subsequent to one of the larger cost centers would not be permitted to allocate any costs to the larger cost center, even if it had provided services to that cost center. Third, the double-distribution procedure allows for one cost center to allocate its costs to any other benefiting cost center on the first distribution. On the second distribution the balances remaining in the support service cost centers are closed directly to the patient service cost centers. This method takes into account the interrelationships between cost centers. Further, it can be accomplished by means of an iterative process that allows numerous distributions, finally allocating directly to patient service cost centers when the balance in the support service cost centers reach some small, predetermined amount. The fourth, and last procedure requires the development of a set of simultaneous equations which represent the complex interactions among all cost centers. Once the equations are defined, the solution can be calculated, usually with the assistance of a computer.

Hrngren9 explores rather extensively the direct, step-down, and simultaneous equation method, and indicates that "little is known empirically about the effects on decisions of alternative cost-allocation bases (procedures)." Implied is the inability to determine what method might be the most accurate, most accurate being defined as the

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distribution of costs to the area benefiting most. Horngren further states: "The use of linear algebra (simultaneous equation method) may make a difference in decisions upon occasion,"'I inferring that the great effort required to develop the simultaneous equations might not be worth the additional expense.

It is not the purpose of this research to indicate the one best

procedure for cost distribution. In fact, that would require a separate project. What this brief discussion has done is indicate the various acceptable distribution procedures in order to place in its proper perspective the one chosen for this research the step-down procedure. First, it does, to some extent, rectify the intercost-center relationships problem. Second, while a double-distribution or algebraic method might afford a more precise answer, the additional time required to achieve a result using that method was deemed impractical for this research, particularly when the "more accurate" assertion was neither a fact, as the brief preceding discussion indicated, nor was it to be tested within the scope of this research.

The distribution method for those support service cost centers

displayed as part of the standardized chart of accounts format can be seen in Appendix E.


eDesin Data Collection and Report Formats

The last step of the procedure was to design the forms required to collect the cost and statistical information, and the reporting formats. Several different forms are necessary for the collection of the cost and statistical data. Examples of each have been placed in Appendix G. The purpose of each will be discussed below.

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The first form titled "Data Ccllection Form," is used to collect the basic cost and selected statistical information for each cost center. One set of forms must be completed for each cost center. The data on this form provides the basic input into the cost system. The Data Collection Form, along with the instruction page provided is self-explanatory. A significant amount of detailed cost information is collected concerning the elements which make up each cost center's total cost.

The next 3 forms in Appendix G are titled "Activity Measurement Statistics," "Activity Measurement and Cost Distribution Statistics All Cost Centers," and "Activity Measurement and Cost Distribution Statistics Patient Service Cost Centers." Data entered upon these forms become the activity bases used for measurement and distribution purposes.

There are 3 separate groups of statistics required at this point as indicated by the 3 different collection forms. This requirement exists because of the various types of cost centers identified: support service and patient service. Of the 2 types of support service cost centers, professional and hotel, the hotel support service cost centers provide service to other cost centers within the hospital. For example, housekeeping and maintenance perform services for all other hospital cost centers. Consequently, the statistics collected on the "Activity Measurement and Cost Distribution Statistics All Cost Centers" form are used as the activity base within the hotel support service areas. Additionally, they also provide the means for distributing the costs of providing such services to all areas within the hospital that benefit from such services.

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The professional support services, however, provide services to

the patient location areas only. To collect statistics which will be the activity base for this group of cost centers, the form titled "Activity Measurement and Cost Distribution Statistics Patient Location Cost Centers" has been developed. The information collected thereon will also serve as a basic input into the distribution method for professional support service cost centers.

Finally, since it is the ultimate purpose to determine the full cost of the patient service cost centers, both primary and patient location, the distribution of costs stops at that point. No costs will be distributed from patient service cost centers. As a result

-the statistics collected from each of these cost centers will be used only as an activity base. To collect the data required to accomplish

this, the form titled "Activity Measurement Statistics" has been developed.

Finally, the report formats were designed. Based upon the type of data that were collected and the manner in which it is processed through the system, 4 reports were developed. Of these, 2 represent detailed cost information which reflects the costs by element within each cost center. Additionally, the summrary reports reflect total cost center costs at 3 different points within the model: 1) at initial entry point; 2) after adjusting for depreciation, interest, start-up, and insurance costs; and 3) after all distributions, or at "rull-cost." Appendix I-contains completed copies of each report which indicate the reporting format. A detailed discussion of each is presented below.

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Detailed reports. The 2 detailed cost reports are titled

"Hospital Cost Report" and "Comparative Hospital Cost Report." The first of the 2 is designed to display detailed information concerning the elements of cost of each cost center. Displayed are: 1) the dollar cost of each element, 2) the percentage each element of expense is to total cost center expense, 3) the expense per patient day of each element of expense within the cost center, and 4) the expense per activity base for each element of expense within the cost center. A significant amount of detail is displayed for each cost center.

The "Comparative Hospital Cost Report" contains the same information as the "Hospital Cost Report" except it is displayed on a comparative basis. This allows for the comparison of cost elements within the cost center, by hospital.

Both of the detailed reports display the cost information as

collected at the initial point of entry into the system, and prior to any adjustments or allocations.

Summary reports. The 2 summary reports are titled "Hospital Cost Summary Report" and "Comparative Hospital Cost Summary Report." The first of those reflects total cost center costs for each cost center within a hospital. The same 4 items, dollars of expense, percentage of hospital total, cost per patient day, and cost per activity base, are displayed on this report as they were on the dt,tailed reports. Additionally, this information is shown at 3 different points within the model. First, the expenses as initially recorded are displayed. This section is called the "Direct Expenses" section, and presents the total cost center costs as displayed on the detailed reports. Second, the direct expenses of each cost center are adjusted for depreciation,

..






interest, start-up, and insurance. This produces the "Adjusted Direct Expenses," and this information is displayed in the same fashion as h "Direct Expenses." Finally, after the costs of all support service

cost centers have been distributed, the "Full-Cost" portion of the report is prepared.

The "Comparative Hospital Cost Summary Report" displays the information from the "Hospital Cos-t Summary Report" on a comparative basis for all hospitals.

The 4 reports called for as output of this cost accounting system enable detailed information for a single hospital or a group of hospitals to be evaluated, even for the smallest element of costs for any of the cost centers. At the other extreme, comparative summary cost accounting data are made available at 3 different points of processing

within the model.



This chaiiter has been concerned with identifying the steps of -the procedure which were required to develop the cost accounting system recommended in Chapter I!. Next, the results of applying that method were discussed. Finally, the elements of the system were described and

provided in the appendices, along with the necessary forms and reporting formats. In essence, the elements required to move from the conceptual cost accounting system model to an operatLing cost accounting systemP were developed. At this point, it is assumed that the cost accounting system developed will produce the desired comparable cost data. It will be the purpose of the next chapter to test that assumption anid doterinine Uf that conclusion is warranted.

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Notes


1. John R. McGibbony, M. D., Principles of Hospital Administration,
2d. edition, (New York: G. P. Putnam's Sons, 1969). Chapters
9-29 are detailed explanations of the responsibilities and
activities of a hospital's departments.

2. United States Department of Labor, Manpower Administration, Job
Descriptions and Oroanizational Analysis for Hospitals and
Related Health Services, (Washington, D. C.: Government
Printing Office, 1971).

3. Harold M. Goldstein and Morris A. Horowitz, Restructuring Paramedical Occupations: A Case Study, (Boston: Department of
Economics, Northeastern University, 1972).

4. Ray E. Brown and Richard L. Johnson, Hospitals Visualized, 2d
edition, (Chicago: American College of Hospital Administration, 1957).

5. Hospital Administrative Services, Devartmental Handbook-Housekeeping, Departmental Handbook-Nursing Services: Operating
and Recovery Rooms, Departmental Handbook-Dietary, Departmental Handbook-Laundry and Linen, Departmental HandbookNursing Services: Obstetrical Nursery, Deiivery and Labor
Rooms, Departmental Handbook-Plant Engineering, (Chicago:
American Hospital Association, 1966), and American Hospital
Association, Management Review Program-Food Services Department, and Manaqement Review Program-Nursery Service. (Chicago:
Ameri can Hospital Associati on).6. American Hospital Association, Uniform Hospital Definition,
(Chicago: American Hospital Association, 1960).

7. Connecticut Hospital Association, Connecticut Hospital Association Accounting Manual, (New Haven, Connecticut:
Connecticut Hospital Association, 1970).
8. Cost Finding and Rate Setting for Hospitals, American Hospital
Association, 1968, pp. 31-34.

9. Horngren, Cost Accounting- A Managerial Emphasis, pp. 417-428.

10. Ibid., p. 426.

11. ibid., p. 424.

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CHAPTER IV


COST ACCOUNTING SYSTEM EVALUATION


Introduction
The cost accounting system developed in the preceding chapter was assumed capable of producing cost accounting information for use by internal and external decision makers. It will be the purpose of this chapter to indicate how that assumption was tested. Each step of the method used to evaluate the cost accounting system will be detailed. At the same time, a discussion of the results of completing each of

those steps will be included.

The method used to evaluate the cost accounting system consisted of 3 major sections. First, actual cost data were collected from each participating hospital and processed in accordance with the instructions and guidelines developed in Chapter III. This represented a test of the procedural aspects of the system. Second, an evaluation of the cost output was conducted to determine if the information was capable of providing assistance to internal and external decision makers. This second section of the method, the output evaluation section, was completed by having the administrators and the financial and/or accounting managers of selected hospitals review and comment upon the cost accounting system's final product--the 4 cost reports described in Chapter III. The last phase of the evaluation was to

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determine the reporting requirements of external cost information users, and to evaluate the cost accounting system's output against

-those requirements.

The remainder of this chapter will be a detailed discussion of the major parts of the method which were outlined briefly above.

Method Related to Procedural Aspects and Discussion of Results

It was the aimi of this particular portion of the research to develop the group of reports called for as the output of the cost ascounting system. As such, the reports were developed from each hospital's actual cost information and are intended to be representative or, typical of the reports which can be prepared on a continuing basis to assist in both internal and external reporting situations.

There were 3 operations performed to arrive at the final output: 1) data collection, 2) data manipulation, and 3) report preparation. Each operation will be discussed in greater detail below. Data Collection

The 5 Jacksonville hospitals participating in the project were

asked to provide the cost data for each activity defined in the Chart of Accounts, which was being performed within that particular hospital. Additionally, the statistics necessary to measure output and distribute indirect costs were to be provided for each activity. The forms displayed in Appendix G were used for that purpose. The data were to cover a 1-month time period. The month was to be a "normal" mon-th, with "normal" defined as a month in which there were no major renovations causing areas of the hospital to be

..






closed, no extremely high or low census as compared with the average for the past 12-month period, and no other extenuating circumstances which might cause operations to be out of the ordinary such as labor disputes. Each administrator determined the "normal" month for his hospital given the preceding guidelines. Three selected January, 1973, and two selected March, 1973.

Having selected the time period, the accounting personnel within each hospital collected all necessary information by following the activity definitions as per the Chart of Accounts. The personnel collecting the data were to contact the researcher only if and when problems were encountered with the activity definitions. It was imperative that the integrity of the definitions be maintained so that cost information, when completed, would be for Identical activities. Other than that one exception, the hospital personnel were to accomplish the data collection using only the guidelines provided by the Chart of Accounts. This served two purposes: first, to determine how closely the definitions explained the activities within the various departments of the hospitals, and second, to establish how much effort was required to develop the data in the required detail.

The current accounting systems employed by the participating

hospitals represented varying degrees of sophistication. As a result,, it took only a short period of data collection to determine that only one of the hospitals was presently collecting information n approaching enough detail to satisfy the reporting requirements as per the proposed system. An investigation indicated that a major difficulty was that the existing reports were prepared at a summary level. A vivid example was found in the nursing service areas. All medical and

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surgical units were summed together and reported as Medical-Surgical. The proposed cost accounting system called for each medical and surgical nursing unit to be identified separately. In order to separate the various nursing units, both cost and statistical information had to be reported for each unit individually. An examination of the hospitals' cost records indicated that the detailed cost information was available, and it was used at the detailed level for this project. A more serious problem, and the main reason why the existing cost reports were used in summary form, was that the statistical data were either not collected, or not collected below the summary level. The latter difficulty required that the accounting personnel collecting the data for this research perform special analyses in order to obtain the necessary information.

The special analyses resolved all statistical data problems except two. First, for Central Sterile, only 2 hospitals maintained a count of requisitions. Second, with one exception, none of the hospitals could provide relative unit values where such were required. Only 2 hospitals were able to do so for the laboratory, and that measure was used for those 2 as a laboratory indicator. For all other relative unit values, unweighted units were substituted, i.e., number of x-ray exams instead of relative unit values of x-rays, and number of cardiac catherization procedures instead of relative unit values of catherization procedures.

Because of the time required to perform the special studies in

order to collect the statistical information, the data collection itself took longer than had been anticipated. It required an average of approximately 4 weeks in each hospital. This operation was begun

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April 1, 1973, and completed rMay 31, 1973. The next operation was to process the data.


Data Manipulation

The information collected was processed through the cost accounting system model represented by Figure 6, Chapter II. The amounts distributed from one cost center to another were calculated as per the instructions in the "Distribution" section of the Chart of Accounts, Appendix E. For the reasons indicated in Chapter III, the step-down procedure was used to distribute costs in accordance with the instructions in the Chart of Accounts. The sequence for closing accounts as outlined in Chapter III was followed. That called for 1) the distribution of depreciation, amortization of start-up costs, insurance expense, and interest expense to all cost centers; 2) the closing of hotel support service cost centers; and 3) the closing of the professional support service cost centers. Figure 7 is an example of how the step-down method works and is extracted from one of the calculations, It is used here for illustrative purpose only. Appendix H1 contains the entire step-down calculations for closing one hospital's

professional support service cost centers to the patient service cost centers.

The entire cost allocation process for this project was completed

manually. It was determined that it would take several months to devolop and to write a computer program to accomplish such an allocation. Consequently, that would have extended the time frame for completing this research. It would be advisable, however, to use a computer for such a routine, repetitive function as this one should

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HOSPITAL 2


TO CLOSE PROFESSIONAL SUPPORT SERVICE COST CENTERS
WORKSHEET "C"

Adj. Exp.
Cost Bal. from Total
Center Work. A. 601 602 690 758 765 775 920 921 Cost
601 7189 7189
602 9114 188 9302
675 36987 126 167 94 37374
690 5132 50 65 5247
758 11522 11522
765 3003 3103
775 17731 17731
920 17023 17023
921-678 15120 117 157 89 15483
702 11738 11738
706 53837 58837
714 3599 13599
716 14064 14064
718 5469 5469
721 49289 49289
728 7347 7347
731 35933 35933
735 6791 14 19 10 6834
737 18946 18946
739 2685 2685
741 7647 7647
757 22416 308 408 232 23364
660 53532 643 854 484 3103 58616


Fig. 7.--Exampie of step-dcwn cost allocation procedure.

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the cost system be implemented. The time required to complete this operation manually was an average of 10 days for each hospital. Report Preparation

At the completion of the cost distribution calculations, it was

necessary to develop a format for displaying the results of those calculations in a logical fashion. For that purpose, 4 were developed in Chapter 111: 1) Hospital Cost Report, 2) Comparative Hospital Cost Report, 3) Hospital Cost Summary, and 4) Comparative Hospital Cost Summary. This portion of the method discussion will present the completed formats. The text will include examples of completed, actual reports and some tables containing extracts of the other reports. Completed copies of all 4 reports are pr-_-sented in Appendix I. This serves 2 purposes. First, it demonstrates the reports that are generated by the cost accounting system. Second, it is a copy of the infori-Iation provided to those who evaluated the cost accounting system.

Figure 8 is a copy of one completed Hospital Cost Report. The information for this report came directly from the Data Collection Form. The Hospital Cost Report displays significant detail concerning the direct expenses of each cost center. Information concerning each element of the direct expenses of each cost center is displayed 4 different ways. Under the "Dollars" column,, the dollars expended on that element are shown. Under, the "Percent of Total" columnn, the percentage each element of direct expense is to the total cost center's expense is shown. Under the "Patient Day" column, the result of dividing each element of the direct expense by Patient days is shown. Finally, under the "Activity" column, the result of dividing each

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67


HOSPITAL COj REPORT


HOSPITAL: 2


PAGE 1 OF 3


ACCOUNT NUMBER: 610 ACTIVITY BASE: Hours of Care


DATE: One month


/ < . -Ai f T O I I J e i n t D i y l A c t i v i t yL 1 D O o i :


I


SAlp~AYT.T 7 FT- _N_-s i- S.p. .S u.er .1 8 2 4
Head NurslProfessional 1 4.40 1.27 t _8 _2"4-L-_hr H _-Lurse j
Staff Nurse i 26.7 7. .03 i 5465
Pract. Nurse!Semi-Pro. j 15.29 4.40 653 3 19 2
Aursi ssist./Student 19.72 0.6 4i
Unit Admin./Clerical
- j.I or 1s/TylD~sts i .812 2. 34 34 'o- Tchn Jc i a s/ qhnici, __. Pbhyiaij nsl Phys i ciins
.ntel ns &, P, residentsOenra l/ =nra 1i7
TOTAL SAL. WAGES, HRS. I'MK 3.05 1 .3

FR_,-113E BENEFITS
__SQc i a I Sec urity (1 .CA. .J. 1T22F_31_. .1.2_._18 fe _._. .54 .08 393
G.qtp lca th insurance
_- T__hLs,.,8~ii_! 22
__Reir. ] Cnti~l~ ] .63 .18 .X3 132
_J r a lo sCm,_LLoernsa'tion .34 .1 I .i 71
Tt t e o.p y Tx .66 .i9 .03 1
Je.,.e U ~oy. Tax ___ _-JIn___f_______ .72 .21 .03 151
Uni fors .
health Servicc .06 .02


D: 1. .j --' r2Consultino ._ ___
:, e-. Spec. Admin.
_M cL. ,Spec. Phys,.Serv.



TOTAL FEES0~Aj _____ ____ 1
SUPPLIES .
-Medical & Sur ica.1 . "1.34 38 .06

I n v n C O ua t ,A d i.u s --LInstruments -9
1ulicjz 01 1 6_______2
I .,, KL r "-. --- .,_,_-_6
in ', . 2r _.1 _ex- U. r



Fig. 8.--Exarnple of a completed Hospital Cost Report.

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68



HOSPITAL COST REPORT


HOSPITAL; 2


ACCOUNT NUMBER: 610 ACTIVITY BASE: Hours of Care


PAGE 2 OF 3 DATE: One month


_____ Accou ltl~e f of Total Patient Day Acti vity Doars
'Films and Chermicals _._ _.



Printed Forms
Fuel
Pub. (Books & PeriodicalsBeverages & Nourishments
_IjjLe irnf-_t_ ne e n a n._e
Disposable Eating Uten.
Kitchen
:Foopd .F-o. ao tii sh Poutrv Eo~La_-e __Lo ice _ __ __. '____________Food-All Other
Laboratory .
Housekeeping
House. Paper Products .
House. Sanitary Products 2_LauLndry '. .
Linens .
Printi nq ,
Miscellaneous .18 .05 .01 37"






I --TOTAL SUPPLIES 1.56 4.
E PURCHASED SERVICE CE._.
Purchased Maintenance
_PUrchas. Main Contract .Purchas. Main Other ,_.
Utilities
Utilities Electricity .
.Utilities Gas
Utilities Water & Sewer
_Garbao!e CoI I ction .___,
_elgp.iong & Telecrp" .47 .14 .02
Insurance & Bonding 1.22 .35
Due., ardjlerbr h p I

rravol -ducation I
Tl'ravel .Other
__id ent erital s
Egim~nt Leases .7__________j.2I .03 150


Fig. '.--Continued.

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69



HOSPITAL COST REPORT


HOSPITAL: 2


PAGE 3 OF 3


ACCOUNT NUMBER: 610


ACTIVITY BASE: Hours of Care


DATE: One month


~c nL TitLle I% of Total Patient Day Activity7 --T-rs
Postaoe _____1_on-Fos ni tal Lab. 1-Serv. From Other Hosp. __on 4 tor inLaundry. .
._r i n

olusekeepi n_
Dietarv Security .
Data Processig .
Interov. Ae.(Univer. Other . .





TOTALp PURHASED SERVE. 2,41 .I0 5
TEREXPEN4SES
1 .4rec .40 .0 6 tiT
___PQpr ___i cLL .L u __._-1 7 .05 Ol'35
_[,,recc BuiLijngo 2.75 .79 .1T 573
,kD.Jep __Buil dirg Sery. 3.41 .98 .14 fl11
Der. c_. Land Impvr,ment .36 .10 .01 75
Amrt.-of Start-Up Cost Interest
Interest Short Term Loan .08 17
Interest Mortages 3.94 .4 .16 823
Interest Bonds 1.62 .47 .07 338
Interest Other I
Loss on Dis. of Assets
Loss on Dis. Stocks & Bonds Credits to Expense Credits to Exp. Research Credits to Exp. Grants Cre. to Exp. Cen. St. Sup .
Credits to Exp. Lharmac;y .
Ore. to LxLp ReA & Ilin. Cre. to Exp.- Other
TOTAL OTHER EXPENSES 13.73 ._.___5_"2

T-GRAND TOTAL 100.09 28.80 4.14 2081

OTHER DATA: _'


I17k_____ -rFLvI~c qi _____I_______


Fig. 8--Continued.


- - 1-* . 1i I -

..






element of direct expense by that certain cost center's activity base as defined in the "Activity" section of the Chart of Accounts is shown. The cost accounting system calls for one such report to be prepared for each cost center within each hospital.

Figure 9 is a copy of one completed Comparative Hospital Cost Report. The comparative report displays the same information as the Hospital Cost Report, except it displays cost on a comparative basis so that each hospital's direct expenses may be evaluated in comparison with others in the community performing the same activity. That comparison may even be carried down to each element of direct expense, if desired.

Both of the detailed reports just discussed represent the collection of cost information before any cost distribution procedures. In order to establish cost in accordance with the cost accounting system model presented in Figure 6, Chapter II, it is necessary to begin to recognize certain indirect expenses and distribute those expenses to the benefiting cost centers. Initially, the direct expenses of all cost centers were adjusted to recognize the amount of depreciation, amortization of start-up costs, general insurancelexpensel and interest expense that should be borne by each. This new cost center expense was titled "Adjusted Direct Expense."' At this point in the processing, if the amounts reflected in those accounts for all cost centers designated Hotel Support Service Cost Centers and Professional Support Service Cost Centers were summed, the total would represent the costs of production through, Stage I of the cost accounting sys-tem model depicted in Figure 6, Chapter II.

..









CCMPAPATIVE COST REPORT
DATE: ACTWYITY BASE: PAGE 1 OF 4

Acct. Cost is % of T)tal Cost Per Patiert Day -ost Per Activiy Base
Title 1 2 3 4 5 1 2 3 4 5 5 1 2 3 4 5


001 Nursinc Supor.LSmuer. _5.6_ 1.17 ._----'ld Hea-durse/Profess I ona 1 4-4 ,0. 16.2 1.27 3.35 ,18 -7-2.
.011iCharqe Nurse
.012 Staff Nurse M6.17 _7,S4 1.0M.020 Pract. Nurse/Semi-Pro. 15.29 22.00 4,40 4.5A .63 .9s
.030 Nursing Assist./Student 19.72 5.68 ,8_.
.040 Unit Adxin./Clerical 2.67 .__ _-12
.041 Clerks/Typists 8.,12 2,34 .34 1 1
.050 Tectinicians.Technicians I
.060 Physicians/Physicians
.061 Imterns & Residents
.07 General/Genera I24,86 5.13 1,10
.OTAL SAL., WAGES, HRS. 73.70 63.40 71.41 71.25 21.23 14.47 14.74 _j 18,30 3,05 2.96 3.17 3.05
FRINGE BENEFITS j
-D1 nrial Spcirily- (FICA) 4.31 3.74 3,36 4.17 1,24 85 .69 1,07 .18 .17 .15 .18
-10 Cr J.miLL ef2_s r~A.r. 1, 8 .85 .54 ,22 .18 2
-_1roUpHealtj I nsur a n c_ _1.10 .86 .75 .,3 .22 ,15 .05 .04
.112 Group Disability Insur. 3,58 ". .5
.120 Retire. Plan Contribu. .63 3.78 .96 .18 .86 .20 .03 .18 .04
.130 workmen's Compensation .34 .23 .10 .05 .01 .01
.140 Sate Unemnlpy, fax ,66 .24 .19 .05 .03 .01
1 l F e d n e m p l o ~y T a x.7.2 -.0
-_5 Uniforms .72 .21 .03
i U -do s .37 .08 1 .02
17o .o6 -02
!.L. 8Q TOTAL FRINGE BENEFITS 8.60 10.81 6.26 9.46 2.48 2.46 1.30 2.43 .36 .50 .28 .41

FEES
k._ aoo -Lega! ____ ______210 Auditing e
.22P Col ection Agencies
Pnc.1. nn ,altirg
.24 Pd Spac.-Admin.



Fig. 9,--Example of a completed Comparative Hospital Cost Report.

..










ACTIVITY BASE:


COMPARATIVE COST REPORT


PAGE 2 OF 4


Ac it Cost s% U f Ttal Cost Pr Patie t Day ost PoriActiviiy Base
Noc. ij Title
l. 1 2 3 4 5 i 2 3 4 5 1 2 3 4 5

.2901L}___ ____ __________ TOTAL FEES ___ __ _ _____I SUPPLIES I "_X0 Mpdical & Surglcal 1.34 2.14 .14 .23 .38 .49 .03 .06 .0. .f .
.,1 Inven. Co, unt Adjust.
,3C2 Instruments
DO gruis .03 ,01
2_? Intrayenys SoAutions .01 ,,
3C.0 Wear. Aoparele Irx, Un .l
.3311 Uniforms, I. 2 0
.3401 General O grating .95 "20 -0
.350 OxsL _36__ __ FUlm._ and_ Chemicals__ _.
.364(

.3701 PrInted Forms .0 10.
1___M_33_ Fuel
.39 Pirb. fBookS & Period.) .
Er o -Iishr
____d _.____,"___ .a
.420 fDjihe. as 1 .i. lver f
-____4-91 Ditpossble Eat, Uten.
i_ __ __Kitchen
.41Fnod-Mp?,t, Fish',pul

[ F o U& d-Dry. 4.4 Feontnrre Pr-Kuiel
F_._ A11 Other-. i ,_. ._"_. .
SLbnratoryXW

pHnupe- Pnitary Prndet. -Ai- I ntundrYl
I cen ane s D5.


Fig. 9.--Cont-inued.


I

..









COMPARATIVE COST REPORT


ACTIVITY BASE:


PAGE 3 OF 4


Acct. Cost a ostPrP et Day Cost Per Activity Base
No 2i'l 34
o. T1t e 2 3 4 5 1
.520 /
53 1

.55G
TOTILUPP IES 1.5 2.1 1.51 .23 .44 .416 31 06 -07 .! .07 i.
PURCHASED SERDI E
.-O Prchas~ed tMainteninrp
"K_6L12i Purcha. Main.-Cntra _t



.6_)3 UtIlitesWater & S__e.620 Garbaae Collect-on
.6301Telephone & Telegra~h ,7 1 .14 ,2
.640 insurance & Bondinq 10 1,22 1 ?,47 .20 1.45 3. .-7f A .r -r4 .17_7. .5n n
.656 Dues and Memberships .651 Prof. Activity Study
660 Travel
_&L -Trave1 -Pducation
.662 T-a'Zl-Oth-r
671_ p. Enuipaitnt Rpntal4
-A71 ElujZ2 enr.se .72 21 .0
"_.6721 Phntocf y Eq_ _p__et__. . Microfilm
.69 Postage
.70 1onn-Hi-a_-ab,
1 From e -sp,
70 outside Monitcrina --.
.720 Laundr 7._]2 [tinting.
.722 Husekeepjng
.7?3~ipt~r. ___j_______ ___ _____.724 security
.72' Data Processing ,.
.730,Tntproov. A e.L(Univer .-l.
.7401_ r _10 -2


Fig. 9.--Continued.

..











COMPARATIVE COST REPORT


DATE: A, IV L T btj S4 PAGE 4 OF 4

Acct. Cost s I of Ttal Cost Pi r Patient Day Cost Per Activiy Basei
No. Title 1 2 3 4 _5 1 2 361 5 1 2 3 4--_ TTA pRC.;SA D SERV. 10.10 2.41 2.47 .69 1.45 3.76 .70 .56 .14 .37 .10 .12 .03 .06
OTHER EXPENSES
.800 Depreciation
801 De rec- aj.v.E uip 1.40, 4.91 1.24 2.53 .40 1.12 .26 .65 .06 .23 .05 .11
_02 p_ e =E.ed q .17 I .04 .05 .01 .Oi
.3 _R_ =-_Buildi 38.88 2.75 18.80 13.08 10.11 14.47 .79 2.01 2.70 2.60 .11 .41 .58 .43
.804 Deprec.-Buildin -j.Z, .1 98. 14
SDprec .=- nd im'proy.vpI n ;.4 -n5 1. 7 1 . 1 01
. __r on t f S4art-fln rn.t_ 0? _7 .A 1
.821. Interest-Short 1m Loa-n 108 .02
.822i ITnterest-o ge 51.02 3.94 7.13 .)0 18.98 1.14 1.3 .19 .16 .33 .04
.8231 interest-Bonds 1.62 I 4.80 4.97 .47 .99 1.28 .07 .21 .21
.824 Interest-Othnr
.830 Lo m -Djj- f Asse-s
.840 Loss Dis. Stockr -&_B _9_ .
.85C Credits to Expense
.851 Credits to Exp.-Resear. .

.3531Cre. to Exp.-Cen.St.Sup
.4 redis to Exp-ha rma cy
_"Crce. to E-p--Rep.&MaJn.
-8 Cr tg Exp.-Oth er
TOTAL THER FXELSES 82.90 13.73- 21.18 20.13 7.61 33, 5 3.95 4.84 4.16 4,53 .56 .98 .89 .75

GRA ID TOTAL O 0, Q 00.00 0 0.00 00.00 37.21 28.80 122.82, 20.64 25.69 4.14 4.68 4.43 4.28

OTHER DATA:


-Full Time Equi.Em1ovyFig. 9.--1iiinu ed Fig. 9.--Continued.

..






Moving from the adjusted direct expenses of all cost centers to the full cost of the patient service cost centers required the stepdown operations previously discussed. The report that reflects the distribution of costs from support to patient service cost centers so that full costs may be calculated is the Hospital Cost Summary. The basic input to this report was each cost center's total direct expense as reflected on the Hospital Cost Report. The summary report displays the same types of information as the detail report, i.e., dollars cost, cost as a percentage of total, cost per patient day, and cost per activity base. The information, however, is provided at 3 different stages of the cost accounting system: Direct Expenses, Adjusted Direct Expenses, and Full Costs.

Figure 10 is a partial copy of the Hospital Cost Summary Report.

It is meant to serve as an illustration of the manner in which the cost information is displayed. A complete copy of the Hospital Cost Summary Report for one hospital is displayed in Appendix I.

The final report prepared was the Comparative Hospital Cost Summary Report. This report summarizes the information found on each Hospital Cost Summary Report. A comparative display of the information allows the management of each hospital to evaluate its cost of providing specific services with other hospitals providing the same service. Further, the comparison can be made for the 3 stages of costs. The following tables reflect, in summary form, highlights of the comparative analyses. The complete Comiparative Hospital Cost Sunary Report is presented in Appendix I.

The information reflected in Table I is the same as that shown in Figure 9, the Comparative Hospital Cost Report.

..



















83,SITAL 2
HOSPITAL COST REPORT


DIRFCT EXPENSE A)TSTED DIRECT EXPENSE FELL COST
COS COST TE R ST C T 9 ENR LA EL DAY '. C15T0R ACH OF TA0 HER BZ A T'LSE P FATLN PETR OFTT15Y1S
K".B_____ TITLE ptCENTCT CENTER fTTTf TT80 CR0 CENTER OF TOTAL my8 BASF CENTER CENTER OF TTO PY 07.10


N.S. Admin. N.5. Spervision
5.5. Heical .S. Medical N.S. Medical N.S. Medical N.S. Surgical tN.S. Surgical N.0. Suroical N.S. Surgical
N.S. Srgical U.S. Surg. Ortho I.S. ICU N.S. 1CU Coronary I.S. Psych. .S. -ewtorn N.S. -OR
5.S. Rec. ROm N0S. DI. 4 Laor Central Sterile I.U. Therapy NS tZucation Lab Atmacal Lab Clinical Blood Ban. ECG
EEG
Radiology Diag. Radioisotope Lab. PharCy 'repack A Dis. Anestfhesiology
Respiratory Therapy Pulr nery functions e'ab. P.T. E.R. 1-sin9 Medical Staff Interns and Residents
Medical KeorJs food Prxidtion Dictary Cafeteria Orerat.on of Plant
Security tes.ekeeping Lasrdry Coll. S Dist. Laundry Processing


1,942 .58
7,511 .89
13.D 3 2.14
16,231 1.92
16,252 1.92
16.,65 1. g2
20,407 2.42
16,827 1.99
17.7 2 2.10
16,372 1.94
15.E64 1.84
16.497 1.95
15.757 1.86
11 0,05 1.31
13,008 1.54
15.362 1.82
40.:24 4.81
4.456 .53
14.636 1.73
31,280 3.8B1
12.00 1.52
2.415 .28
9.559 1.13
51,371 6.08
12.173 1.44
12,314 1.46
4,605 .54
40,562 4.80
6,233 .74
32 .43 3.83
5,795 .68
16.017 1.90
2,070 .24
4.286 .51
13,287 1.07
6.887 .81
2,707 .32
14.310 1.69
57.423 0.80
29,40t 3.48
33,437 3.96
3.717 .44
32.7E9 3.03
6.b02 .78
10.6&4 1.28


5.58 5.G8 3.57 3.78 3.60
3.63 3.56 3.58
3.54 3.69
3.49 3.58
4.45 5.47 3.92
4.33 .81
.0a 133.05

2.94
2.41 .25
.20 50.58
12.89
34.52 10.50
12.54 1.47 .13
2.85

3.34 5.54
.83
041.00 4.66
2.00
1.05 .11 .02
3.1 .05 .10


5,378 .59
7,643 .84
20.3 2.30
18.86C 2.01
18,521 2.04
19,776 2.18
23.001 2.53
19.635 2.16
20,530 2.27
18.633 2.05
18.677 Z.06
19,347 2.13
16.757 1.85
11.641 1.28
15.855 1.75
15,912 1.75
42.613 4.70
5.026 .5S
16,281 1.79
31,9.3 3.52
13,318 1.47
3,140 .35
10,095 1.11
52.491 5.78
12.252 1.35
12.500 l.28
4,721 .52
42,021 4.63
6.382 .70
32,779 3.01
5.993 .65
16.782 1.79
2.159 .24
5,145 .57
14,033 1.63
7.048 .78
2,710 .30
14,714 1.62
59.513 6.56
30.334 3.35
43,405 4.78
3,776 .42
33,385 3.68
6.912 .76
10,664 1.29


42,739 4.71
35,376 4.01
39,429 4.34
41.073 4.53
52,317 5.76
42,055 4.63
42,944 4.72
37,756 4.38
38.948 4.29
40.864 4 50
26.665 2.94
20,193 0.23
32,351 3.57
29.048 3.20
.8.616 6.46
7.820 .86
23,354 2.57
37.374 4.12

11.738 1 29
58.837 6.48
13,g9g 1.50
14,064 1.55
5.459 0
49,289 5.43
7,347 .81
35,933 3.96
6.834 .7S
18.946 2.00
2,685 .30
7,647 .84
23.3&4 2. 58


08.95 8.46
64.38 8.45
55.15 8.73
59.96 8.94
57.05 9.12
59.07 8.94
62.27 9.27
57.12 8.97
62.52 8.74
53.28 8.80
141.08 7.53
152.98 9.09
87.91 9.75
57.41 8.19
7.07 1.17
.94 .14
2.82 212.30
4.51


1.42 .31
7.10 .23
1.64 67.65
1.70 14.73
.66 41.32
5.95 12.70
.89 14.38
4.34 1.63
.82 .15
2.29 3.37
.32 5.96
.92
2.82 9.75


Fig. 1O.--A partial copy of the Hospital Cost Summary Report.

..






Table 1: Direct Expense Comparison Selected Cost Centers as they appear on the Comparative Hospital Cost Summary Report


Dollars
--610-Medical
660 NS-0.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg. Total Hospital


Percent of Total
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.

Cost Per Patient Day
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg. Total Hospital

Cost Per Activity Base
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.


$ 897 $
60,697 57,846 27,885 10,949 27,595 1,112,676


.08%
5.44
5.20 2.51 .98 2.48


$ 14.47
6.17 5.88
2.83 1.11
2.80
113.02


1.18 1.21 21.34
.05
13.61


2

8,053
40,624 51,371 13,287
10,664 14,191 344,466


2.14%
4.81 6.08
1.57 1.26
1.68


* 24.90
4.90 6.20
1.60 1.29 1.71 101.89


$3.57
.81
.20
5.54
.10
4.63


3

$ 23,988 $
19,494
31,071 3,858
4,485 4,940
372,469


6.44% 5.23 8.33 1.04 1.20 1.33

17.42 5.26 8.39
1.04 1.21 1.33 100.53

$ 3.57
1.50 1.90 12.65 .12
6,46


4

13,220 $
61,663

15,083 10,017
18,640 1,110,483


1 .1 9% 5.54

1.36
.90 1.68


16.44 4.74

1.16
.77 1 .43 85.35


$3.53
.89

5.04 .04 4.23


24,492 51,333
83,036 35,637
9,929
17,356 1,305,254


1.88%
3.93 6.36 2.73
76
1.33

$ 20.79
5.56 8.99 3.86 1.07 1 .88
141.29

$3.47 1.74
.70
4.07
.19 .63

..






Table 2 reflects the adjusted direct expenses for selected cost centers. This cost information represents the direct expenses adjusted for depreciation, insurance, amortization of start-up costs, and interest expense. The effects of adding those 4 major categories of indirect expenses to the direct expense can be easily traced by comparing the data in Table I with the data in Table 2.

Table 3 indicates the effect of distributing the costs of support service cost centers to patient service cost centers. It should be noted that the support service cost centers show no "full cost." They have been closed to the patient service cost centers. Those cost centers which still remain open and for which a full cost is displayed are those cost centers selling a service/product to the patient/physician. The price or charge of the service offered by the cost

centers should be equal to the full cost if each cost center is to "break even," i.e., to operate at neither an accounting profit nor accounting loss.

The foregoing discussion attempted to explain the procedural portion of the evaluation method. The discussion centered around the details of collecting, processing, and reporting the cost data which were later evaluated. As such, copies of, or extracts of, information from all reports were provided in the text of this chapter. All reports are shown in Appendix.I. The only problem related to these 3 steps was encountered during the data collection operation. The manner in which the problem was alleviated was discussed. In all cases, the procedures called for in the cost accounting system development discussion in Chapter III were followed. This section has demonstrated that by carrying out the instructions included in the

..






Table 2: Adjusted Direct Expense Comparison

Selected Cost Centers as they appear on
the Comparative Hospital Cost Summary Report


Dollars
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg. Total Hospital


Percent of Total
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.

Cost Per Patient Day
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg. Total Hospital

Cost Per Activity Base
610 NS-Medical 660 NS-O.R. 706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.


1

$ 2,307
64,957 61,890
28,779 13,043
31,047 1,240,564


.19%
5.24 4.99
2.32 1.05 2.50


$ 37.21
6.60 6.29 2.92 1.32 3.15 126.01

$ w
1.26 1.30
22.02
.06
15.31


2

$ 20,881 42,613 52,491 14,033 10,664 14,615 907,576


2.30% 4.70 5.78 1.63 1.18 1.61


$ 28.80
5.14 6.33 1.79 1.29
1.76 109.50


$4.13
.85
.20
6.19
.10
4.76


3

$ 31,418 $
20,843 32,273
4,194 4,485 5,135
408,566 1


7.69% 5.10 7.90 1.03 1.10 1.26


$ 22.82
5.63 8.71 1.13 1.21 1.39 110.27


$ 4.68 1.60 1.97 13.75
.12
6.71


16,596
72,988

18,361 12,881 19,917 1,306,767


1. 27% 5.88

1.41
.98
1.52

$ 20.64
5.61

1.64
.99
1.53
100.43


$4.43
1.05

6.14
.05
4.52


5

30,258 59,473
92,048 39,193 12,958
21,572 1,547,519


1.96% 3.84 5.75 2.53
.84
1.39


$ 25.96
6.44 9.98 5.24 1.40 2.34 167.52


$4.29
2.03
.78
4.47
.25 .79

..







Table 3: Full Cost Comparison

Selected Cost Centers as reflected
on the Comparative Hospital Cost Summary


Dollars
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
863 Laundry-Proces.
910 Patient Acctg. Total Hospital


Percent of Total 610 NS-HFEcTca660 NS-O.R. 706 Lab-Clinic.Path.
757 ER-Nursing
863 Laundry-Proces. 910 Patient Acctg.

Cost Per Patient Day
610 NS-Medica 660 NS-O.R. 706 Lab-Clinic.Path.
757 ER-Nursing
863 Laundry-Proces.
910 Patient Acctg. Total Hospital

Cost Per Activity Base
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
863 Laundry-Proces.
910 Patient Acctg.


$ 6,159 42,739
95,800 58,616 81,805 58,837 39,393 23,364


1,240,564 970,576


.50%
7.72
6.59 3.18


4.71%
6.46 6.48
2.58


99.34 58.95 9.73 7.07
8.31 7.10
4.00 2.82

126.01 109.50


1 .86 1.72
30.14


8.46
1.17 .23
9.75


76,787 28,711
38,378
20,697


408,566


18.79 7.03
9.39 5.07



55.76 7.75
10.36 5.59

110.27


11.43
2.21 2.35 67.86


36,303
105,672

292,219


67,749 110,775
131,953 i08,564


1,306,767 1,547,519


2.78 8.08 2.24


45.15 8.12 2.25 103.43


9.70
1.52

9.77


4.38
7.16 8.53 7.02


57.51 11.99
14.28 11.75

167.52


9.60 3.77 1.18 12.33

..





cost accounting system development discussion, the reports called for can be prepared. It will be the subject matter of the following section of this chapter to evaluate that output.

Method Related to Output Evaluation and Discussion of Results

After generating the required cost information, the next step was to determine whether that output was the type of information anticipated There were 2 aspects to the test required to determine this.

First, did the reports help internal managers in their decision making, by providing measures of 1) the activities within their hospital, and 2) the comparable activity within other hospitals in order to compare operations? The answers to these questions were determined by providing a group of hospital managers with the cost reports and then soliciting their response to several questions concerning the reports. Second, the question of the reports' being able to provide comparable data for external parties remained. This problem was resolved by determining the reporting requirements of the identified external users and comparing the system output with t1,hose requirements.


Evaluation by Hospital Managers

Copies of seleCted reports were presented to a panel of 13 evaluators. The evaluators were the administrators, assistant administrators for finance, financial directors, and chief accountants of the 5 Jacksonville, Florida hospitals participating in the research. Appenidix K lists the evaluators by name, position, and hospital represented. The evaluation was accomplished by holding interviews with each hospital's personnel separately. The interview procedure is outlined below.

..






I.Distribute Reports to Managers. Copies of the following reports

were given each manager.

A. Hospital Cost Report. Due to the detailed nature of this

report, copies were provided for only 6 cost centers.

Those cost centers were:

610 Nursing Service-Medical
660 Nursing Service-Operating Room
706 Laboratory-Clinical Pathology
757 Emergency Room-Nursing
863 Laundry-Processing 910 Patient Accounting

This group of reports was selected because it contained at

least one of each type of cost center.

B. Comparative Hospital Cost Report. Copies of this report for

the same 6 cost centers listed in A. above were provided.

C. Hospital Cost Summary.

D. Comparative Hospital Cost Summary.

IT. Discuss Reports. During this period of time the researcher discussed each report and its purpose. Questions from hospit al

managers concerning the method used to prepare the reports, and

the interpretation of the reports, were answered during the

discussion.

III. Managers' Evaluation. At the conclusion of the discussion, the

hospital personnel were asked to respond to several questions.

Appendix J contains the list of questions used for this purpose

and a recap of the responses. Additionally, each manager was asked for comments regarding the output of the cost system in

relation to his needs.

..





The questions asked of the hospital managers were designed to determine 4 types of information. First, questions 1 and 2 were directed at determining the general cost accounting system's effectiveness. Second, questions 3 through 6 were directed toward evaluating the various elements of the cost accounting system. Third, questions 7

-through 12 were directed toward determining the uses of cost accounting system's output. Finally, the last question was directed toward possible implementation of the cost accounting system. The responses to the questions will be grouped below by the 4 major topics indicated,


General System Effectiveness

The 2 questions relating to the overall effectiveness asked if

the cost accounting system could produce costs by program and by product. "Program" in this case referred to the various programs identified in the current hospital cost accounting system model as depicted by Figure 5, Chapter II. "Products," on the other hand, referred to the outputs of the cost centers which are part of the proposed hospital cost accounting system model as depicted by Figure 6, Chapter II. All evaluators indicated that the system provided both program and product costs, but one evaluator (an administrator) did indicate that there should be an additional calculation for the purpose of reviewing costs of activities that provide a substantial amount of service for outpatient clinics and emergency rooms. In essence, this would result -in a more finely defined product cost.

..






System Element Evaluation

The proposed cost accounting system has as its base proper activity definitions, with a cost center designated for each activity. A additionally, the activity measures must represent the output of each cost center for the cost accounting system to be of value. Questions

3 through 6 were directed at determining whether the elements of the cost accounting system did what they purported to do.

All evaluators responded that the activities were defined such

that they represented-accurately the activities being performed within their respective hospitals. Additionally, all of the evaluators were in agreement with the activity bases that had been selected to measure the level of activity within each cost center. There was one exception: 2 evaluators (one administrator and one chief accountant) indicated that the activity base of "hours of care provided" used for the nursing services cost centers might be a more meaningful activity base if it were weighted by patient days of care provided. No recommendations were made regarding a preferred weighting scheme.

The need to define so many activities, however, was not as unanimously endorsed. Of the 13 evaluators, 4 felt that too much cost detail was presented, while 9 indicated that the amount of cost detail was right. Yet, when asked if the number of activities defined was too few, too many, or about right, only 2 felt that too many activities had been defined. The other 11 felt that the number of activities defined was correct. This seemed to point to a minor conflict. Some of the evaluators felt the cost accounting system was too detailed, yet when confronted with reducing the number of activities for which costs

..






would be collected, they indicated that the number of activities was correct.

In general, the majority of the responses indicated that the cost accounting system was producing the right amount of information and for the right number of activities. More important was the unanimous response that t he activities had been defined accurately and, with the noted exception, the activity bases properly reflected the outputs of the various cost centers.


Uses of System Outputs

The next 6 questions were asked in order to determine how the cost data would be used. The first question of this series asked to what groups of external users had the hospital managements been required to provide cost data? The following is a summ~ary of the responses regarding the 5 hospitals. Listed first is the requesting agency, followed by the number of hospitals sending reports to that group within th e past 6 months.

Annual Price Commission Reports 2 hospitals

Price Exception Request 2 hospitals

Annual Medicare Report 5 hospitals

Special Reports to Public Groups
or persons 2 hospitals

Special Reports to Third-Party-Payers 1 hospital

The next question asked if the type of cost information provided by this cost accounting system would have been helpful in preparing any of the reports. Of the 13, 9 evaluators responded that it would have been, and 2 gave a qualified "yes." The qualification was -that it would be helpful only if all hospitals adopted such a cost

..






accounting system and could report comparable information. The other 2 evaluators indicated that the information would not have been helpful for any of the reporting. This last opinion was expressed with particular emphasis upon the reporting requirements of regulatory agencies such as the Social Security Administration and the Price Commission. The 2 evaluators giving a negative response stated that both of the cited regulatory agencies, while indicating cost and statistical data could be submitted for evaluation, were reluctant to use such data when it was submitted.

The evaluators then were asked to what agencies or groups they

would provide such cost information. All 13 indicated they would present the cost data to their boards of directors, while 11 of the 13 stated they would provide it to governmental agencies, third-party payers, and volunteer planning agencies. When asked if such information would be made available to consumer groups, only 6 responded in the affirmative.

All of the evaluators indicated they would use a cost accounting system such as the one developed here as a budgetary and planning

model, but only 9 of the evaluators indicated they would use the information produced by such a cost accounting system as the basis for the internal allocation of resources. Concerning pricing decision,

however, all of the evaluators stated that they would use the output of this cost accounting system for establishing and justifying rates or prices. Finally, all 13 stated they felt the cost accounting

system would be of more benefit to internal decision making than to external reporting.

..






The preponderance of the responses to these questions tended to favor this cost accounting system as an internal management decision making tool. However, most evaluators would provide the output to those groups outside the hospital who had a requirement for such data.


System Implementation

The last question asked if the evaluator would implement such a system in his hospital. Of the 13 evaluators, 8 indicated they would; 3,gave a qualified "yes," stating they would prefer to study the lkeldicare implication further; and 2 indicated they would not. These last 2 indicated that the cost accounting system was adequate but that they had to consolidate their records with other hospitals under the same ownership, and the proposed cost accounting system would make them incompatible with existing reporting schemes.

In total, the evaluators who reviewed the cost accounting system and its output generally were favorable toward the cost accounting system. As the responses discussed have indicated, the cost accounting system seems to provide useful information. Most indicated they would implement such a cost accounting system.


Requirements of External Users

The procedural aspects of the cost accounting system were tested by generatin g the reports required. Hospital managers then evaluated the output. The remaining step of the evaluation procedure is to determine the reporting requirements of external cost information users and to compare the output with those requirements.

Identified were 4 different external groups. They were 1) the Soci al Security Administration, under Title XVIII of the Social

..







Security Act (Medicare); 2) regulatory agencies that administer price

control programs; 3) third-party-payers; and 4) interested consumer

groups. The reporting requirements of each will be outlined below.

The Social Security Administration

In 1965 the Congress of the United States enacted Title XVIII of

the Social Security Amendment of 1965, commonly referred to as Medicare.

Under the provisions of Title XVIII people over 65 years of age were to

have medical payments made in their behalf by the Social Security

Administration. Section 139f(b) of Title XVIII states the following:

The reasonable amount paid to any provider of
services with respect to services for which
payment may be made under this part shall,
subject to the (deductible and co-insurance)
provisions of section 1395e of the Title,
be the reasonable cost of such services,
as determined under section 1395x(v) of this title.1

The restrictions of section 1395x(v) were listed as follows:

The reasonable cost of any service shall be
determined in accordance with the regulations establishing the method or methods to be used,
and the items to be included, in determining
such cost for various types or classes of
institutions, agencies and services .Such
regulations may provide for determination of
the costs of services on a per diem, per unit,
per capita, or other basis, may provide for
using different methods in different circumstances, may provide for the use of estimates of costs of particular items or services,
and may provide for the use of charges or a
percentage of charges where this method
reasonably reflects costs.
Such regulations shall (A) take into account
both direct and indirect costs of providers
of services in order that, under the methods
of determining costs, the costs with respect to
individuals covered by the insurance programs
established by this subchapter will be borne
by individuals so covered and the costs
with respect to individuals not so covered 2
will not be borne by such insurance programs .

..







In order to define "reasonable costs," the Social Security Commissioner formed the Health Insurance Benefits Advisory Council. The

council consisted of representatives of the hospital, nursing home,

and insurance industries as well as representatives of Federal, state,

and local governmental agencies that purchase health care. After a

year of deliberation, a Principles of Reimbursement for Provider Costs

was produced. This document set out 4 general reimbursement principles and 12 principles pertaining to specific reimbursable costs.3

The specific principles indicated what indirect costs, in addition to

the direct costs, would be considered reimbursable. The general

principles hold more significance for this research. The pertinent

general principles are:

1. Costs related to patient care. Payments to
providers must be based on the "reasonable
costs" of services covered under Title MIT
and related to care of beneficiaries.
Reasonable costs includes all necessary and
proper costs incurred in rendering the services,
subject to principles relating to specific
items of revenue and cost.

2. Determination of Cost of Services to Beneficiaries.
Total allowable costs of a provider shall be apportioned between beneficiaries and
other patients so that the share borne by the
program is based upon actual services received
by program beneficiaries. To accomplish this
apportionment, the provider shall have the
option of either of the two following methods.

a) Departmental method-the ratio of
beneficiary charges to the total patient charges for the services of each department is applied to the cost of the department.

b) Combination method-the cost of 11routine services" for program beneficiaries is determined on the basis of average cost per them of
those services -for all patients;

..







to this is added the cost of ancillary services used by beneficiaries, determined by apportioning the total cost of ancillary services on the basis of the ratio of beneficiary charges for ancillary services to total patient charges for such services.

3. Adequate Cost Data. Providers receiving
payments on the basis of reasonable cost, must
provide adequate cost data. This must be based
on financial and statistical records capable of verification by qualified auditors. The
cost data must be based on an approved method
of cost finding and on the accrual basis
of accounting.

Consequently, the reimbursement for "reasonable costs" as broadly outlined in the statutes has been very narrowly defined by later regulations and procedures. Of all the guidelines which explain procedure, however, there seem to be only 2 requirements that cost and statistical information must meet.

Adequacy. Adequacy seems to imply the availability of detailed cost and statistical data to at least the departmental level.

Verifiabili V. The cost information reported must be capable of verification by qualified auditors. CoGt Information Required by Regulatory Agencies

On August 15, 1971, Executive Order 11615, established a freeze on prices, rents, wages, and salaries for a period of 90 days and established a Cost of Living Council responsible for administering the Economic Stabilization Program. Since that time price controls have bcen in effect for the health industry. The Internal Revenue Service was delegated the operational responsibility of developing reporting procedures and formats.

..


Full Text
75
Moving from the adjusted direct expenses of all cost centers to
the full cost of the patient service cost centers required the step-
down operations previously discussed. The report that reflects the
distribution of costs from support to patient service cost centers so
that full costs may be calculated is the Hospital Cost Summary. The
basic input to this report was each cost center's total direct expense
as reflected on the Hospital Cost Report. The summary report displays
the same types of information as the detail report, i.e., dollars cost,
cost as a percentage of total, cost per patient day, and cost per ac
tivity base. The information, however, is provided at 3 different
stages of the cost accounting system: Direct Expenses, Adjusted Di
rect Expenses, and Full Costs.
Figure 10 is a partial copy of the Hospital Cost Summary Report.
It is meant to serve as an illustration of the manner in which the cost
information is displayed. A complete copy of the Hospital Cost Sum
mary Report for one hospital is displayed in Appendix I.
The final report prepared was the Comparative Hospital Cost Sum
mary Report. This report summarizes the information found on each
Hospital Cost Summary Report. A comparative display of the information
allows the management of each hospital to evaluate its cost of provid
ing specific services with other hospitals providing the same service.
Further, the comparison can be made for the 3 stages of costs. The
following tables reflect, in summary form, highlights of the compara
tive analyses. The complete Comparative Hospital Cost Summary Report
is presented in Appendix I.
The information reflected in Table 1 is the same as that shown in
i
Figure 9, the Comparative Hospital Cost Report.


TABLE 5Continued
COST CENTEX
NUMBER AND TITLE
80? dietary food fro i
833 food OH i
£15 *?r.
81? ?v -,S.
Total Dietary
830 &p of Plane Adm.
831
832
623
834
*35
836
037
839
-Pow.
- £le.
- Meet
- Carp
- Croa
- Kech
Pain
- Ssni
840 Automotive Sv$.
Total Op cf PIart
844 Security
850 HX Aiai.
51 £R
852 OP
853 Food Svs.
354 OR
855 Pat. P.ooffls
956 Prof. Spt.
8>7 Pub b Admin.
8S8 Mental HaaltJj
659 Inter. Cecorat.
Tota Housekeeping
850 laundry Attain.
ssi coil :oh
85? fiend
864 Process
Total Laundry & Linen
B7C Mousing
9C0 Fin Kft Adilft
901 Fin Mgt
910 Patient Acctg.
914 Financial Eval
lota! Patient Acctg.
9*0 Admitting
9:C IP Wn
937 i)P Systems
938 DP Operition;
letal P-atrt Process
$39 Corc-wricstinns
910 Courier Svs.
950 Administration
55! fors?n;:el-AcSin.
9;V -Employ
953 -Wage
9M -Train
Total Personnel
955 Purch. Admin.
956 Buying
$5? .deceiving
950 Storage
Total Purchasing
HOSPITAL J
rref
TOTAL t PAT OAT
Tnjsrrar
ACT BASE
1,76* KU
9.32
1.69
TtfBRT
HOSPITAL 1
tot mrm:
TOTAL S PAT DAT
57,423 6.80
29,404 3.48
93,705
8.41
9.S2
1.73
86,827
10.26
8,433
.76
.86
.04
33,437
3.96
24,799
Z.23
2.52
.11
20,183
1.81
2.05
.09
3.649
.33
37
.02
1,950
.17
20
.01
1.950
.17
.20
.01
5,602
.50
.57
.02
976
0
.10

3,534
.32
.36
.02
71,011
6.38
7.23
.32
23,437
3.96
3,128
.23
.22
.01
3,717
.44
1,475
.13
.15
.12
32,769
3.88
452
.04
.05
4.27
1,676
.15
.77
3.51
2,562
.23
.25
3.32
19,360
1.74
1.97
3.35
4,914
.44
.59
3.32
5.175
.46
.53
1.52
25,614
3.19
3.63
2.96
32,769
3.63
7.445
.13
.15
.01
6,602
,73
7.608
.C3
.77
.04
10.949
.98
1.11
.05
10,664
1.26
20,002
1.79
2.03
10
17,266
2.04
10,542
.95
1.07
.S5
7,806
.92
27,595
2.48
2.eo
13.61
14,191
1.62
27,595
2.43
2.80
13.61
14,191
1.58
8,2/9
.74
.84
4.75
11,207
1.32
1.6C4
.14
.15
.14
5,031
.4b
,l
.46
10,381
.93
l.CS
.0
15,833
1.88
17.066
1.53
1.73
1.53
15,813
1.88
17.385
1.56
1.77
5i.re
14.135
1.67
42.227
3.79
4.29
3.80
17,619
2,03
1,643
.15
.17
1.86
4.664
.55
2.255
.29
.33

1,102
.10
.11
1.24
1.345
.12
.14
2.79
7,350
.66
.75
8.30
4,664
.55
1.510
.14
.15
1.05
2,663
.30
6.207
.56
.63
4.32
7,717
.70
.78
5.37
2.553
.30
3.55
10.48
4.03
4.03
.45
3.95
1.29
2.09
.94
1.71
1.71
1.35
1.92
1.92
1.71
2.13
.55
.56
.31
TOST PER"
ACT BASE
2.05
1.05
3.10
.19
.1
.02
3.15
3,15
.96
.10
.16
.92
4.63
4.63
.35
1.88
!.A*
79.05
5,4/
5.47
1.85
1.85
HOSPITAL 3
HOSPITAL 4
4
HOSPITAL
DOLLARS
S OF
OU5 Put
MSI PER
Mrar
OT
COST PER
cost ren
Tollms
X wf
cos: pep.
SUTES
TOTAL $
PAT OAT
ACT BASE
TOTAL t
PAT OAT
ACT CASE
TOTA. S
PAT DAT
ACT BASE
41,391
11.11
11.17
1.05
59,305
5.34
4.56
1.25
70.401
5.39
7.52
1.05
2,739
.25
.21
.06
8,r>64
.77
.65
.18
22,418
2.02
1.72
.83
478
.04
.34
.01
41,391
11.11
11.17
1.86
97,552
8.78
7.50
2.42
72,667
5.56
7.87
1.08
21,038
5.65
5.68
.22
9.842
.89
.76
.03
4,751
.36
.51
.01
23,766
3.49
2.93
.10
3?,*11
2.87
4.05
.03
4,524
.41
.35
.01
5,805
1.45
.63
.01
4,639
.42
.36
.01
11,23/
.86
1.22
.02
3,6-58
.33
.22
.01
6.607
.5)
.72
.01
1*781
.16
.4
.
2,255
.17
.24

6.558
.50
.71
.01
2,841
.26
.22
.01
4,898
.38
.53
.01
1,746
.16
.13
.
14,027
1.08
1.52
.03
941
.03
.07
21,038
5.65
5.68
.22
68,738
6.20
5.29
.17
93,549
7.15
30.13
.18
3,497
.94
.94
.04
11,326
1.02
.87
.03
5,529
.42
.60
.01
4,069
1.10
1.10
1.25
1,892
.17
.15
.15
3,216
.25
.36
.19
92
.02
.02
3.0/
553
.05
04
2.98
4,354
.33
.47
2.97
816
.07
.06
2.73
7,830
.60
.85
2.83
740
.20
.20
3.02
2,159
.19
.17
3.97
348
.03
.04
8.70
556
.15
.15
3.02
4,342
.39
.32
2.15
4,352
.33
.47
2.99
5.976
1.60
1.61
3.03
21,411
1.93
1.65
2.73
20,115
1.54
2.ie
2.99
1,121
.32
.33
3.03
4,983
.45
.38
9.06
9,609
*76
1.04
2.71
1,335
.36
.36
3.03
857
.05
.04
.44
3,482
.27
.38
3.95
3,110
.28
.24
11.33
1,773
.14
.19
2.29
4,031
.36
.31
4.b7
13,309
3.75
3.77
4.25
44,154
3.97
3.37
5S,'84
4.23
5.96
3.13
1,863
.17
.14
.01
1,157
.09
.13
.02
395
.08
.07
.01
6,934
.53
.75
.13
430
.11
.11
.01
447
.04
.03
_
423
.03
.05
.01
4,485
1.20
1.21
.12
10,017
.90
.77
.04
9,929
.76
1.07
.19
4,915
1.31
1.32
.13
13,222
1.19
l.Oi
.06
'8,443
1.41
2.00
.35
707
.06
.05
101.00
3,963
.36
.31
.36
3.331
.25
.36
i "*6
4,033
1.08
1.09
1.09
4,929
.44
.38
.41
6,743
.52
.73
.52
4,940
1.33
1.33
6.46
18,640
1.68
1.43
4.23
17,356
1.33
1.88
.53
11,544
.88
1.25
.42
4,940
1.33
1.33
6.45
18,610
1.68
1.43
4.23
23,900
2.21
3.13
1.05
10,060
2.70
2.72
23.95
7.432
.67
.57
3.75
7.S2
.58
.82
7 CO
1,389
.12
.11
.12
2,034
.15
.22
.16
1.616
.15
.12
.15
3,269
.26
.36
.26
400
.11
.11
.11
12,876
1.1C
.99
1.16
8.779
.67
.95
.67
400
.11
.1
.11
15,381
1.43
1.32
1.43
14,182
1.09
1.53
1.09
6.053
1.63
1-64
73.10
26.278
2.37
2.02
121.10
17,116
1.31
1.85
61.35
1,251
.11
.10
.11
17,053
3.24
3.25
3.24
41,572
3.74
3.20
3.74
14,050
1.18
1.63
1.08
2,707
.73
.73
7.65
2,09*1
.19
.16
1.75
2.019
.:s
.22
1.49
3,513
.32
.27
121.34
4,525
.35
.49
502.89
!I7
.01
.01
.10
4.787
.37
.5?
3.53
2,707
.73
.73
7.65
5,734
.51
.44
4.77
11.332
.63
1.23
8.31
3,'b
2.738
.2
.19
.04
1,705
.13
.18
.06
1.365
.12
.10
.02
11.64!
.89
1.26
.41
647
.06
.05
.01
2,186
.20
.17
.04
U ,501
.88
1.24
.40
3,228
.87
.87
.11
C.63S
.60
.51
.11
24,847
1.90
2.69
.87
f>0
o
-si


90
to this is added the cost of ancillary
services used by beneficiaries, determined
by apportioning the total cost of ancil
lary services on the basis of the ratio of
beneficiary charges for ancillary services
to total patient charges for such services.
3. Adequate Cost Data. Providers receiving
payments on the basis of reasonable cost, must
provide adequate cost data. This must be based
on financial and statistical records capable
of verification by qualified auditors. The
cost data must be based on an approved method
of cost finding and on the accrual basis
of accounting.
Consequently, the reimbursement for "reasonable costs" as broadly
outlined in the statutes has been very narrowly defined by later regu
lations and procedures. Of all the guidelines which explain procedure,
however, there seem to be only 2 requirements that cost and statisti
cal information must meet.
Adequacy. Adequacy seems to imply the availability of detailed
cost and statistical data to at least the departmental level.
Verifiabi1ity. The cost information reported must be capable of
verification by qualified auditors.
Cost Information Required by
Regulatory Agencies
On August 15, 1971, Executive Order 11615, established a freeze
on prices, rents, wages, and salaries for a period of 90 days and es
tablished a Cost of Living Council responsible for administering the
Economic Stabilization Program. Since that time price controls have
been in effect for the health industry. The Internal Revenue Service
was delegated the operational responsibility of developing reporting
procedures and formats.


28
The evolution of managerial accounting from cost accounting can
be traced through the 3 models. The simplified version allowed for
only the costing of product at a gross level. The expanded model pro
duced information that could be used to plan, control and evaluate,
in detail, the direct or prime costs involved in the manufacture of
various products. A better product costing method also was achieved.
Finally, with the addition of detailed information concerning the
indirect services, full product costing was achieved. More importantly,
the model now provided data that could measurably aid management
planning, control, and evaluation. Since each of the labor operations
and indirect services is normally supervised by a different individual,
a responsibility accounting system evolved. By being able to collect
costs in a detailed fashion, planning and control functions are placed
upon a responsible individual who is later evaluated based upon adher
ence to the plan. At the same time, by aggregating data, product
costing is achieved.
Being able to define the responsibility centers within an organi
zation, those individuals who supervise than, and the costs of operating
each has made modern cost accounting an executive control device.
Current Hospital Cost Accounting Model
Presently various types of cost data are required by external
parties. Usually that information is required annually. Consequently,
hospitals generally have tended to wait until year-end, then rearrange
the financial accounting data by means of cost analysis to accommodate
the cost requesting agencies. The result of this annual cost-finding
exercise is the assignment of all costs to one of several programs.


17
13. Rockwell I. Schulz and Jerry Rose, Can Hospitals be Expected to
Control Costs?" Inquiry, Volume X, Number 2, June, 1973, p. 3.
14. Ibid., p. 4.
15. For recent hospital accounting information system studies and
models which deal primarily with internal management decision
making, see: C. T. Andrews, Financial and Statistical Reports
for Administrative Decision-Making in Hospitals, Unpublished
Doctoral Dissertation, Indiana University, 1968.
M. W. Veuleman, An Inquiry Into the Adequacy of Cost Informa
tion Systems of Selected Arkansas Hospitals, Unpublished
Doctoral Dissertation, University of Arkansas, 1971. Carnegie-
Mellon Institute and Washington University of St. Louis are
both working independently on information systems for a model
hospital. Searle, Inc., has a model information system, called
Medidata.
16. Report of the Governor's Committee on Hospital Costs, Marion
Folsom, Chairman (Albany, New York, Office of Public Health
Education, New York State Health Department, 1965), p. 9.
17. Secretary's Advisory Committee on Hospital Effectiveness Report,
John A. Barr, Chairman, (Washington: Government Printing
Office, 1968), p. 22.
18. Ibid., p. 23.
19. Improving Our Nation's Health Care System: Proposals for the
Seventies, (Washington: Chamber of Commerce of the United
States, 1971), p. 17.
20. Ibid., p. 18.
21. Committee on Accounting Practice of Not-For-Profit Organizations,
"Report of the Committee on Accounting Practice of Not-For-
Profit Organizations," The Accounting Review; Supplement to
Volume XLVI, 1971, pp. 80-163.
22. Ibid., p. 125.
23. Ibid., p. 92.
24. Ibid., p. 134.
25. Hospitals Guide Issue, Part II, August 1, 1971, p. 487.
26. Committee on Accounting Practice of Not-For-Profit Organizations.
"Report of the Committee on Accounting Practice of Not-For-
Profit Organizations," The Accounting Review; Supplement to
Volume XLVI, 1971, p. 130.


97
Finally, when actual data are submitted each December 1, a cost
analysis and certification are called for.
...primarily for the purpose of the develop
ment of comparative analysis, each hospital
shall submit to the Connecticut Hospital
Association on or before December 1 annual
cost reports, related statistics and its
portion of the Utilization Formula, prepared
and certified in accordance with the official
Connecticut Hospital Association Manual and
the reporting forms pertaining thereto...
The HOSPITAL agrees to cause such reports,
statistics and formulas to be reviewed and
corrected by the Connecticut Hospital Asso
ciation and its independent certified public
accountant. The Connecticut Hospital Asso
ciation and its independent certified public
accountant. The Connecticut Hospital Asso
ciation shall submit to the Connecticut Blue
Cross not later than December 31, of each
year, together with a copy of the HOSPITAL'S
cost analysis, a report by Connecticut Hos
pital Association's independent certified
public accountant which shall contain a
statement (1) that they have reviewed the
HOSPITAL'S cost reports, statistics, Utili
zation Formula and related certifications for
conformance with the requirements of the
Connecticut Hospital Association Accounting
Manual and (2) have reviewed the cost analy-
sis of the HOSPITAL for confirmation of the
required conformance with the Connecticut
Hospital Association Accounting Manual and
(3) that, in their opinion, except for non-
material exceptions noted, the cost reports,
analysis, statistics and Utilization Formula
have been prepared in accordance therewith
and C4) of recommendation to effect the cor
rection of any exceptions so notedJ2
This particular rate setting method depends upon a uniform use of the
Connecticut Hospital Association's Accounting Manual which is a guide
for collecting costs and statistics at the departmental level.
The Hew Hampshire-Vermont Blue Cross Association has not yet im
plemented the new reimbursement program, but the Director of Reim
bursement has indicated some of the reporting guidelines. Budget and


TABLE 7
COMPARATIVE HOSPITAL COST SUMMARY REPORT
FULL COST
COST CENTER
HOSPITAL 1
HOSPITAL 2
HOSPITAL 3
HOSPI
TAL 4
HOSPITAL 5
NUMBER MO
DOlLARS
1 OF
COST PEk
cost m
dollars
XCr
COST PER
COST PER
DOlLARS
%T)F
COST PER
COST PER
DOLLARS
5 OF
COST PST"
" co3T rar*
DOLLARS
l OF
cost m
COST PER
TITLE
TOTAL $
PAT DAT
ACT BASF.
TOTAL S
PAT DAT
ACT BASE
TOTAL S
PAT OAT
ACT BASE
TOTAL'S
PAT OAT
ACT BASE
TOTAL $
PAT DAT
ACT BASE
601 F..S. Attain.
602 N.S. Suser.
610 N.S. fled.
6.159
.50
99.34
42,739
4.71
58.9S
8.46
76,787
18.79
55.76
11.43
36,303
2.78
45.15
9.70
67,749
4.38
57.51
9.60
en *
38.633
3.11
47.75
10.25
3S.376
4.01
64.38
8.46
28.834
2.21
45.27
10.59
64,486
4.17
49.53
11.44
612 *
39.731
3.20
51.13
10.65
41,577
3.13
43.77
10.58
,209
2.99
135.51
6.74
613
27,767
2.24
33.14
91.33
47,433
3.63
47.53
10.53
6!4 '
26.691
2.16
35.59
23.31
39.429
4.34
55.15
8.73
6*5 -
23,123
2.27
3.43
41 ,C73
4.53
59.96
8.94
Total N.S. Medical
167,109
13.47
51.75
9.71
159,517
17.53
59.33
8.65
76,787
18.79
55.7C
11.43
154,147
11.80
45.43
5.40
173,444
11.54
53.26
9.13
520 N.S. Surg.
21,599
1.74
78.26
13.37
52,117
S.76
57.05
9.12
123,350
31.41
58.29
11.22
38,899
2.82
43.17
9.90
68,933
4.45
60.10
9.77
621
43.690
3.52
52.01
10.41
<2,055
4.63
59.07
8.94
37,599
2.83
45.30
9.84
60,239
3.89
53.98
10.26
622 "
44,463
3.58
53.89
10.28
43.601
623 *
15,089
1.22
55.89
.
42,844
4.72
62.27
9.27
48.93
9.75
6?4 *
38.741
3.12
59.60
6.40
37,736
4.38
57.12
8.97
17,376
1.33
60.97
13.99
5?r
7.S99
.64
_
4.53
33,918
4.29
62.52
8.74
41,756
3.19
7.56
9.63
6?5
49.e64
4.50
53.28
8.86
46.123
3.53
48.81
10.54
627
25.331
1.94
63.81
9.CO
171,581
13.82
75.89
9.55
256.784
2S.28
73.66
13.91
128,350
31.41
58.29
H.22
240,690
15.03
49.82
12.18
129,172
8.34
57.03
9.S9
Total N.S. Med/Surg
338,690
27.29
61.69
9.68
4(6.01
45.87
67.42
8.86
205,137
50.20
57.33
11.25
402,837
30.83
48.0/
11.41
307,616
19.83
60.51
9.47
650 N.S. Pads.
54,087
4.36
65.96
12.30
56,683
4.34
67.56
10.02
61,272
3.96
59.84
12.17
631 "
66,517
5.36
73.83
12.22
2,476
.19
103.17
41.06
633 '
1,50/
.12

-
Totil N.S. Ped
122,111
9.84
70.95
24.70
8.41
59,155
4.53
68.55
10.34
61,272
3.95
K9.E4
12.17
f0 N.S. 1CU
31,816
2.56
142.04
10.15
25,665
2.94
141,06
7.53
15.229
3.73
120.87
35,118
2.33
233.C2
8.01
641
20,193
2.23
152.38
9.99
32,363
2.48
150.53
8.14
21,639
1.40
139.61
12.49
643
644
18f096
1.46
.
7.81
37,538
2.87
59.50
8.85
Total N.S. ICU
49.914
4.02
222.83
9.15
46,858
5.17
145.38
S.42
15,229
3.73
120.87
8.41
59,897
5.35
118.07
8.sl
57,757
3.73
186.31
9.25
645 N.S, Psych.
36,163
2-92
49.40
10.74
32,351
3.57
67.91
9.75
78,351
6.00
51.33
17.30
111,113
7.13
76.26
9.80
650 N.S. OS
38.881
3.13
75. SO
15.49
33,325
2.55
48.86
IP.S4
52,548
3.40
60.54
15.87
651 N.S. GYN
42,453
3.25
46.70
5.63
Total N.S. 08/GYN
38.881
3.13
75.50
15.49
75,778
5.80
47.63
10.13
52,548
3.40
60.54
15.87
52 N.S. Newborn
657 N.S. Float
23,965
1.93
42.57
10.91
29,04ft
3.20
57.41
8.19
2.21
35,337
2.71
50.84
7.03
41,952
110,755
2.70
SQ .12
7.95
550 N.S. OR
55,800
7.72
9.73
1.86
58,516
6.46
7.07
1.17
28,711
V13
7.75
105,672
8.08
8.12
1.52
7.16
11.94
3.77
655 I.S. Rkc. Poe*
10,048
.81
1.02
.19
7,820
.SS
.94
.1*
6,0y6
1.48
1.53
.37
10,593
.81
.81
.26
15,791
1.02
1.71
.11
670 N.S. Del* Rooa
25,299
2.04
2.57
ICS.BO
23,354
2.57
2.82
212.33
21,675
.C6
1.67
7.17
37,165
2.40
4.02
160.89
673 N.S. Del. Rec
4.722
.38
.*3
35.24
3.49
3.85
6.43
3,737
.29
.29
20.52
675 CSR Admin.
676 CSR con & om
37.274
4.12
4.51
'4,252
26,847
2.05
2.06
1.93
43,870
3.54
4.46
6.43
5,314
.41
.41
.33
46,778
3.02
5.06
TOTAL CSR
678 IV Therapy
S90 N.S. Inservice
692 4-Yr. Nurs. Prog.
43,870
3.54
4.46
37,374
4.12
4.5!
14,262
3.49
3,85
32,161
2.46
2. 7
2.3i
46,7?e
3.02
5.06
Total Nursing Ed.
70S Lab. Admin.
702 Leb. Anaton.
15,435
L24
1.57
11.25
11,738
1.29
1.42
.31
6,846
.52
.51
.19
14,249
.<*2
1.54
1.93
704 Lab. Cytology
1,392
.11
.11
.11
1.54
1.93
8,233
.63
.64
.17
4,249
.92
706 Lab. Clinical
707 Lab. Patter.
81,805
6.59
8.31
1.72
58,837
6.48
7.10
.23
33,378
9.39
10.36
2.35
8,197
.63
.63
.44
131,953
6.53
14.23
1.13


120
List of Cost Centers cont.
2. Delivery Room
3. Recovery Room
18. NURSING SERVICE MEDICAL
1.General
19. NURSING SERVICE NEWBORN
1. Normal Nursery
2. Formula Room
20. NURSING SERVICE OPERATING ROOM
1. General
2. Post-operative Recovery
21. NURSING SERVICE PEDIATRICS
1. General
22. NURSING SERVICE PSYCHIATRIC
1. General
23. NURSING SERVICE SURGICAL
1. General
24. OPERATION OF PLANT*
1. Painting
2. Carpentry
3. Heating, Airconditioning, Refrigeration
4. Grounds & Roads
5. Sanitation
6. Mechanical
7. Electrical
8. Masonry
9. Safety
10. Security
11. Refurnishing & Remodeling
25. OUTPATIENT CLINICS*
1. General
26. PERSONNEL*
1. Employment
2. Wage & Salary Administration
3. Training & Development
4. Employee Services & Benefits
27. PHARMACY*
1. Administration
2. Purchasing & Inventory Control
3. Narcotics Control


107
16. Anne R. Somers, Health Care in Transition: Directions for the
Future, pp. 116-125.
17. Ibid., p. 122.
18. Cecil G. Sheps, "The Influence of Consumer Sponsorship on Medical
Services," The Milbank Memorial Fund Quarterly, Volume L,
Number 4, October, 1972, Part 2.
19. Ibid., p. 62.
20. "Motorola, Hospitals Argue Costs," Medical World News,
September 22, 1972, pp. 63-64. See also, "Planning Agency
Tries to Mediate Motorola-Hospital Controversy," Modern
Hospital, July, 1972, pp. 35-36.


79
Table 2: Adjusted Direct Expense Comparison
Selected Cost Centers as they appear on
the Comparative Hospital Cost Summary Report
1
2
3
4
5
Dollars
610 NS-Medical $
2,307 $ 20,881
$ 31,418 $
16,596 $
30,258
660 NS-O.R.
64,957
42,613
20,843
72,988
59,473
706 Lab-Clinic.Path.
61,890
52,491
32,273
'
92,048
757 ER-Nursing
28,779
14,033
4,194
18,361
39,193
864 Laundry-Proces.
13,043
10,664
4,485
12,881
12,958
9l0 Patient Acctg.
31,047
14,615
5,135
19,917
21,572
Total Hospital 1
1,240,564
907,576
408,566 1
,306,767 1
¡,547,519
Percent of Total
610 NS-Medical
.19%
2.30%
7.69%
1.27%
1.96%
660 NS-O.R.
5.24
4.70
5.10
5.88
3.84
706 Lab-Clinic.Path.
4.99
5.78
7.90
-
5.75
757 ER-Nursing
2.32
1.63
1.03
1.41
2.53
864 Laundry-Proces.
1.05
1.18
1.10
.98
.84
910 Patient Acctg.
2.50
1.61
1.26
1.52
1.39
Cost Per Patient Day
610 NS-Medical
$ 37.21
$ 28.80
$ 22.82
$ 20.64
$ 25.96
660 NS-O.R.
6.60
5.14
5.63
5.61
6.44
706 Lab-Clinic.Path.
6.29
6.33
8.71
-
9.98
757 ER-Nursing
2.92
1.79
1.13
1.64
5.24
864 Laundry-Proces.
1.32
1.29
1.21
.99
1.40
910 Patient Acctg.
3.15
1.76
1.39
1.53
2.34
Total Hospital
126.01
109.50
110.27
100.43
167.52
Cost Per Activity Base
610 NS-Medical
$ -
54.13
$ 4.68
$4.43
54.29
660 NS-O.R.
1.26
.85
1.60
1.05
2.03
706 Lab-Clinic.Path.
1.30
.20
1.97
-
.78
757 ER-Nursing
22.02
6.19
13.75
6.14
4.47
864 Laundry-Proces.
.06
.10
.12
.05
.25
910 Patient Acctg.
15.31
4.76
6.71
4.52
.79


SPECIFIC FUNCTIONAL QUESTIONNAIRE
Hospital: Person Interviewed:
Department: Nursing Service Date:
Cost Center: Operating Room
1. Does the operating room have a separate hospital budget?
(If no, explain in Remarks Section)
2. Is the operating room supervisor responsible to the Director
of Nursing? (If no, explain in the Remarks Section)
3. Are charges for the operating room made:
A. By unit (operation)?
B. By hour?
4. Are operating rooms cleaned after each procedure?
5. Is the operating room cleaned by:
A. Operating room employees?
B. Department of nursing employees?
C. Housekeeping employees?
D. Other? (Explain in Remarks Section)
6. Do employees of this cost center have duties:
A. In the recovery room?
B. In ICU?
C. On the floor?
D. Other? (Explain in Remarks Section)
7. Do employees of this cost center escort patients? If yes,
is it:
A._ From their rooms?
B. Jo their rooms?
C. To recovery?
8. Do employees of this cost center:
A. Prepare deceased persons for transport to the morgue?
B. Transport them to the morgue?
9. What is the proportion of employees in this cost center:
129


5
Statement of Specific Problem
With a more comprehensive view of health care planning, cost
accounting and statistical information are necessary to help facilitate
decision making on a community or regional basis. Virtually all
studies completed to date, however, have concerned themselves with
the cost information needs of individual hospitals.^
While the cost accounting systems developed are useful to internal
management, several investigative committees have concluded that there
is not enough comparability among available data to make valid judg
ments concerning the problems of effective utilization of resources
committed to a group of community/area hospitals. One of the earlier
studies which concluded this was the New York Governor's Committee on
Hospital Costs. That committee concluded:
...the financial and statistical reporting of
hospitals is insufficiently detailed, clear
and uniform to permit the identification of
the components of cost analysis of the causes
of rising costs, and to serve as dependable
bases for evaluation and planning.16 .
In 1967, the Secretary of Health, Education, and Welfare,
John W. Gardner, appointed an Advisory Committee on Hospital Effective
ness (Barr Committee) to examine the evidence and advise him of actions
that might be taken to improve performance in 4 principal areas of
health service involving hospitals. Recommendation 7 made by the Barr
Committee reads:
...(a) In every state there shall be a
state agency with specific responsibility
for setting up a system for accumulating,
processing, and publishing detailed infor
mation on the operations of health care
institutions; taking into consideration
the kinds of data that will be most useful
to third-party-payers and most useful to
institutional managements in judging com
parative performance [emphasis added]....17


228
Tully, Emerson G. "A Proposed System to Assure the Continuation of Full
Reimbursement to Florida Hospitals by Blue Cross of Florida,
Inc.," August 9, 1971. Mimeographed pamphlet.
Speeches
Elnicki, Richard. "Hospital Productivity Measures," Committee on
Health Services Industry, Economic Stabilization Program,
Phase II, Washington, D. C., May 15, 1972.
Moses, Gregory H. "Economic Stabilization Program," Florida Hospital
Financial Managers Association, Tampa, Florida, March 16, 1973.


HOSPITAL
DATA COLLECTION FORM
PAGE 1 OF 3
DEPARTMENT
DATE
Acct.No.
Account Title
Hours
Do)lars
SALARIES AND WAGES
.001
Nursirig Supervisor/Supervisor
rtrnr
Head Nurse/Professional
Oil
Charqe Nurse
.012
Staff Nurse
ruzul
Practical Nurse/Semi-Professional
.030
Nursing Assistants/Students
.040
Unit Administrators/Clerical
.041
Clerks/Tvoists
.050
Technicians/Technicians
.060
Physicians/Phvsicians
.061
Interns and Residents/Interns and Res.
.070
General/General
TOTAL SALARIES, WAGES AND HOURS
FRINGE BENEFITS
.100
Social Security (FICA)
.110
Group Life Insurance
111
Group Health Insurance
.112
Group Disability Insurance
.120
Retirement Plan Contribution
.130
Workmen's Compensation
.140
State Unemployment Tax
.141
Federal Unemployment Tax
.150
Uniforms
.160
Meals
.170
.180"
TOTAL FRINGE BENEFITS
FEES
.200
Legal
72T0~
Auditing
.220
Collection Aqencies
.230
Consul tino
.240
Medical Specialists Administrative
.250
Medical Specialists Physicians Services
.260
.270
.280
.250
ra'IATTFIB ~
SUPPLIES
.300
Medical and Surqical
.301
Inventory Count Adjustments
.302
Instruments
.3*0 Druqs
Intravenous Solutions
.330
Wearing Apparel (Excludes Uniforms)
TSST
Uni forms
TSW
Genera) Operating
.35D
Oxygen and Gases
Films and Chemicals
-
.ifn

.362
. L
tift
- .. L J
.364
!
i'


Appendix J
EVALUATION INTERVIEW GUIDE
"WRESPONSES


96
on prospective rates established through budgetary review and analysis.
The Connecticut and New Hampshire-Vermont plans are examples of the
latter group. The trend is for plans to be requiring more cost detail.
Pennsylvania, New York, California, Ohio, and Rhode Island are states
that have recently instituted programs requiring detailed cost dis
closures. This research will consider only the more recent programs
that are based upon detailed cost reporting. The cost requirements of
the plans of the Connecticut Blue Cross Association, the New Hampshire-
Vermont Blue Cross Association, and the Philadelphia Blue Cross Asso
ciations 'will be reviewed here. The Connecticut plan contract calls
for each member hospital to submit, by August 1, a budget for the com
ing fiscal year. Within 30 days of submission of the budget, Connect
icut Blue Cross "shall review operating and capital, budgets on a
departmental basis and may consult with the hospital and the Connecticut
Hospital Association personnel to obtain clarification and understand
ing of the submitted data..."^ Once the budget is approved, it shall
be computer processes (cost-finding procedure) to determine prospec
tive costs for the applicable fiscal yearJ Any budgeted data which
are disputed will be resolved through binding arbitration. At the con
clusion of the fiscal year, and on or before December 1, the hospital
will submit such actual data as are required to evaluate and/or adjust
the originally accepted budget. Adjustment procedures are well defined.
At this time the hospital may keep any payments received from Connect
icut Blue Cross in excess of adjusted budget. On the other hand, the
hospital must absorb any actual costs in excess of the final budget.^
The last measure was instituted to provide some incentive for hospi
tals to operate at a lower than budgeted cost when possible.


SPECIFIC FUNCTIONAL QUESTIONNAIRE
Hospital: Person Interviewed:
Department: Operation & Maintenance Date:
Cost Center: Security
1. Does the hospital contract for security services?
2. Are rounds made on a regular basis by cost center
employees?
3. Are special security measures taken in:
A. Entrance areas?
B. Nursery area?
C. Pharmacy area?
D. Physical plant area?
E. Walkways to and from parking area?
F. Emergency room?
G. Other? (Explain in Remarks Section)
4. Is the parking area lighted?
5. Do cost center employees assist visitors and/or patients
having automobile trouble?
6. Are cars, when illegally parked towed away? If yes:
A. At owners expense?
B. On contract basis with local garage?
7. Do cost center employees maintain all building keys?
8. Do cost center employees manufacture duplicate keys?
9. _Are cost center employees given special fire training?
10. Do cost center employees maintain a current disaster plan?
11. Do cost center employees test disaster plan on a periodic
basis?
138


system. The system as proposed was developed. Cost data were pro
cessed through the system in the manner indicated. All evaluators
agreed that the output was as anticipated and provided costs by prod
ucts and by program.
Second, comparable output could only be achieved with comparable
input, and that was dependent upon proper definition of the elements
of the proposed system. All evaluators found that the activities for
which costs were collected were properly defined, and that the activity
measures selected properly reflected the output of each activity.
Further, where cost distributions were necessary, those distributions
were found to be appropriate.
Finally, the ability of the cost output to meet external user re
quirements was reviewed. From published materials, a group of 4 re
quirements of cost data for external users was developed. Those
requirements were: 1) specificity, 2) verifiability, 3) compa
rability; and 4) consistency. The proposed cost accounting system
output was determined capable of meeting the 4 requirements, and as
such capable of being useful for external decision making, including
area-wide planning.
y


13
of costs has been the cost-finding manual. Hence, their work does not
extend into the cost accounting area, which is the major thrust of this
research study.
There are an increasing number of state organizations attempting
to cope with the hospital cost problem. Those states which have cost
collection systems such as Connecticut,39 New York, and Pennsylvania
have adhered to the American Hospital Association's basic chart of
accounts. Certain modifications have been made for each of the pro
grams, but the approach has been basically the same as the national
organization's approach. Other state programs, of which Florida and
California^0 are examples, have dealt with the application of indus
trial engineering techniques to individual hospital problems. Pri
marily, man-hours, not cost data, are generated for each subscribing
institution within the state. Often such information, as in the case
of the Florida Program, is not used for interhospital comparisons.
Finally, other programs such as the MICHA programs used by the Mental
Health Institute of Michigan and Rhode Island, deal only with indirect
cost allocation problems.41 Very little of the information regarding
these systems has been formally published. Where not referenced in the
preceding discussion, information concerning any of the state programs
can be obtained by writing to the various State Hospital Associations.
The literature of the practicing professionals has done nothing
to advance the knowledge of cost accounting techniques within the
hospital industry. While many recognize the necessity of such systems,
none have indicated a method by which one could be implemented. There
have been attempts at discussing cost accounting practices for indi
vidual departments within hospitals, but nothing concerning an


25
Stage I
Stage II
Stage III
Raw Materials
_v_
Work-in-Process
Finished Goods
Customer
V
Cash
Purchase
6-
of Goods
Purchase
of Goods
&
Services
Fig. 1 .Simplified manufacturing cost accounting system model.


80
Table 3: Full Cost Comparison
Selected Cost Centers as reflected
on the Comparative Hospital Cost Summary
Dollars
610 NS-Medical $
6,159
42,739
75,787
36,303
67,749
660 NS-O.R.
95,800
58,616
28,711
105,672
110,775
706 Lab-Clinic.Path.
81,805
58,837
38,378
-
131,953
757 ER-Nursing
39,393
23,364
20,697
292,219
108,564
863 Laundry-Proces.
-
-
-
_
910 Patient Acctg.
-
-
-
_
Total Hospital 1
,240,564
970,576
408,566
1,306,767
1,547,519
Percent of Total
610 NS-Medical
.50%
4.71%
18.79
2.78
4.38
660 NS-O.R.
7.72
6.46
7.03
8.08
7.16
706 Lab-Clir.ic.Path.
6.59
6.48
9.39
-
8.53
757 ER-Nursing
3.18
2.58
5.07
2.24
7.02
863 Laundry-Proces.
-
-
-
-
-
910 Patient Acctg.
-
-
-
-
-
Cost Per Patient Day
610 N5-Medical
99.34
58.95
55.76
45.15
57.51
660 NS-O.R.
9.73
7.07
7.75
8.12
11.99
706 Lab-Clinic.Path.
8.31
7.10
10.36
-
14.28
757 ER-Nursing
4.00
2.82
5.59
2.25
11.75
863 Laundry-Proces.
-
-
-
-
910 Patient Acctg.
-
..
Total Hospital
126.01
109.50
110.27
103.43
167.52
Cost Per Activity Base
610 NS-Medical
-
8.46
11.43
9.70
9.60
650 NS-O.R.
1.86
1.17
2.21
1.52
3.77
706 Lab-Clinic.Path.
1.72
.23
2.35
-
1.18
757 ER-Nursing
30.14
9.75
67.86
9.77
12.38
863 Laundry-Proces.
-
-
-
-
-
910 Patient Acctg.
-
-
-
-
-


Notes
1. United States Code, 1964 Edition, Supplement IV, 1968, Title 42,
Sub-Chapter XVIII, Paragraph 1395, p. 2,527.
2. Ibid., p. 2,597.
3. United States Department of Health, Education, and Welfare;
Social Security Administration, Health Insurance for the Aged;
Principles of Reimbursement for Provider Costs, Him-5, May,
1966, and Revised Edition, January, 1967. See also Reimburse
ment Guidelines for Medicare, 89 Congress, 2 Session,
United States Senate, Committee on Finance (May 25, 1966).
4. Internal Revenue Service, Instructions for Form S-52 (Auqust,
1972), p. 1.
5. Ibid., p. 1.
6. Federal Register, Vol. 37, No. 242, Friday, December 15, 1972,
p. 26,707.
7. Gregory H. Moses, Jr., Director, Office of Exceptions Review,
"Economic Stabilization Program," a speech delivered to
Florida Hospital Financial Managers Association, March 16,
1973, Tampa, Florida.
8. Blue Cross Association, "Blue Cross Payment Methods Summary"
(Memo), September 25, 1968.
9. Amendment to Agreement Between Connecticut Blue Cross Incorpo
rated and The Connecticut Hospital Association, Incorporated,
New Haven, Connecticut, October 1, 1972, p. 7.
10. Ibid., p. 8.
11. Ibid., p, 11.
12. Ibid., pp. 17-18.
13. J. Armand Bouchard, "Budgeting: An Old Tool in A New Era,"
Hospital Financial Management, August, 1972, p. 25.
14. Herbert S. Denenberg and James M. Mead, "Healh-Care Delivery-
System Reform Via Blue Cross-Hospital Contracts," Hospital
Topics, December, 1972, pp. 16-20.
15. Daniel Grotta, "The Ralph Nader of Insurance," Saturday Review,
July 1972, p. 35.
106


172
831:
FUNCTION:
i
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
OPERATION OF PLANT POWER GENERATION
Operate the hospital's power plant. This includes
operating and maintaing stationary engines and
mechanical equipment such as steam engines, com
pressors, generators, turbines, and steam boilers
which provide power for utilities.
Compensation of firemen, stationary engineers,
clerical and supportive staff. Fees, contracts
for power generation, materials, supplies, mis
cellaneous and indirect expenses required to
perform this function.
Square feet.
To primary and patient location areas based upon
the ratio of square feet in each area to total
square feet.
None


116
As has been indicated, once a data base has been developed, the
opportunities for future research begin to develop. This study has
been a first step in that direction.


Appendix H
STEP-DOWN PROCEDURE


161
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
620: NURSING SERVICE SURGICAL
Provide surgical nursing services.
Compensation of nursing service personnel,
unit administrators, clerical and supportive
staff assigned to surgical nursing services.
Fees, materials, supplies, miscellaneous and
indirect expenses required to perform this
function.
Hours of nursing care. Hours are determined from
paid hours of nursing service personnel assigned
to this function.
None
621: Orthopedic
622: Ophthalmology
623-629; Other specialized surgical services


66
the cost system be implemented. The time required to complete this
operation manually was an average of 10 days for each hospital.
Report Preparation
At the completion of the cost distribution calculations, it was
necessary to develop a format for displaying the results of those cal
culations in a logical fashion. For that purpose, 4 were developed in
Chapter III: 1) Hospital Cost Report, 2) Comparative Hospital Cost
Report, 3) Hospital Cost Summary, and 4) Comparative Hospital Cost
Summary. This portion of the method discussion will present the com
pleted formats. The text will include examples of completed, actual
reports and some tables containing extracts of the other reports.
Completed copies of all 4 reports are presented in Appendix I. This
serves 2 purposes. First, it demonstrates the reports that are gen
erated by the cost accounting system. Second, it is a copy of the in
formation provided to those who evaluated the cost accounting system.
Figure 8 is a copy of one completed Hospital Cost Report. The in
formation for this report came directly from the Data Collection Form.
The Hospital Cost Report displays significant detail concerning the di
rect expenses of each cost center. Information concerning each 'ele
ment of the direct expenses of each cost center is displayed 4
different ways. Under the "Dollars" column, the dollars expended on
that element are shown. Under the "Percent of Total" column, the per
centage each element of direct expense is to the total cost center's
expense is shown. Under the "Patient Day" column, the result of di
viding each element of the direct expense by patient days is shown.
Finally, under the "Activity" column, the result of dividing each


DATE:
ACTVI7Y EASE:
COMPARATIVE COST REPORT
PAGE 1 OF 4
:
Acct.
Ho.
Title
1
Cost /
2
s of T
3
atal
4
5
1
Cost P
2
r Patier
3
t Day
4
5
1
lost Per
2
Activii
3
y Base
4
5
ADftlES AND kA&ES
.001
Nursinc Super./Super.
5.65
1.17
.25
.CIO
Head Nurse/Professional
4.40
-16.22
1.27
. 3.35
.18
.7?
.011
Charqe Nurse
.012
Staff Nurse
26.17
7.54
1.08
.020
Pract. Nurse/Semi-Pro.
15.29
-22.00
4.40
4.54
.63
.98
.030
Hursina Assist./Student
19.72
5.68
.82.
.040
Unit Adiiiin./Clerical
2.67
.55
.12
.041
Clerks/Typists
8.12
2.34
.34
.050
Technicians/Technicians
.060
Phvsicians/Phvsicians
.061
Interns & Residents
.070
General/General
24.86
5.13
1.10
TOTAUSAL., WAGES, HRS.
73.70
63.40
71.41
71.25
21.23
14.47
14.74
18.30
3.05
2.96
3.17
3.05
FRINGE BENEFITS
100
Sccial Security fFICAl
4.31
3.74
3.36
4.17
1.24
.85
.69
1.07
.18
.17
.16
.18
.110
Group Life Insurance
1.88
.85
.54
.22
.03
.04
111
Group Health Insurance
3.29
1.10
.86
.75
.23
.22
.15
.05
.04
.112
Group Disability Insur.
3.58
-.92.
.15
.120
Retire. Plan Contribu.
.63
3.78
.96
.18
.86
.20
.03
.18
.04
TT
Workmen's Compensation
.34
.23
.10
.05
.01 ,
.01
.140
State Unemolov. fax
.66
.24
.19
.05
.03
.01
.141
Fed. 'Jnemolov. Tax
150
Uniforms
.72
.21
.03
.160
Meals
.3/
.08
.02
.170
.06
.02
.130
TOTAL FRINGE BENEFITS
8.60
10.81
6.26
9.46
2.48
2.46
1.30
2.43
.36
.50
.28
.41

FEES
.200
Leqal
,210
Auditinq
.220
Collection Aoencies
.230
Consulting
.240
Med. SpecI-Admin.
.250
Mc-d. Sper.-Phvs. Serv.
. 260
.2701
2301
Fig. 9.--Example of a completed Comparative
Hospital Cost Report.


BIOGRAPHICAL SKETCH
Gary R. Fane was born August 25, 1940, at Ottumwa, Iowa. He was
educated in the Iowa public school system. He attended grade school at
Eldon, Iowa, and was graduated from high school at New London, Iowa, in
1957. Mr. Fane received a Bachelor of Business Administration degree
with a major iri accounting from the State University of Iowa, Towa City,
Iowa, June, 1961.
After completing undergraduate work, Mr. Fane served 3 years as a
lieutenant in the United States Air Force, receiving an honorable dis
charge in 1964. From 1964 through 1969 he was employed by Caterpillar
Tractor Company, where he held the position of Supervisor, Budgets,
Audits and Procedures for the Joliet, Illinois, plant. During that
period of time, Mr. Fane earned the degree Master of Business Adminis
tration from Loyola University, Chicago, Illinois. In January, 1970,
Mr. Fane entered the University of Florida to begin work toward his
doctorate.
Mr. Fane married the former Sandra Lee Smith of Galesburg,
Illinois. They have 2 children: Gregory, age 7 years and Mitchell,
age 3 years.
Hr. Fane is a member of Beta Alpha Psi, honorary accounting fra
ternity, and the American Accounting Association and the National
Account ing Association.


91
The guidelines developed provided for hospitals to make price in
creases under certain conditions. If price increases were in excess
of the guideline limitations, various agencies were to be notified de
pending upon the amount by which the limit was surpassed. Those
instructions stated:
1) Price increases resulting in an annualized
rate of increase in aggregate annual
revenue of up to 2 1/2% may be implemented
without notification of any agency.
2) Price increases resulting in an annualized
rate of increase in aggregate revenues greater
than 2 1/2% but not less than 6% could be
implemented upon notification and approval
of the local District Director of Internal
Revenue
3) Price increases resulting in an annualized
rate of increase in aggregate revenues
greater than 6% could only be implemented
upon notification and approval of a local .
State Advisory Board and the Price Commission.
The determination of the aggregate percentage increase in prices is
accomplished by adjusting the present period's aggregate revenue, then
calculating the difference between the present period and prior period
aggregate revenue. The difference then is divided by the prior year's
aggregate revenue to determine the percentage change due to price in
creases. The adjustment allows for changes in volume, increased
number of patients, and intensity of service, more service provided to
each patient. It can be calculated in one of two ways. Detailed data
may be provided that identify changes attributable to volume or inten
sity. This requires the collection of such detailed data as are neces
sary to substantiate volume changes by department, or even at a more detail
ed level. The detailed information must be submitted on schedules showing


67
HOSPITAL COST REPORT
HOSPITAL: 2 PAGE 1 OF 3
ACCOUNT NUMBER: 610 ACTIVITY BASE: Hours of Care DATE: One month
/irrniipt Title IS of Total
Patient Day!
Actiy i ty j Do I jars j
S7EARIES"7rirTrAES f'
Nursing Super./Super. 1
Head Nurse/Professicnal 1 4.40
1.27 1 .IS
r\ o a
Charge Nurse 1
1
Staff Nurse
26.17
7.4 -03
5^65
Pract. Nurse/Seni-Pro.
15.29
4.40 i .53
3192
Nursino Assist./Student
19.72
5.68
.82
41 I 7
Unit Admin./Clerical
Clerks/Typists
3.12
2.34
.34
i 6yc-
Technici ans/Techn¡cia ns
Phvsicians/P'nvsicions
Interns & Residents
General/General
TOTAL SAL.. WAGES. HRS.
73770
2T723
3.05
! 5393"
FRINGE BFNFFTTS
Social Security (FICA)
4.31
1 .24
.¡3
gOO
Group Life Insurance
1.33
.54
.08
393
Group Health Insurance
Group Disability Insurance
Retire. Plan Contribution
.63
.18
.03
132
Workmen's Compensation
.34
.ID
.01
71
State Unemplov. Tax
.66
. iy
.03
138
Fed. Umeplov. Tax
Uni ferns
.72
.21
.03
151
Meals
Health Service
.06
.02
-
~T3
TOTAL FRINGE BFNEFTTS
8.60
08
. db
r7!J8~
FEES
Leaal
Audi tina
Collection Agencies
Consultino
Med. Spec. Admin.
Med. Spec. Phvs. Serv.

TOTAL FEES
SUPPLIES
Medical & Surgical
1.34
.38
.06
. -2Z5
Inven. Count Adiust.
Instruments
Drugs
.03
.01
-
6 .
]nlrverous Solutions
.01[
2
Wearing Anparel (ex. Uni.l
1
Uniforms

1
Gongral Operating
Qx^oiLJLQfLj&as.es^
.
Fig.' 8.--Example of a completed Hospital Cost Report.


58
interest, start-up, and insurance. This produces the "Adjusted Direct
Expenses," and this information is displayed in the same fashion as the
"Direct Expenses." Finally, after the costs of all support service
cost centers have been distributed, the "Full-Cost" portion of the
report is prepared.
The "Comparative Hospital Cost Summary Report" displays the infor
mation from the "Hospital Cost Summary Report" on a comparative basis
for all hospitals.
The 4 reports called for as output of this cost accounting system
enable detailed information for a single hospital or a group of hospi
tals to be evaluated, even for the smallest element of costs for any
of the cost centers. At the other extreme, comparative summary cost
accounting data are made available at 3 different points of processing
within the model.
Summary
This chapter has been concerned with identifying the steps of the
procedure which were required to develop the cost accounting system
recommended in Chapter II. Next, the results of applying that method
viere discussed. Finally, the elements of the system were described and
provided in the appendices, along with the necessary forms and report
ing formats. In essence, the elements required to move from the con
ceptual cost accounting system model to an operating cost accounting
system were developed. At this point, it is assumed that the cost ac
counting system developed will produce the desired comparable cost data
It will be the purpose of the next chapter to test that assumption and
determine if that conclusion is warranted.


TABLE 5Continued
COST CENTER
HOSPITAL 1
HOSPITAL 2
HOSPITAL 3
HOSPITAL 4
HOSPITAL 5
NUMBER ANO T1UE
DOLLARS
IDF
COSTFOt
COST PER
DOLLARS
1 Or
PtH
COST TER
DOLLARS
X Of
COST PER
COST PE!
DOLLARS
X OF
COST PER
COST PE
DOLLARS
^OF
COST PER
cost m
TOTAL t
PAT DAY
ACT BASE
TOTAL %
PAT DAY
ACT RASE
TOTAL t
PAT OAT
ACT BAS1
TOTAL S
PAT DAY
ACT BASE
TOTAL $
PAT OAY
ACT BASE
959 Pub. Re. Coba.
2.768
.27
.30
.39
3,102
.37
.37
3.64
34
.01
.01
.10
1,229
.11
.09
1X2
2,146
.16
.23
1.58
950 Pub. RI. Spec.
2,771
.25
.21
.25
961 Orplaln
1,993
.27
.30
.27
1,438
.40
.40
.40
204
.02
.02
.02
1.668
.13
.18
.13
963 Hat. Hindi.-fre<
16.209
1.64
1.85
12.67
961 Recycle Frese!*
970 Volunteer Svs
92
.01
.05
3.54
976
.OB
.11
2.90
999 Parking Lot
.39
.45
.
1,348
.12
.10
.12
Totai Hospital
1,112.676
100.00
113.02
-
844,466
IOO.CO
101.89
-
372.469
100.00
100.53
-
1,110,483
100.00
85.35
-
1,305,264
100.00
141.29
-
t\3
O
CO


105
system and subject to the same verification procedures that are per
formed in conjunction with a financial audit.
Comparability. Each cost center is uniformly defined and usually
represents a single activity. Each hospital performing that activity
does so in the same cost center. Given the use of the uniform defi
nitions, the cost collected in a cost center are for the same activity
in each hospital.
Consistency. The nature of the proposed cost accounting system is
to capture costs at a basic level. As such, even hospital reorgani
zations would not affect the data collection, only the data summari
zation. This detailed collection would tend to insure some degree of
consistency, because regardless of the manner in which data might be
ultimately consolidated, the basic information would always be avail
able for comparison with previous periods.
Summary
This chapter has discussed how the cost accounting system de
veloped in Chapter III was evaluated. The evaluation consisted of 3
steps. First, the procedural aspects were tested through the develop
ment of the system outputthe various cost reports. Second, those
reports were evaluated by a selected group of hospital managers.
Finally, 4 major requirements of cost information for external users
were developed. The requirements were based upon published materials
concerning the information needs of those user groups. This chapter
has discussed the method used to evaluate and presented the results of
completing that evaluation. It will be the purpose of the next chap
ter to develop conclusions based upon the material presented here.


225
Henke, Emerson 0. "Performance Evaluation for Not-For-Profit Organiza
tions," Journal of Accountancy, (June, 1972), 51-55.
Herkimer, Allen G., Jr. FHFMA. "Treatment Degree: A Standard Unit
of Measure for All Components of the Health Care Industry,"
Hospital Financial Management, (March, 1972), 7-13.
Hospitals Guides Issue, (August 1, 1971), 487.
Lave, Judith R. and Lave, Lester B. "Estimated Cost Functions for
Pennsylvania Hospitals," Inquiry, (June, 1970), 3-14.
Macleod, Roderick K. "Program Budgeting Works in Nonprofit Institu
tions," Harvard Business Review, 49 (September-October, 1971),
46-56.
McCosh, Andrew. "Computerized Cost Finding Systems," Hospital Financial
Management, (November, 1969), 18-21.
"Motorola, Hospitals Argue Costs," Medical World News,
(September 22, 1972), 63-64.
Mullinix, Larry B. "Elements of an Integrated Financial and Cost
Control Systems," New Jersey C.P.A., (Winter, 1971), 10-15.
Reeves, Philip N. "Coordinating and Automating the Hospital's Informa
tion and Planning Systems," Hospital Financial Management,
(January, 1972), 32-35.
Rice, Dorothy P. and Cooper, Barbara S. "National Health Expenditures,
1969-71," Social Security Bulletin, (January, 1972), 3-18.
Seago, W. E. "Medicare: Accounting Methods and Social Goals," Journal
of Accountancy, (August, 1971), 46-53.
Schultze, Robert, CPA, FHFMA. "Comparability is the Key for Outpatient
Unit Cost Measurement," Hospital Financial Management,
(March, 1972), 17, 20-22.
Schulz, Rockwell I. and Rose, Jerry. "Can Hospitals be Expected to
Con' ol Costs?" Inquiry, X (June, 1973), 3-8.
Sheps, Cecil G. "The Influence of Consumer Sponsorship on Medical
Services," The Milbank Memorial Fund Quarterly Volume L,
Number 4, (October, 1972), Part 2.
Skolnik, Alfred M. and Dales, Sophie R. "Social Welfare Expenditures,
1929-71," Social Security Bulletin, (December, 1971), 3-16.
Steinert, Jeff H. FHFMA. "The Impact of the Federal Government on
Hospital Costs," Hospital Financial Management, (Julv, 1971).
11-12. ^


170
FUNCTION:
EXPENSES:
ACTIVITY BASE
DISTRIBUTION:
782: OUTPATIENT CLINICS ~ PATIENT CARE
Provide patient care on an outpatient basis.
Compensation of physicians, nursing service per
sonnel, clerical and supportive staff. Fees,
contracts, materials, supplies, miscellaneous and
indirect expenses required to perform this function.
Number of outpatient visits.
To patient location areas based upon the ratio of
visits in each area to total number of visits.
SUB-ACCOUNTS:
783-792: Major speciality clinics, as required.


HOSPITAL:
ACTIVITY MEASUREMENT AND COST DISTRIBUTION STATISTICS AI.L AREAS
PAGE I OF 7
DATE:
Acct.
No.
0)
Employ.
Health
Service
(2)
No. of
Meals
Served
(3)
Hours
of H.K.
Service
(4)
Lbs. of
Soiled
Laundrv
(5)
No, of
Person
Llv.-In
.16)
No. of
Phone
Lines
(7)
1o. of
New l
Hires
(8)
Hrs. of
Person.
Train.
0)
$ Value
of Item
Rea.
(10)
Carts
recess
(Fres.)
(ID
Hrs. of
Vclunt.
Service
-
SOI '
60Z
510
611
612
613
614
l
615
1
616
I
617
618
619
620
621
622
1
623
624
625
626
*
627
628
629
630
631
632
633
634

635
636
637
638
639
640
641
642
643 -

;
644
64E




i
646

1
647
!
i !
CO


COMPARATIVE COST REPORT
DATE: ACTIVITY BASE: PAGE 3 OF 4
Acct.
Cost ,
.3 % Of 1
otal
Cost P
ar Patiei
t Day
Cost Per
Activi
;y Base
No.
Title
1
2
3
4
5
I
2
3
4
5
1
2
3
4
5
.520
,530
.540'
.550
TOTAL SUPPLIES
1.56
2.14
1.51
.23
.44
.40
.31
.06
.07
.10
.07
.01
PURCHASED SERVICE
.600
Purchased Maintenance
.601
Parchas. Maln.-Cnnt.ract
.60?
Parchas. Main.-Other
.610
Utilities
.611
Utilities-Electricity
.61?
Utilities-Gas
.613
Utilities-Water & Sewer
.620
Garbaae Collection
.630
Teleohone S Telecraoh
.7
.14
.02
.640
Insurance & Bondino
10.10
1.22
2.47
.20
1.45
3.76
.56
.04
.37
.06
.1?
.01
.06
.650
Oues and Memberships
.651
Prof. Activity Study
. .660
Travel
.661
Travel-Pducatlnn
.662
Travel-Other
,
.670
Equipment Rentals
.671
Fouinment l eases
.72
.21
.03
.672
Photocoov Equipment
.580
Microfilm
.600
Postaae
.
.700
l-on-Hosoital Lab.
.701
Serv. From Other Poso.
.710
Outside Monitorina
.720
Laundry
.721
Printino
.722
Housekeeoina
.723
Dietary
.724
Security
.725
Data Prnressina
.730
Tnternnv. Anna. Miniver]
.740
Other
.40
,10
02 .,
.750
760
Fig. 9.--Continued.
U>


43
not to participate. Those-withdrawing were the 66-bed city-county
hospital and 3 of the privately-owned hospitals. Of the private
institutions withdrawing, one was a small 160-bed unit, one a medium-
sized 325-bed unit, and one a 72-bed specialty (pediatric) hospital.
Appendix K lists those five hospitals participating along with selected
volume indicators concerning each.
Even though the hospitals remaining numbered 5, they accounted for
72 percent of all beds and 74 percent of all admissions for the city
of Jacksonville. The size of this volume coupled with the variety of
sizes and ownership patterns represented were felt to be significant
enough to make the results meaningful. A system that could meet the
requirement of providing comparable data for decision-making purposes
among the members of this heterogeneous group should be able to accom
modate any mix of hospitals.
The administration of the questionnaires by means of structured
interviews was completed over a 3-month time period. During that time,
the supervisor of each defined cost center was interviewed by one of the
four members of the interview team.
Data Analysis
The information gathered via the activity analysis was studied to
aid in the definition of each cost center's activities. The defini
tions for the cost centers which resulted from the data analysis became
the basis for the system framework (chart of accounts), uniform activ
ity bases, and uniform distribution methods. The activity bases were
determined after reviewing both the activity analysis and current meas
urement. practices as recommended by the American Hospital Association in


Appendix B
GENERAL FUNCTIONAL QUESTIONNAIRE ALL COST CENTERS
and
SPECIFIC FUNCTIONAL QUESTIONNAIRES


TABLE 6Continued
HOSPITAL 1
HOSPITAL 2
HOSPITAL 3
HOSPITAL 4
HOSPITAL 5
NUK5EA AND
mero-
TUT
TOTAL $
cost m
PAT OAT
TBsrrer
ACT BASE
Miras-
i or
TOTAL *
LOST PER
PAT OAT
COST PE*
ACT BASE
DOLLARS
tOF
TOTAL
COST PER
PAT DAT
"T5TP3P
ACT SASE
DOLLARS
X Or
TOTAL $
COST Pdt
PAT DAT
tCsf Pci
ACT CASE
DOLLARS
X OF
TOTAL $
COST PLR
PAT DAY
COST PER
ACT BASE
13,713
1.05
1.05
5.39
23,610
1.85
3.10
7.91
782 OP Pit. Care
763 OP Tumor Re?.
784 CP Dental
22,348
22,348
1.80
1.80
2.27
2.27
47.85
47.65
3,031
743
344
22,831
.62
.06
.03
1.76
.62
.06
.01
1.76
3.54
3.22
7.32
6.97
44,659
73,269
2.87
4.72
4.63
7.93
4.51
7.45
795 X-*ay Tech
75 Kental HealtH
3,957
.30
.30
.83
2,716
.18
.25
.55
23,694
1.81
1.81
.48
11.588
.75
1.25
.24
2,1(0
.17
.21
.04
44,003
10.79
11.90
1.98
4,264
.33
.33
.09
*,751
.18
.30
.04
302 -Food Pro
95,327
7.68
9.68
1.76
59.513
6.56
7.18
2.13
64,919
4.97
4.99
1.36
82,467
5.33
8.93
1.23
603 -Food Dis
2,739
.21
.21
.06
8,564
.66
.66
.18
30.384
3.35
3.67
1.09
24.695
1.83
1.90
.92
1.98
1,450
.11
.11
.03
97,438
7.8S
9.89
1.80
89,697
9.91
10.23
3.22
44,088
10.79
11.90
106,640
8.17
8.20
2.C4
05,218
5.51
5.23
1.27
830 Cp of P1ant-A&a.
63! -Pow.
8,742
.70
.89
.04
43.M5
4.78
5.24
.25
22.395
5.48
6.04
.23
9,84?
.75
.76
.03
5.235
.34
.57
.Cl
29,758
2.70
3.02
.13
38,766
2.97
2.93
.10
49,646
3.20
5.37
.10
632 -Ele.
20,512
1.6S
2.03
.09
4,524
.25
.35
.01
7,040
.46
.76
.01
833 -Heit
8.190
.66
.83
.04
4,639
.35
.35
.01
23,472
1.52
2.54
.05
8M -Carp
2,184
.13
.22
.01
3.668
.28
.28
.01
7,746
.50
.04
.02
835 E -Croup
2,171
.17
.22
.01
1,781
.14
.14
-
3,394
.22
.37
.01
836 -Uert>
5,503
.48
.60
.03
2,841
.22
7,637
.50
.83
.02
3/ -Paint
1,210
.10
.12
.01
.22
.01
6,037
.3?
.65
.Cl
639 -Sani
4,550
.37
.46
.02
1,746
.13
.13
-
15.166
.98
1.64
.C3
$.04
.23
941
.07
.07
-
Tota* Op of Plant
83.229
6.71
3.44
.33
43.At*
4.78
$.24
.25
22,395
$.48
68,723
5.27
5.29
.17
125,433
8.11
13.57
.26
3,!?8
.25
.32
.Cl
3,776
.42
.46
.02
3,497
.86
.94
.04
11 .'43
.88
.08
.03
5,529
.35
.fO
.01
- 1,585
.13
.16
.12
33,385
3.63
4.03
3.21
4.C89
1.00
1.10
1.25
2,736
.21
.21
.21
4,795
.33
.62
. .27
458
.ot
.OS
4.33
95
.02
.03
3.17
553
.04
.04
2.68
4,450
.29
.48
3.04
815
.06
.06
2.73
7,926
.50
.86
2.37
853 food Svs
1,682
.14
.17
3.32
772
.19
.21
3.15
2,159
.It
.17
3.97
444
.03
.05
11.10
2,568
.21
.26
3.33
581
.14
.15
3.16
4,477
.34
.34
2.22
4,440
.23
.48
3.05
19,632
1.50
1.99
3.39
6,251
1.53
1.69
3.17
22.038
1.69
1.69
2.34
2,640
1.40
2.34
3.2!
$4$ Prof.Spt.
4,920
.40
.50
3.32
1,265
.31
.34
3.16
5,232
.40
.40
9.60
9,705
.63
1.05
2.74
657 Pub 1 Adra
5,182
.42
.53
1.53
1,357
.34
.38
3.17
564
.04
.04
.44
3,573
.23
.39
4.C5
853 Mental Ileal
2.4C4
.26
.2C
12.37
1,874
.12
.20
2.41
4.41
4,635
.33
.34
4.83
Total Vousekeeotng
36.-29
2.92
3.65
2.99
33,385
3.53
4.03
3.21
14,455
3.91
46,604
3.55
3.55
3.62
58.860
3.72
6.37
3.33
1,630
.13
.17
.01
1.5K3
.15
.15
.01
1,399
.09
.15
,C3
861 Col & D
5.913
.75
.83 .
.07
1 ,661
.13
.13
.01
8,267
.53
.89
.15
D62 %-n
7/*4S
.52
.79
.01
55
.11
.12
.01
5U
.04
.04
-
6S5
.04
.07
.01
13,043
1.05
1 32
.06
10,664
1.18
1.29
.10
4,485
1.10
1.21
.1?
12,86.1
.98
.99
.05
12,958
.84
1.40
.25
Total Laundry A Liner
22,418
1.80
2.25
.1!
17,582
1.S3
2.12
.17
4,940
1.21
1,33
.13
7.029
1.30
1.31
.07
23,289
1.50
?.51
.45
5.2C0
.40
.0
751.43
>C0 Fin M§t Adetn
1.18
4,225
.32
.32
.38
3,587
.23
.39
.28
11,455
.92
1,16
1.03
6.243
.91
.99
.95
4,393
1.08
1.19
5,636
.43
.43
.51
7.658
.50
.83
.52
9*0 Patient Aect?.
31,047
2,50
3.1S
15.31
14,615
1.61
1.76
4.76
5.135
(.26
*.33
.71
19,917
1.52
1.53
4.52
21,572
1.3S
2.31
.79
1.35
19.91/
14,403
.93
1.56
.53
31.047
2.50
3.15
IS.31
14,615
1.61
1.7$
4.76
5,135
1.26
6.71
1.52
1.53
4.52
35,975
2.32
3.90
1.32
920 Admitting
9,493
.77
.96
5.45
11,866
1.31
1.43
3.64
10,526
2.S3
-2.84
2S.0E
3,3.15
.54
-64.
5.20
9,3!C
.60
1.01
9.35
1,706
.14
.17
.15
.12
,12
.¡4
2,300
.15
.25
.is
5,031
.41
.52
.46
.M
.11
i4sc
.15
.15
.18
3.903
.23
M
.30
10,331
.84
1.05
.93
15,942
1.76
1.92
1.89
400
.10
14,503
1.03
T .04
1.22
8,7?9
.57
. ?5
.67
17*156
1.39
1.74
1.54
15,942
1.75
1.92
1.89
400
.10
.H
.11
15,9/7
1.30
1.31
1.54
14,982
.97
1.62
1.15
16,600
1.50
1.89
98.41
14,779
1.5C
1.73
81.24
6,175
1.51
1.67
74.40
26,865
2.06
2.C7
123.90
18.618
1.20
2.02
66.73
940 Courier Sv*
.10
.10
.11


102
Boards of Trustees, to the other extreme of substantial consumer con
trol over hospital management through representation on hospital boards
of trustees. Another approach, between these 2 extremes, has been sug
gested by the United States Chamber of Commerce. Specifically, the
Chamber of Commerce recommendations call for business to try to take a
closer look at the health care costs in an attempt to determine exactly
what they are buying: at least one major corporation has done just
that.2 Motorola, by virtue of being the largest employer in Arizona,
was also the largest purchaser of health care. As the cost of such
care was increasing, the company attempted to discuss, with hospital
administrations, ways to contain those costs through better management
techniques. The zeal with which the hospitals resisted such a move
prompted a long and bitter state-level inquiry. This single case of
a major consumer being able to force hospitals to reveal detailed
costs information is exceptional. No regular process has been initi
ated yet that allows such screening by major customers on a regular
basis. However, it seems plausible that in the absence of any consid
eration of consumers' wishes, this policy could be extended. The infor
mation required to settle each inquiry might be different depending
upon the questions to be resolved in the course of each investigation.
As a result, the type of information demands could vary considerably.
It does not seem unreasonable to think that one of the major categories
of data requested would be detailed cost and statistical measures.
Since there have been no consumer-oriented programs fully imple
mented to date, the cost information needs of such programs remains un
defined. If it is assumed that one of the major concerns of consumers


TABLE 6Continued
03S? CENTER
N*EL* RKO
TITLE
950 Administration
43,746
3.53
4.41
95! Personnel Admir.
1,851
.15
.19
VS2 E>1
3,354
.27
.34
9S3 Wage
1,201
.10
.12
954 Train
1,444
.12
.15
Total Personnel
7,850
.64
.80
955 Purch. Admin
1,713
.14
.17
956 Buying
957 Receivin'
958 Storage
6,714
.54
.68
Total Purchasing
o,427
.68
.35
**59 Pub. Rel. Cetra.
950 Pub. Rel. Spec.
3,374
.27
.34
961 Chaplain
3,290
.27
.33
963 Nat. Hand!. Fre<
964 Recycle freseIn
970 Volunteer Svs
21,CS2
1.76
2.22
999 Parking Lot
7,481
.60
.76
Total Hospital
1,240,564
100.00
125.01
HOSPITAL 1
TOTAL S PAT CAT
ten
3.93
17,914
1.98
2.IS
2.1?
12,953
HT1 f
3.17
3.50
3.48
2.09
4,880
.54
.59
5.72
2,901
.71
.78
8.19
1.36
3.03
8.86
4,880
.54
.5
5.72
2,901
.71
.78
1.19
3.216
.30
.39
2.31
3,982
.97
1.07
.14
4.67
S.8S
3.216
.30
.39
2.31
3,982
.97
1.07
-14
3.81
3.105
.34
.37
3.64
34
.01
.01
.10
.30
1,536
.38
.4!
.41
15.22
354
.04
.04
.26
907.676
100.00
109,58
-
408,566
100.00
110.27
-
"M033S
HOSPITAL *
TF
COST PER COST FEff
"W5EX755 T5F
cost FER CSJTTBT
DOLLARS
43,005
3.119
3.519
117
6,755
2,516
1,462
741
5,504
10,326
] ,364
2,906
1,539
% OF
TOTAL 1
COST PER COST PER ] DOLLARS F
COST PER COST PER
3.29
.24
.27
.01
.62
.20
.11
.06
.42
.79
.10
.22
.12
1,346 .10
3.31
3.87
15,180
.93
1.64
1.16
.24
2.6Q
2.214
.14
.24
1.63
?7
121.34
4,792
.30
.52
532.4
.Cl
.01
5,053
.33
.55
3.72
.52
S.6Z
12.059
.77
1.31
8.63
.20
.04
1.971
.13
.21
.07
.11
.02
12,053
.78
1.30
.42
.06
.01
.42
.09
13,661
.88
1.48
.43
.79
.16
27,705
1.79
2.99
.9/
.10
1.14
2,291
.15
.25
1.C9
.22
.25
.11
.14
1,934
.13
.21
.14
.10
.12
1,121
.07 .
.12
3.53
100.43
-
1.547,519
100.00
167.52
-


GENERAL FUNCTIONAL QUESTIONNAIRE ALL COST CENTERS
Hospital:
Department:
Cost Center:
Person Interviewed:
Date:
1. Is this cost center staffed on a:
A. 8 hour basis?
B. 16 hour basis?
C. 24 hour basis?
D. Other? (Explain in Remarks Section)
2. Is this cost center staffed on a:
A. 5 day week?
B._ 6 day week?
C. 7 day week?
3. Does number of employees vary from shift to shift and/or
day to day? (Explain in Remarks Section)
4. Are cost center employees paid for "on-call" coverage? If
yes, are they used:
A. In addition to staffing?
B. Instead of staffing?
5. Are cost center employees paid rate differentials? If yes,
is it for:
A. Shiftwork?
B. Weekend Work?
C. Other (Explain in Remarks Section)
6. Are part time employees regularly used? If yes, are they
used to:
A. Cover peak periods of operation?
B. Cover vacations & sickness?
C. Cover weekends & evenings?
D. Other? (Explain in Remarks Section)
7. Do cost center employees ever have duties in other cost
centers?
8. Is this cost center involved in a formal program of student
training?
123


32
At this point, one exception should be noted. Usually those items
representing Revenue Reductions are not considered expenses or expired
costs of the current period. This model, however, implies that the
costs of operation must be recovered. If some are not so recovered
due to a bad account or a courtesy discount, it is incumbent upon the
management to raise the necessary resources in some other fashion.
Consequently, the model includes a component which recognizes the
necessity to recoup the resources which are consumed but for which no
reimbursement is received, and calls the model a Full Cost model.
While this method of cost analysis allows for an evaluation of
program costs which can be used for rate setting and reimbursement
purposes, it fails to achieve the significance of the cost accounting
system model which was outlined in the previous section. First, it is
an historic evaluation of the operations. Often it is too late to take
corrective action once the year has ended. Second, it does not allow
for product costing on a current basis. To know what Basic Production
component costs are after a year's operation is of little use in
helping determine what rates should have been charged during that
period of time. Also, unless the historical program costs are manipu
lated to reflect expected events, there is little evidence to indicate
that they can be useful planning tools for future rate setting policies
Third, since the structure is one of a programatic nature, the responsi
bility lines often are blurred and what information is presented is
lacking in its ability to provide for the control and evaluation
aspects found in the industry model. Finally, this approach is only
significant when it is assumed that ultimately total allowable costs
will be recouped, as in the case of the year-end Medicare adjustment.


130
Specific Functional Questionnaire
Cost Center: Operating Room
A. Staff physicians?
B.
RN's
C.
LPN's
D.
Aides?
E.
Orderlies?
F.
Technicians?
G.
Administrative?
Section)
H.
Other? (Explain in Remarks
Do physicians provide own scrub nurses?
Is there a distinction made
between minor and major
operating rooms in terms of staffing, equipment, etc.?
12. What is the number of:
A. Minor operating rooms?
B. Major operating rooms?
13. Does the operating room supervisor:
A. Participate in preparation of the budget?
B. Purchase supplies?
C. Store supplies?
D. Issue supplies?
E. Maintain inventory of supplies?
14. Is the daily schedule of operations posted in the operating
room?
15. Is the daily schedule of operations distributed among the
nursing units?
16. Are surgical instruments sterilized in:
A. Operating room?
B. Central Sterile Supply?
17. Are surgical gloves:
A. Disposed of after use?
B. Resterilized?
18. Is closed circuit television provided?
19. Is there an operating room any place else in the hospital,
such as in the emergency room?
20. Is anesthesia equipment stored in the operating room?
21. Are there residents or interns performing operations?


PATIENT SERVICES EXPENSE
OTHER PROF. SV$. DIV. EXPENSE
AHA
1
2
3
4
5
Other Prof. Svs. Div. Admin.
700
Lab. Admin.
701
Cytology.
Lab. Clinical
702
702
702
705
Clinical
Microscopy "i
702
Lab. Chemistry
703
703
Lab. Bacteriology
704
704
Lab. Pathology
705
705
705
705
Lab. Other
706-709
706-Hemo.
707-Heart Cath.
708 Isotopes
709-Mi sc.
Blood Bank
710-711
710
710
710
710-B.B.
710-Blood Therp.
711-Trans.
71T-Hemodialys.
Electrocardiology
712-713
712
712
712
712
Electroencephalography
714
714
714
714
713
School of Med. Tech.
715
715
Other Units
716-719
716-EMG
716-Cardio-
716-ECHO
vascular Lab.
Radiology Admin.
720
Radiology Diagnostic
721
721
721
721
721
721
Radiology Therapeutic
722
School of X-Ray Tech.
723
723
Radiology Other
724-729
724-Nuclear
724-
724-
724-
Medicine
.Isotopes
Isotopes
Isotopes
725-Spec.
Proced.
726-Breast
Cancer
Pharmacy
730-734
730
730
730
730
730
Anesthesiology
735
735
735
735
735
735
Inhalation Therapy
736
736
736
736
736
736
Physical Therapy
737
737
737
737
737 .
737


HOSPITAL 2
TO CLOSE PROFESSIONAL SUPPORT SERVICE COST CENTERS
WORKSHEET "C"
Adj. Exp.
Cost Bal. from
Center Work. A.
601
7189
602
9114
675
36987
690
5132
758
11522
765
3103
775
17731
920
17023
921-678
15120
702
11738
706
58837
714
13599
716
14064
718
5459
721
49289
728
7347
731
35933
735
6791
737
18946
739
2685
741
7647
757
22415
660
53532
601 602
7189
188 9302
126 167
50 65
117 157
14 19
308 408
643 854
690 758 765 775 920 921
94
5247
11522
3103
17731
17023
89 15483
10
232
484
Total
Cost
37374
11738
58837
13599
14064
5469
49289
7347
35S33
6834
18946
2685
7647
23364
58616
3103


45
small in terms of the expected number of employees and dollar expendi
tures. The criteria for consolidating v/ere to have a separate cost
center if: 1) the expected number of employees in a cost center
numbered more than 2; and 2) the expected dollar expenditures were
more than $100. There were some exceptions to these guidelines, but
the criteria v/ere adhered to generally.
The analysis of which cost centers should or might be found
within a hospital v/as developed a priori. It would be the purpose of
a later step, the activity analysis, to substantiate or refute such
an assumption. Having completed the preliminary list of cost centers,
the questionnaire development step was next.
Develop Questionnaire
Appendix B contains a copy of the General Functional Questionnaire
that was used in the interviews with each cost center supervisor. The
same appendix also contains copies of several of the Specific Func
tional Questionnaires. Those Specific Functional Questionnaries
presented are meant to be representative of the type of questions
developed and used for gathering information from specific cost
centers. The complete set of questionnaires is located in the offices
of the Graduate Program in Health and Hospital Administration, Univer
sity of Florida.
Test Questionnaire
The results of the testing of the questionnaires at Shands
Teaching Hospital and Clinics were encouraging. Only one new cost
center was added, Cardiac Gatherization Laboratory. All other re
mained essentially unchanged. The 4 interviewers gained experience
and were prepared to complete the activity analysis.


SPECIFIC FUNCTIONAL QUESTIONNAIRE
Hospital: Person Interviewed:
Department: Business Affairs Date:
Cost Center: Admitting
1. Do employees of this cost center spend time:
A. Explaining hospital rules, regulations, billing system?
B. Completing pre-admission forms?
C. Obtaining patient information from patients, family
or physicians?
D. Interviewing patients or family upon leaving the
hospital?
E. Evaluating patient financial status?
F. Assigning patients to rooms?
2. Does this cost center initiate:
A. Preadmission forms?
B. Admission forms?
C. Patient forms?
D. Insurance forms?
E. Laboratory requests?
F. Daily census reports?
G. Patient ledger?
H. Other? (Explain in Remarks Section)
3. Does this cost center maintain:
A._ Admission and discharge forms?
B._. Patient log?
C. Other? (Explain in Remarks Section)
4. Does cost center employees operate visitor information
desk?
5. Do cost center employees handle patient mail?
6. Do cost center employees complete death certificates?
7. Do cost center employees release dead bodies?
8. Do cost center employees conduct some interviews for
outpatients?
134


14
institutional system or a system that can be applied to all hospitals
within a community.
Generally, it can be concluded that the related literature does
virtually nothing to explain how a cost accounting system can be
developed and implemented within a group of community hospitals.
Summary
This chapter had indicated that the problem of rapidly increasing
costs and decreasing availability of resources confronts the hospital
today. In an effort to more efficiently utilize the limited resources
and justify increased resources, a new system of review, the regional
management, and/or community level review, is gaining prominence. In
order to accomplish this type of review, a new cost accounting system
is necessary that can provide the required information. It was then
stated that the purpose of this study is to develop and evaluate such
a cost accounting system.
A review of the related literature indicated few hospitals have
attempted to install cost accounting systems, primarily implementing
cost-finding techniques as suggested by the American Hospital Associ
ation and/or various state level organizations. Nothing has been done
toward establishing a community-wide cost accounting system. In ad
dition, accountants, who have the necessary skills to provide leader
ship in this endeavor, apparently have failed to do so.
The next chapter will compare and contrast the types of cost
accounting systems presently used by industrial concerns and by hospi
tals. A cost accounting system will be proposed for hospitals along
the same lines as the industrial model. The balance of the research
will be divided into 2 major sections: system development and system
evaluation.


SELECTED COST CENTERS BY CATEGORY
Support Service Cost Centers
Hotel Support Service Cost Centers
802 Dietary Food Production
831 Operation of Plant Power Generation
844 Security
855 Housekeeping Patient Rooms
901 Financial Management
902 General Accounting
903 Budgets
904 Cost Accounting
905 Payroll Accounting
906 Accounts Payable Accounting
907 Plant and Equipment Accounting
908 Inventory Accounting
909 Internal Auditing
952 Personnel Employment
Professional Support Service Cost Centers
601 Nursing Service Administration
602 Nursing Service Supervision
751 Home Health Care
752 Social Service
Patient Service Cost Centers
Primary Service Cost Centers
702Clinical Laboratory Anatomical Pathology
703 Histopathology
704 Cytology
705 Morgue
706Clinical Laboratory Clinical Pathology
707 Bacteriology
708 Biochemistry
709 Chemistry
710 Hematology
711 Serology
712 Emergency Laboratory
713 Outpatient Laboratory
178


89
In order to define "reasonable costs," the Social Security Com
missioner formed the Health Insurance Benefits Advisory Council. The
council consisted of representatives of the hospital, nursing home,
and insurance industries as well as representatives of Federal, state,
and local governmental agencies that purchase health care. After a
year of deliberation, a Principles of Reimbursement for Provider Costs
was produced. This document set out 4 general reimbursement princi
ples and 12 principles pertaining to specific reimbursable costs.3
The specific principles indicated what indirect costs, in addition to
the direct costs, would be considered reimbursable. The general
principles hold more significance for this research. The pertinent
general principles are:
1. Costs related to patient care. Payments to
providers must be based on the "reasonable
costs" of services covered under Title XVIII
and related to care of beneficiaries.
Reasonable costs includes all necessary and
proper costs incurred in rendering the services,
subject to principles relating to specific
items of revenue and cost.
2. Determination of Cost of Services to Beneficiaries.
Total allowable costs of a provider shall
be apportioned between beneficiaries and
other patients so that the share borne by the
program is based upon actual services received
by program beneficiaries. To accomplish this
apportionment, the provider shall have the
option of either of the two following methods.
a) Departmental method-the ratio of
beneficiary charges to the total
patient charges for the services
of each department is applied to the
cost of the department.
b) Combination method-the cost of
"routine services" for program
beneficiaries is determined on the
basis of average cost per diem of
those services for all patients;


125
General Functional Questionnaire All Cost Centers (Continued)
Cost Center:
23. Do employees of this cost center prepare reports of cost
center activity? If yes, are they prepared:
A. Daily?
B. Weekly?
C. Biweekly?
D. .Monthly?
E. Other? (Explain in Remarks Section)
24. Does this cost center make use of any unique or specially
designed systems for such activities as the delivery of
supplies, transmittal of messages, voice communication, or
performance of routine tasks? (Explain in Remarks Section)
25. Is the hospital undergoing a major addition or renovation
that will substantially modify the cost center's present
method of operations?
26. Are cost center employees unionized?
27. Does the cost center receive government surplus items and/or
donated items?
28. Are all supplies and equipment used by the cost center
charged to this cost center? (If no, note why in the
Remarks Section)
29. Do cost center employees prepare patient charges?
30. Do cost center employees engage in any community service
activities?
31. How are you presently measuring the output of this cost
center? (Explain in Remarks Section)
32. What operating statistics are currently being collected in
this cost center? (Explain in Remarks Section)
33. What other statistics do you feel might be useful? (Explain
in Remarks Section)


SPECIFIC FUNCTIONAL QUESTIONNAIRE
Hospital:
Department: Public Relations
Cost Center: Communications
Person Interviewed:
Date:
1. Are there full time employees devoting full time efforts
to public relations?
2. Are there full time employees devoting a portion of their
efforts to public relations?
3. Is the public relations effort performed by an outside
public relations firm?
4. Which of the following are published by this cost center:
A. Hospital newsletter?
B. Patient information booklet?
C. Employee information booklet?
D. Institutional brochures?
E. Annual financial report?
F. Other? (Explain in Remarks Section)
5. Is this cost center responsible for providing patient
condition reports to the press?
6. Does this cost center provide tours of the hospital?
7. Do employees of this cost center conduct studies of the
public's image of the hospital?
8. Is there a formalized program of public education?
9. Does the cost center prepare for patient such items as
daily news notes, Christmas cards, etc.?
10. Have the cost center employees produced movies, film
strips, video-tape, or slide presentations?
137


hospitals. The test at Shands Teaching Hospital and Clinics resulted
in the addition of one more cost center. By the time the interviev/s
were completed in all 5 hospitals the changes were of a greater mag-
^ n/itude. Appendix C is a partial list of the cost centers identified
during the activity analysis which needed to be defined and accounted
for separately in the cost accounting system. A comparison of the
r
Jtotal final list with the preliminary list in Appendix A indicates sub-
( stantial change. The total number of cost centers ultimately identified
__increased to 252. This was primarily the result of expanding the number
of cost centers recognized within the Nursing Services., the Clinical
Laboratory Department, and the Housekeeping Department. These increases
were offset somewhat by eliminating a few of the original cost centers
and consolidating others. The net effect, however, was the increase
cited. The final result of studying the information obtained during
the activity analysis was the identification of 252 activities con
sidered significant enough to require separate definition. Each activi
ty so defined became a cost center. After determining and defining the
cost centers, the balance of the analysis phase was used to develop the
3 elements of the cost system. The development of each will now be
traced.
System framework. Every accounting system must have a framework
which allows the data collected to be logically organized. That frame
work is a chart of accounts. Every hospital participating in this
research had a chart of accounts, and all of the hospital controllers
indicated that their charts were in conformance with the American
Hospital Association's Recommended Chart of Accounts. As a result,


TABLE 5
COMPARATIVE HOSPITAL COST SUMMARY REPORT
DIRECT EXPENSES
COST CENTER
NUMBER AND TITLE
601 N.S.-Admin.
602 N.S.-Super.
610 N.S.- Med.
611 "
612u *
CU *
614 M
615 "
Total H.S.-Medical
620 N.S.-$urg.
621
622* "
62? "
52? "
625
626
627 *
Total N.S.-Surg.
Total N.S.-Mod/$urg.
630 N.S.-Peds.
63)
033 a "
Total N.S.-Peds.
640 N.S.-1CJ
641 "
642 M
613 "
644 *
Total N.S.-XU
045 N.S.-Psych.
OSO N.S. OB
651 N.S. GYN
TOTAL N.S. OB/GYN
652 N.S. Newborn
65? N.S. Moat
660 *.%. OR
655 N.S. Rec. Kaon
670 N.S. Del. Roan
673 N.S. Del. Rec R
675 CSR Admin,
676 CSR Coll i Diet
677 CSR Processing
Total CSR
578 IY Therapy
690 N.S. Inservice
632 4-Yr. Nurs.Prog.
Total Nursing Ed.
701 lab.- Admin.
702 Lab.- Anatom.
704 Lab.- Cytology
Total Anatom. P3th.
706 Lab.- Clinical
7C7 Lab.- Bacter.
703 lab.- Mise.
709 Lab.- Chem.
710 Lab.- hemo.
H0SPI
fAL 1
HOSPITAL 2
HOSPITAL 3
HOSPITAL 4
HOSPITAL 5
DOLLARS
% or
cost PER
COST PER
DOLLARS
S Of
COST PER
COST PER
DOLLARS
% OF
COST PER
COST PER-
COLLARS
% OF
COST PER
COST PER
TOTAL $
PAT DAY
ACT 8ASE
TOTAL $
PAT DAY
ACT BASE
TOTAL %
PAT DAY
ACT BASE
TOTAL %
PAT DAY
ACT EASE
TOTAL S
PAT HAY
ACT BASF
11.775
1.05
1.20
4.97
4,342
.58
.60
5.53
7,363
1.98
1.99
6.06
57553
.45
.33
4.38
n,7C5
.90
1.28
5.32
7,511
.89
.90
5.68
14,044
1.26
1.08
5.10
897
.08
14.47
-
8,053
2.14
24.90
3.57
23,988
6.44
17.42
3.57
13,220
1.19
16.44
3.53
24,492
1.88
20.79
13,491
1.21
16.6e
3.58
16,231
1.92
28.73
3.78
10,191
.92
16.00
3.74
19,666
1.50
15.10
3.49
15,254
1.37
19.81
4.09
13,569
1.22
14.28
3.45
23,068
1.77
67.64
3.37
4,112
.37
4.91
13.52
15,965
1.44
16.02
3.55
5,229
.47
6.97
4.57
16,262
1.92
22.74
3.60
19,944
1.79
-
2.47
16,656
1.92
24.33
3.63
58,927
5.29
18.25
3.42
67,212
7.90
24.99
3.64
23,988
6.44
17.42
3.57
52,965
4.77
15.63
3.55
67,226
5.15
23.83
7,790
.70
28.22
4.82
20,407
2.42
22.25
3.56
41,251
11.07
18.73
3.60
13,661
1.23
17.83
3.67
24,508
1.87
21.37
15,119
1.36
18.00
3.60
16.827
1.99
23.63
3.58
13,611
1.23
16.40
3.56
18,640
1.42
16.61
17,233
1.55
20.89
3.S3
11
-
-
-
17,772
2.10
25.83
3.84
16.129
1.45
18.10
3.60
15,144
1.36
23.30
2.50
16,372
1.S4
23.53
3.69
5,194
.47
18.22
4.18
4,403
.40
-
2.49
15,564
1.84
24.96
3.49
14,935
1.35
17.01
3.44
i
16,497
1.95
21.51
3.58
15,450
1.39
16.35
3.53
10,185
.92
26.65
3.62
53,700
5.37
26.40
3.33
103,441
12.24
29.67
5.60
41,251
11.07
18.73
3.60
89,165
8.04
17.86
1.3/
43,048
3.29
113,627
10.£6
21.61
3.38
170,653
20.14
27.63
3.63
65,239
17.51
18.22
3.59
942,130
12.81
16.96
4.03
110.274
8.44
19,595
1.76
23.90
4.45
20,911
1.88
29.42
3.70
21,328
1.63
31.27
26.759
2.40
29.70
4.92
263
.02
10.96
4.36
885
.08
_
-
47,239
4.24
27.15
9.56
21,174
18,018
1.62
80.44
5.75
15,757
1.86
83.37
4.45
9,158
2.45
72.68
5.06
1.90
24.54
3.70
21,328
1.63
31.27
11,055
1.31
83.83
5.47
14,356
19.P60
1.52
123.13
1.34
69.13
3.70
7,432
.57
47.95
4.25
12,816
1.15
.
5.53
17,210
1.55
45.65
4.05
30,834
2.77
137.65
5.65
26,822
3.17
B3.56
4.82
9,158
2.46
72.68
5.06
32,066
2.63
54.16
3.90
27,292
2.09
4
12,017
1.03
16.42
3.57
13,008
1,54
35.35
3.52
15,248
1.37
17.77
3.37
35,442
2.72
10,318
.93
20.03
4.11
12,732
1.15
18.67
4.14
12,391
.95
14.27
3.74
15,711
1.42
17.28
3.56
10,318
.93
20.C3
4.11
28,443
2.57
17.88
3.80
12,391
.95
14.27
10,748
.97
19.09
4.89
15,362
1.32
30.36
4.33
15,975
1.44
22.95
3.18
20,330
1.56
24.25
9,067
.82
.70
2.45
7,998
.60
.87
60,637
5.44
6.17
1.18
40,624
4.81
4.90
.81
19,494
5.23
5.26
1.50
61,663
5.51
4.74
.89
51,333
3.93
5.56
6,974
.63
.71
.13
4,455
.53
.54
.08
3,159
.85
.85
.19
6,901
.62
.53
.17
11,181
.85
1.21
13,284
1.19
1.35
99.13
14,636
1.73
1.7
133.05
11,972
1.03
,92
64.71
20,461
1.57
2.21
3,353
.23
.34
25.02
2,731
.75
.21
14..76
1,038
.10
.11
31,260
3.81
3.77
9,613
2.58
2.59
4.33
1,637
.15
.13
,12
2,210
.17
.24
3.07
18,702
1.68
1.44
1.35
34,155
3.47
1,149
.10
.09
.03
31,1GS
35,284
3.17
3.58
31,260
3.81
3.77
9,613
2.58
2.59
4.33
21,483
1.93
1.66
1.55
3,942
.35
12,950
1.53
1.56
2.94
7,695
2.07
2.08
6.41
5,527
.49
.42
12.34
.40
1.42
2,415
.28
.29
2.41
976
.26
.26
5.81
5,492
.49
.42
4.99
1,075
3,942
8,741
.79
.61
291.37
.35
.40
1.42
2,415
.28
.29
2.41
976
.26
.26
5.81
14,233
1.28
1.03
4,173
.37
.42
.09
16,949
1.53
1.30
.05
18394
10,111
.91
1.03
7.37
9,569
1.13
1.15
.25
2,719
.25
.21
.07
6,333
.49
.69
108
.01
.01
.01
57,845
5.20
5.83
1.21
51,371
6.03
6.20
.20
31,071
8.33
8.39
1.90
2,827
5,502
.25
.49
.22
.42
.06
,30
6,330
83,036
.19
6.36
.69
8.59
.86
.70
10,337
.93
.79
.55
12,713
1.14
.98
.12
8,002
-72
.62
.09
f\}
O
cn


23
Patient Service Cost Centers
This term defines those cost centers that provide services di
rectly to the patient. There are 2 types of direct patient service
cost centers.
Patient location cost center. Those cost centers where the pa
tient is physically located for the receipt of services. This includes
nursing areas, outpatient clinics, emergency rooms, and operating rooms.
Primary service cost centers. Those cost centers that provide
professional support services to the patient location cost centers.
They include such cost centers as clinical laboratory, radiology, inha
lation therapy, and physical therapy. These cost centers represent
those activities that distinguish a hospital from a nursing home or
other such types of "maintenance" institutions.
Support Service Cost Center
Those cost centers that provide supportive services to the patient
services cost centers. There are 2 types of support service cost
centers.
Professional support service cost center. Those cost centers
that provide support to the professionals delivering health care at the
patient location cost centers. These include such cost centers as
medical records, admitting, and nursing supervision.
Hotel support service cost center. Those cost centers that pro
vide institutional services. These include such cost centers as house
keeping, dietary, maintenance, and administration.
Distribution Method
Costs of the support service cost centers within the hospital
must be distributed to the direct patient services cost centers if an


ACTIVITY MEASUREMENT STATISTICS
PAGE 1 OF 3
Emergency
Inpatient Nursery Outpatient Room
1. Pharmacy Cost of Drugs Requisitioned -
2. Outpatient Pharmacy Cost of Drugs Dispensed
3. Elapsed Anesthesiology Time _______ (
4. Total Clinical Lab. Relative Unit Values
a. Total Anatomical Pathology R.U.V. '
b. Histopathology R.U.V. .
c. Cytology R.U.V. -
d. Morgue
e. Total Clinical Pathology R.U.V.
f. Bacteriology R.U.V.
g. Biochemistry R.U.V.
h. Chemistry R.U.V.
i. Hemotology R.U.V. '
j. Seralogy R.U.V. ___________
k. Emergency Laboratory R.U.V.
n"toatient Laboratory R.U.V.


OTHER SERVICES EXPENSE
GEN. SERVICES DIV. EXPENSE
Printing
Physicians' Offices
Barber and Beauty Shops
Other Shops
Other Units
FISCAL SVS. DIV. EXPENSE
Fiscal Svs. Div. Admin.
Accounting Admin.
General Accounting
Budgets and Costs
Payroll Acct.
A:count Payable
Accounts Receivable
Plant and Equipment
Inventory Acct.
Other Units
Admitting
Cashiering
Credits and Collections
Data Processing
Communications
AHA
1
2
3
i
5
880
881-882
883-885
886-889
890-899
880
880
880
900
900-901
901
902
903-904
901
901
901
903
902
905
906
907
907
908
909
910-919
919-Acct.
& Audit
Fees
920-929
920-In
920-Admitt.
Pat
921-ER.
925-Off.Mach.
920
& OP.
Maint.
930-934
935
Mail
935
S35
904
Room
903
936
935
936
908
936
937-939
S37
937-tele-
937
937
phone
938-Mail
Mess.


UNIFORM CHART OF ACCOUNTS
Introduction '
This chart of accounts is compatible with the numbering system re
commended by the American Hospital Association in their latest (1966}
Chart of Accounts. A six digit number is used to identify each account
and will appear as follows:
XXX X XX
A B C
A. The first three digits iden
Expenses are classified by
600-699
700-799
800-899
900-949
950-999
B. The fourth digit identifies
0
1
2
3-5
6-7
8-9
C. The fifth and sixth digits
They are:
.000-.099
.100-.199
.200-.299
.300-.599
.600-.799
.800-,999
Definition of Terms
tify primary account classifications,
department and function. They are:
Nursing Services
Other Professional Services
General Services
Fiscal Services
Administrative Services
primary subclassifications. They are
Salaries and Wages
Employee Benefits
Fees
Supplies
Purchased Services
Other
identify secondary subclassifications.
Job categories
Type of employee benefit
Type of fee
Type of supply
Type of service purchased
Other subclassifications
The chart of accounts which follows consists of one page of infor
mation for each primary account. The format of each account description
has been standardized to include six major items of information.
151


THE DEVELOPMENT AND EVALUATION
OF A UNIFORM HOSPITAL COST
ACCOUNTING INFORMATION SYSTEM
By
GARY R. FANE
X
A DISSERTATION PRESENTED TO THE GRADUATE
COUNCIL OF THE UNIVERSITY OF FLORIDA IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
v DOCTOR OF PHILOSOPHY
/
UNIVERSITY OF FLORIDA
1974


84
System Element Evaluation
The proposed cost accounting system has as its base proper ac
tivity definitions, with a cost center designated for each activity.
Additionally, the activity measures must represent the output of each
cost center for the cost accounting system to be of value. Questions
3 through 6 v/ere directed at determining whether the elements of the
cost accounting system did what they purported to do.
All evaluators responded that the activities were defined such
that they represented accurately the activities being performed within
their respective hospitals. Additionally, all of the evaluators v/ere
in agreement with the activity bases that had been selected to measure
the level of activity within each cost center. There was one exception:
2 evaluators (one administrator and one chief accountant) indicated that
the activity base of "hours of care provided" used for the nursing
services cost centers might be a more meaningful activity base if it
were weighted by patient days of care provided. No recommendations
were made regarding a preferred weighting scheme.
The need to define so many activities, however, was not as unan
imously endorsed. Of the 13 evaluators, 4 felt that too much cost
detail was presented, while 9 indicated that the amount of cost detail
was right. Yet, when asked if the number of activities defined was
too few, too many, or about right, only 2 felt that too many activities
had been defined. The other 11 felt that the number of activities de
fined was correct. This seemed to point to a minor conflict. Some of
the evaluators felt the cost accounting system was too detailed, yet
when confronted with reducing the number of activities for which costs


85
would be collected, they indicated that the number of activities was
correct.
In general, the majority of the responses indicated that the cost
accounting system was producing the right amount of information and
for the right number of activities. More important was the unanimous
response that the activities had been defined accurately and, with the
noted exception, the activity bases properly reflected the outputs of
the various cost centers.
Uses of System Outputs
The next 6 questions were asked in order to determine how the cost
data would be used. The first question of this series asked to what
groups of external users had the hospital managements been required to
provide cost data? The following is a summary of the responses re
garding the 5 hospitals. Listed first is the requesting agency, fol
lowed by the number of hospitals sending reports to that group within
the past 6 months.
Annual Price Commission Reports
Price Exception Request
Annual Medicare Report
2 hospitals
2 hospitals
5 hospitals
Special Reports to Public Groups
or persons
2 hospitals
1 hospital
Special Reports to Third-Party-Payers
The next question asked if the type of cost information provided
by this cost accounting system would have been helpful in preparing
any of the reports. Of the 13,9 evaluators responded that it would
have been, and 2 gave a qualified "yes." The qualification was that
it would be helpful only if all hospitals adopted such a cost


162
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
630: NURSING SERVICE PEDIATRIC
Provide pediatric nursing services.
Compensation of nursing service personnel, unit
administrators, clerical and supportive staff
assigned to pediatric nursing services. Fees,
materials, supplies, miscellaneous and indirect
expenses required to perform this function.
Hours of nursing care. Hours are determined from
paid hours of nursing service personnel assigned
to this function.
None
631-639: One account should be used for each
designated pediatric nursing service
area.


TABLE OF CONTENTSContinued
IV. COST ACCOUNTING SYSTEM EVALUATION 60
Introduction 60
Method Related to Procedural Aspects and
Discussion of Results 61
Method Related to Output Evaluation and
Discussion of Results 81
Evaluation by Hospital Managers 81
Requirements of External Users 87
General Cost Information Requirements
Compared to System Output 103
Summary 105
Notes 106
V. CONCLUSIONS AND RECOMMENDATIONS FOR FUTURE RESEARCH ... 108
Introduction 108
Conclusions 108
Recommended Future Research 114
Appendixes
A. PRELIMINARY LIST OF COST CENTERS 117
B. GENERAL FUNCTIONAL QUESTIONNAIRE ALL COST CENTER
AND SPECIFIC FUNCTIONAL QUESTIONNAIRES ......... 122
C. PARTIAL LIST OF FINAL COST CENTERS 142
D. COMPARISON OF PARTICIPATING HOSPITALS' CHARTS OF
ACCOUNTS (SELECTED ACCOUNTS) ......... 145
E. RECOMMENDED CHART OF ACCOUNTS (SELECTED'ACCOUNTS). ... 150
F. SELECTED COST CENTERS BY CATEGORY ..... 177
G. EXAMPLES OF DATA COLLECTION FORMS 180
H. STEP DOWN PROCEDURE 192
I. COST SYSTEM OUTPUT (REPORTS) 195
J. EVALUATION INTERVIEW GUIDE WITH RESPONSES 216
K. SELECTED INFORMATION REGARDING PARTICIPATING HOSPITALS
AND COST ACCOUNTING SYSTEM EVALUATORS 219
i v


69
HOSPITAL COST REPORT
HOSPITAL: 2 pAQE 3 OF 3
ACCOUNT NUMBER: 610 ACTIVITY BASE: Hours of Care DATE: One month
Account Title
% of Total
Patient Day
Activity
Dollars
Postaae
Non-Hospital Lab.
Serv. From Other Hose.
Outside Monitoring
Laundrv
Printinq
Housekeeping
Dietary
Security
Data Processinq
Interoov. Aqen. (Univer.)
Other
TOTAL PURCHASED SERV.
2.41
.70
10
5U2
OTHER EXPENSES
Depreciation
TT40
.40
.06
2W'
Deprec. Fixed Eauio.
.17
.05
.01 '
35
Deorec. Bail dina
2.75
.79
. 11
b7b
Donrec. Bui1 dina Serv. 3.41
.98
.14
711
Decree. Land Improvement
.36
.10
.01
75
Amort, of Start-Up Cost
Interest
Interest Short Term Loan
.08
.02
-
17
Interest Mortoaqes
3.94
TR
.10
823
Interest Bonds
1.62
.47
.07
338
Interest Other
Loss on Bis. of Assets
Loss on Ois. Stocks & Bonds
Credits to Expense
Credits to Exp. Research
Credits to Exp. Grants
Cre. to Exd. Cen. St. Sup
Credits to Exp. Pharmacy
Cre. to Exp. Rep. & Main.
Cre. to Exp. Other
TOTAL OTHER EXPENSES
T3773
3.95
.56
GRAND TOTAL
100.0D
28.80
7TT
20881
OTHER DATA:
Square Feet
Full Time Fquiv. Employ.
Fig. 8.--Continued.


221
List of flvaluators
Several of the administrative and management personnel of the
participating hospitals served as the panel of evaluators who reviewed
the cost accounting system's output,
were:
Baptist:
Mr. George Mathews -
Mr. Thomas Brolair -
Mr. Gerold Tucker
Memorial:
Mr. Charles Vadakin -
Mr. Lee Ledbetter
Mr. John Pritz
Methodist:
Mr. Marcus Drewa
Mr. Donald Homachek -
Mr. J. M. Dill
St. Vincents:
Mr. Robert Moore
Mr. Royal Clayton
University:
Mr. Mike Woods
Mr. Donald Dahlfues -
Those evaluators, by hospital,
Executive Director
Finance Director
Chief Accountant
Administrator
Finance Director
Accountant
Administrator
Assistant Administrator
Chief Accountant
Assistant Director -
Finance
Chief Accountant
Executive Director
Associate Executive
Director of Finance


157
a. Pharmacy 731: Prepackaging and Drug
Distribution.
b. Medical Records 780: Transcription.
c. Dietary 802: Food Production.
d. Data Processing 936: Data Processing -
Administration.
e. Personnel 951: Personnel Adminis
tration.
f. Purchasing 955: Purchasing Adminis
tration.
Every attempt should be made to collect detailed cost
data before using the accounts listed above.
2. In many cases hospitals will have available and will
desire to collect information in more detail. There
fore, subaccounts have been provided and are recom
mended when possible.
3. Primary accounts have been established to accommodate
the collection of costs for activities performed
within all hospitals. As a result, a particular
hospital may not be performing the activity(s) in
dicated by the primary account. If that is the case,
omit that particular account.
4. Certain primary accounts call for a special analysis
in order to complete the distribution of costs to
user areas. In those cases a recommended special
analysis procedure is outlined in Appendix A.


220
The table below indicates selected information concerning the
(Jacksonville, Florida hospitals participating in this research proj
ect.
TABLE 8
SELECTED INFORMATION ABOUT PARTICIPATING HOSPITALS
Hospital
Name
Number
of
Beds
Percentage of
Jacksonville
Beds
Number
of
Admissions
Percentage of
Oacksonvilie
Admissions
Baptist
389
17.49%
17,048
19.49%
Memorial
303
13.62
13,364
15.28
Methodist
164
7.38
4,655
5.32
St. Vincents
445
20.00
17,972
20.60
University
301
13.53
11,951
13.66
Total
1,602
72.02%
64,980
74.35
Source: The 1973 American Hospital Association Guide to the
BeaTtFTXare Field, p. 54T


COMPARATIVE COST REPORT
DATE: ACTIVITY BASE: PAGE 4 OF 4
Acct.
Ho.
Title
1
Cost /
2
s of T
3
ita!
4
5
1
Cost P
2
r Patier
3
t Day
4
5
1
Cost Per
2
Activi<
3
y Base
4
5
.Til
.730
.790
TOTAL PURCHASED SERV.
10.10
2.41
2.47
.69
1.45
3.76
.70
.56
.14
.37
-
.10
.12
.03
.05
OTHER EXPENSES
.800
Deoreciation
.801
DeDrec.-Mai. Mov. Foud
1.40
4.91
1.24
2.53
.40
1.12
.26
.65
.06
.23
.06
.11
: .802
Deprec.-Fixed EauiD.
.17
.04
-
.05
.01
.01
-
.803
Deprec.-Buildinq
38.88
2.75
8.80
13.08
10.11
14.47
.79
2.01
2.70
2.60
-
.11
.41
.56
.43
.801
Deprec.-Buildina Serv.
3.41
.98
.14
.809
Deprec.-Land Improve.
.35
.05
.07
.10
.01
.01
......01
_
.310
Amort, nf Start-llp Cnst
.29
.07
. .01 .
320
Tntprer.t
.821
Interest-Short Trm Loan
.08
.02
.822
Interest-Mortaaaes
51.02
3.94
7.13
.90
18.98
1.14
1.63
.19
.16
.33
.04
.823
Interest-Bonds
1.62
4.80
4.97
.47
.99
1.28
.07
.21
.21
.824
Interest-Other
.830
Loss on Dis. of Assets
. .840
Loss Dis. Stocks & Bond
.850
Credits to Exoense
.851
Credits to Exo.-Resear.
,
.852
Credits to Exo.-Grants
.853
Cre. to ExD.-Cen.St.Suo
.854
Credits to Exo-Pharmacy
.855
Cre. to Fxp-Reo.XMain.
Cre. to Exp.-Other
.
TOTAL OTHFR EXPENSFS
85.90
13.73
21.18
20.13
17.61
33.45
3.95
4.84
4.16
4.53
.56
.98
.89
.75
-
GRAND TOTAL
100.00
100.00
100.00
100.CO
100.00
37.21
28.80
22.82
20.64
25.69
4.14
4.58
. 4.43
.'.4.23
OTHER DATA:
Sanare Feet
Full Time Eouiv. Fmolov
Fig. 12.--Continued.
ro
o
iX>


103
will be the review and containment of costs, then certain types of
information will be needed, depending upon the manner in which the cus
tomer is ultimately represented. Regardless of the mode of represen
tation, the information provided will be required to meet some basic
requirements. Those requirements would seem to include the following.
Verifiabi1ity. The cost data will be under close scrutiny and
must be capable of being verified by independent reviewers acting on
behalf of concerned customers.
Specificity. There must be detailed information available to at
least the departmental level. It seems reasonable that consumers will
want to review costs of services rendered and often departments are
configured in a manner which reflects services provided.
Comparability. Consumers will probably be comparing the cost of
the same service in various hospitals in an attempt to decide which
hospital provides the greatest amount of service for the money ex
pended. As such, the data must be comparable.
General Cost Information Requirements
Compared to System Output
The preceding review of the cost information needs of the 4 iden
tified external user groups led to some conclusions regarding the re
quirements for the output of any hospital cost accounting system. The
following indicates the general requirements suggested.
Specificity. There must be data available in a form that allows
for the collection of costs for specific activities. Medicare calls
it "adequate," and Blue Cross calls it "sufficient," and both indicate
that the basic information must be in usable form capable of being
recalled on short notice.


CHAPTER II
THE COST ACCOUNTING SYSTEM
Introduction
According to the comments of one of the American Accounting
Association's Committees, "cost accounting, coupled with performance
standards, has made much of modern management possible.Initially
used to accomplish only the function of product costing for inventory
valuation and income determination, cost accounting today encompasses
the more general aspects of management control and has been titled
managerial accounting. Product costing is only one of many uses of
cost accounting information today. Benninger^ indicates the level of
sophistication of current cost accounting when he enumerated the uses
to which cost data are put. They include: 1) planning and budgeting;
2) cost control i 3)) employee motivation; 4) financial statements
preparation( 5) management motivation; 6) product pricing; 7) special
decisions; and 8) uniform industry pricing.^ Additionally, the cost
accounting systems have been fully integrated into the financial
accounting systems.
While industry has been developing and refining such accounting
systems, the nonprofit sector has lagged far behind. The health care
industry has a need for cost data as the previous chapter indicated.
It has probably done more than most segments of the nonprofit sector
to provide some such cost information through the efforts of the
19


iS/
11. Hours Interns Assigned Enter the hours interns are as-
signed to each area in the row opposite the appropriate
account number.
12. Number of Discharges Number of discharges from each
area should be entered i-n the row opposite the appro
priate account number.
13. Number of Discharges Reviewed Enter the number of dis
charged cases from each area which are reviewed and
audited in the row opposite the appropriate account
number.
14. Number of Cases Reviewed Enter the number of cases from
each area which the utilization committee reviewed in the
row opposite the appropriate account number.
15. Number of Records Filed Enter the number of medical
records filed and retrieved for patients of each area in
the row opposite the appropriate account nunber.
16. Number of Legal Requests Enter the number of legal re
quests received for or by patients of each area in the
row opposite the appropriate account number.
17. Number of Reports Prepared Enter the number of statis
tical reports prepared by the medical records department
for each area in the row opposite the appropriate ac
count number.
18. Number of Lines Transcribed Enter the number of lines
transcribed by medical records personnel for patients
from each area in the row opposite the appropriate ac
count number.


CHAPTER III
DEVELOPMENT OF THE UNIFORM COST ACCOUNTING SYSTEM
Introduction
The preceding chapter included a discussion of the types of cost
accounting systems that are currently used by: 1) industries in the
profit-oriented sector of the economy; and 2) by the hospital industry.
A new cost accounting system, to be used by hospitals, was developed.
The recommended cost accounting system was based upon the industry
version. Figure 6, Chapter II, represents the proposed cost accounting
system model.
It will be the purpose of this chapter to indicate how the pro
posed cost accounting system v/as transformed from the conceptualized
model into an operating cost accounting system. The first part of this
chapter will explain in detail each step of the method used to develop
the cost accounting system. The latter part of the chapter will dis
cuss the results of using the method selected.
Method Used to Develop the Uniform Cost
Accounting System
A review of Figure 6, Chapter II, shows that at the base of the
the requirement that it be possible
service and support service cost
center. The locus of cost planning, cost accumulation, and cost
control is the cost center. In order to develop a cost accounting


Notes
1. Alfred M. Skolnik and Sophie R. Dales, "Social Welfare Expendi
tures, 1929-71," Social Security Bulletin, December, 1971,
p. 11.
2. Ibid., p. 11.
3. Edmund K. Faltermayer, "Better Care at Less Cost Without
Miracles," Our Ailing Medical System, (New York: Harper A
Row, 1969), p. 16.
4. Dorothy P. Rice and Barbara S. Cooper, "National Health Expendi
tures, 1969-71," Social Security Bulletin, January, 1972, p. 9.
5. U. S. Department of Commerce, Statistical Abstract of the United
States. Washington, D. C.: U. S. Government Printing Office,
1972.
6. Ibid., p. 63.
7. Richard A. Elnicki, "Effect of Phase II Price Controls on Hospital
Services," Health Services Research, Summer, 1972, pp. 105-117.
8. Ibid., p. 113.
9. Dorothy P. Rice and Barbara S. Cooper, "National Health Expendi
tures, 1929-71," Social Security Bulletin, January, 1972, p. 7.
10. Anne R. Somers, Health Care in Transition: Directions for the
Future, (Chicago: Hospital Research and Education Trust,
197177 pp. 121-122.
11. John F. OLeary, J. D., "Certificate of Need Legislation: The
Case For and Against," Viewpoint, 1971, pp. 1-8. This particu
lar article gives a good overview of the certificate of need
legislation questions and a concise summary of what states have
enacted certificate of need legislation and those states with
legislative action pending.
12. Commerce Clearing House, Medicare and Medicaid Guide, H.R. 1,
Social Security Amendment of 1971, Number 42, June 1, 1971,
pp. 78-80 and pp. 302-305.
16


COMPARATIVE COST REPORT
DATE: ACTIVITY BASE: PAGE 2 OF 4
:r
Acct. ¡
No. j Title
1
Cost !
2
S % Of 1
3
a tal
4
5
1
Cost P
2
r Patier
3
t Day
4
5
1
East Par
2
Activi"
3
y Base
4
5
.2S0
1 TOTAL FEES
1
1 SUPPLIES
.3CO| Medical X Surolcal
1.34
2.14
.14
.23
.38
.49
.03
.06
.06
.10
.01
. 01 .
.301 Inven. Count Ad lust.
.302 Instruments
.310 Druas
.03
.01
.320[ Intravenous Solutions
.01
.330 Wear. Aopareliex. Un1.1
.3311 Uniforms
.3401 General Ooeratina
.95
.20
.04
.350 Qxvcen and Gases
.36C1 Films and Chemicals
.3611
.3621
.363
.3641
.370 Printed Forms
.16
.03
.01
..330) Fuel
.390) Pub. iBooks Si Period.1
.40.3] Beveraaes A Moorish.
.4101 Repair & Maintenance
.420] Dishes. Glass.. Silver.
.421 [ Disposable Eat. Uten.
-430| Kitchen
.440) Fond
.
.4411 Fnnd-Meat. Fish, Pool.
.44?) Fnnd-Dairv
.4431 Food-Fresh Produce
.444) Fnmi-All Other
-46rt 1 aboratorv
.460! Hnnsekeer.ino
.461 House.-Paner Products
46?) House.-Sanit.arv Product
.470) 1 aimriry
. 4RO¡ 1 inens
4 an! Printirio
.500l Miscellaneous
.13
.?fi
.05
.06
.m
m
. 5101
!
Fig. 9.--Continued.
rv>


158
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
601: NURSING SERVICE ADMINISTRATION
Plan, organize, direct, and control the activities
of Nursing Service.
Compensation of the director of nursing, associate
or assistant directors of nursing, clerical and
' supportive staff. Fees, materials, supplies, mis
cellaneous and indirect expenses required to per
form this function.
Hours of administration. Hours are determined
from paid hours of nursing service personnel
assigned to this function.
To patient location areas based upon the ratio of
each area's nursing care hours to total nursing
care hours.
SUB-ACCOUNTS:
None


98
actual data will be required to the departmental level. However, it
is unclear if it will be used at that level of detail since most com
parisons will be made on the basis of "aggregate" figures. This pro
gram does require breakdown of costs not called for by any of the
preceding plans. Under this plan 3 types of costs are to be identi
fied: the fixed or readiness-to-serve type; the semi-variable type
which relates to a minimum number of employees for a maximum number of
activities or work units; and the variable costs which vary directly
with units of activitiesJ3 The method of verification of information
provided and the resolution of points of contention have not been de
termined as yet.
The Philadelphia Blue Cross plan has undergone substantial change
since the Pennsylvania Commissioner of Insurance has begun to exercise
his right to deny requests for rate increases. Several new procedures
have been implemented already in Philadelphia.
Prospective rating. The Pennsylvania Insurance Department has al
ready approved some elaborate rating plans for use by the 5 Blue Cross
plans in Philadelphia.
Budgetary review. Each hospital must operate on a budget and
these budgets must be submitted to Blue Cross in advance for prior
review.
More uniform accounting. Hospitals are required to move toward
more uniform accounting to make gathering, exchange, and analysis of
data easier for Blue Cross as well as others. Blue Cross will issue
instructions to the Philadelphia hospitals on uniform cost data accord
ing to the new contract.


6
The Barr Committee continued by stating:
The recommendation for state and national
systems for reporting operating data from
health care institutions is based on the
conviction that pressures for improved
management performance can be produced by
making comparative data on managements
visible throughout the community [emphasis
added].1 5
More recently, the United States Chamber of Commerce released
its study on health care problems and made several policy proposals.
Policy proposal VI-(l) states: "All hospitals, extended care facili
ties, and nursing home facilities [should] adopt uniform accounting
practices, financial reporting and cost-finding systems.9 This
recommendation was supported by the comment that:
Discussions with top flight hospital
administrators revealed that there is a
real need for all community, nonprofit
hospitals to follow uniform accounting
practices and reporting techniques and
cost-finding procedures. Cost per-
' patient-day varies widely among hospitals
^ in the same community. Many nonprofit
hospitals report sizeable net income.
At present, business, the largest single
private purchaser of health care services,
does not know what it is getting for its
money, and the only way to find out is to
get a look at the figures.20
The current criticisms of the nonavailability of necessary cost
data should not be unexpected if the environment in which the hospital
lias been operating is briefly considered. Hospitals recently have been
able to secure the resources needed, due to beneficial reimbursement
arrangements. Virtually all third-party-payers have allowed hospitals
to pass all cost increases through by perpetuating rate schedules that
allowed recovery of full costs regardless of what the full costs might
be. Consequently, hospital administrations generally did not have to


49
general numbering scheme of the one recommended by the American Hospi
tal Association, but it allowed for the necessary detail. Further, by
explicitly defining each activity, the collection of information for
heterogeneous activities in the same account was significantly reduced.
Each cost center identified through the activity analysis was assigned
a primary account number. There are 252 indicated primary account:,
with the flexibility to increase that number to 400 if other activities
should be identified for which it is deemed necessary to collect cost
information.
The chart of accounts constructed here uses a 6-digit number to
identify each account and type of expenditure. The first 3 digits are
the primary account numbers. They are organized by department and
activity within the department. Each identified cost center has been
assigned a primary account number from one of the following groups.
600-699 Nursing Services
700-799 Other Professional Services
800-899 General Services
900-949 Fiscal Services
950-999 Administrative
The fourth digit identifies primary subclassifications. They are:
0 Salaries and Wages
1 Employee Benefits
2 Fees
3-5 Supplies
6-7 Purchased Services
8-9 Other
The fifth and sixth digits identify secondary subclassifications.
They are:
.001-.099 Job Categories
.100-.199 Type of Employee Benefit
.200-.299 Type of Fee
.300-.599 Type of Supply
.600-.799 Type of Service Purchased
.800-.999 Other Subclassifications


TABLE 4Continued
COST CENTER
NUMBER
COST CENTER
TITLE
~raw
CENTER
% Uck COS7
CENTER OF TOTAL
"KR PAtCT-
DAY
' Per AttivltV
base
mmr
CENTER
£ EACH COST
CENTER OF TOTAL
"TOrantRT"
PAY
" PBTKCTIVTTV
BASE
PCS COST
CENTER
"T UMTMSI
CENTER OF TOTAL
mm VAT 1 ENT
DAY
"TtOCTTYTTC
BASE
901
financial Man3g,
7,806
.92
.94
.92
8,243
.91
.99
.98
910
Patient Accounting
14,191
1.63
1.71
4.63
14,615
1.61
1.76
4.76
S20
Admitting
11,207
1.32
1.35
8.35
11,866
1.31
1.43
8.84
933
Data Froctssing Ope**.
15,333
1.86
1.92
1.88
15,942
1.76
1.92
1.89
939
Corn unications
14,135
1.67
1.71
79.85
14,379
1.58
1.73
81.24
950
Administration
17,619
2.03
2.13
2.09
17,914
1.98
2.16
2.12
951
Personnel Admin.
4,664
.55
.56
5.47
4,880
.54
.59
5./2
955
Purchasing
2,583
.30
.31
1.85
3,216
.30
.39
2.31
959
Public Relations Conn.
3,102
.37
.37
3.64
3,105
.34
.37
3.64
970
Volunteer Service
92
.01
.06
3.54
354
.04
.04
.26
Total
644,466
100.00
101.89
-
907,576
100.00
109.50
-
907,576
100.00
109.50
-
oiREcrjarass
~¡g¡OTCTinmirrerRprH5r~
ro
o
4^


99
Use departmental accounting. Use the departmental method of
cost calculation.^
The Philadelphia contract does not indicate how differences will
be resolved. It is clear, however, that uniform cost and statistical
information, both budget and actual, are going to be collected at the
departmental level.
The foregoing indicates that there seem to be at least 4 require
ments which the reported cost data must meet.
Verifiability. Data reported must be capable of being verified by
independent parties. While only implied in most contracts, it is made
explicit in the Connecticut program.
Uniformity. Uniformity of data is desired so that costs can be
compared. All 3 Blue Cross plans based upon prospective rate reim
bursement require interhospital comparisons.
Consistency. The data reported must be consistently gathered and
manipulated from period to period if meaningful trends are to be es
tablished. The New Hampshire-Vermont plan specifically calls for
trend analysis. Other plans call for upper limits of allowable cost
increases from year to year.
Specificity. Cost and statistical data must be available at a
low enough level of operation to allow for the costing of at least de
partmental activities.
Cost Information Required by
Interested Consumer Groups
Much has been written recently about protecting the interest of
the consumer, particularly in the health care industry, yet few con
structive programs have been outlined and even fewer have been


TABLE 6Continued
COST CENTER
ffjr!EER AND
TITLE
HOSPITAL 1
HOSPITAL 2
HOSPITAL 3
HOSPITAL 4
coTOT*ror wtrrarTOrror
TOTAL S PAT DAY ACT 8ASE
HOSPITAL 5
TOTAL $ PAT OAY
ACT EASE
DOLLARS
X OF
TOTAL 5
COST PER
PAT DAT
COST PER
ACT BASE
OOLLARS
X OF
TOTAL $
COST PER
PAT OAY
COST PER
ACT BASE
DOLLARS
2 OF
TOTAL $
COST PLR
PAT DAT
COST PER
ACT EASE
707 Lab. Bicter.
S.502
.42
.42
.30
7C8 Lab. HI sc.
10,337
.79
.79
.55
709 Lab. Choi.
12,713
.97
.98
.12
710 lab. Hero.
9,002
.61
.62
.09
711 Ub. Hiero.
7,952
.61
.61
.15
7'i2 Lab. £R
4,412
,34
.34
.it
m uu op
2.720
.21
.21
.05
Total Clinical Path,
51,638
3.95
3.97
.18
92,048
5.75
9.98
.78
Total Lab.
72,900
$.83
7.41
1.49
63,085
6.89
7.55
.21
32,273
7.90
8.71
1.97
54.465
4.17
4.19
.16
100,712
6.51
10.00
.6$
71* Blood Bank
15,776
1.27
1.60
89.92
12,252
1.35
1.48
60.96
4,721
1.16
1.27
62.12
11,521
.88
.89
24.41
22,373
1.45
2.42
46 V
715 ECG
11,537
.93
1.18
12.95
12,530
1.38
1.52
13.09
3,561
.87
.96
10.09
10,152
.78
.78
8.61
2,489
.16
.27
2.07
71S EEC
4,464
.36
,45
32.82
4,721
.52
.57
35.53
2,836
.63
.77
34.59
4,634
.35
.35
34.33
778
.OS
.08
8.94
719 Sch. of Me Tec
1.746
,14
.19
.55
2.341
.18
.18
1.59
1,843
.12
.20
1.37
72C Sad. Atom.
3.956
.32
.40
.77
42,021
4.63
5.07
10.86
4,494
.34
.35
.82
21.620
1.40
2.3*
2.96
721 R-id. Oiegnost.
30.683
2.47
3.12
7.96
9,445
4.76
5.25
15.06
43,304
3.31
3.33
8.04
45.227
2.92
4.90
7.03
724 Rad. Therapy
31,144
2.51
3.16
23.90
12,428
.95
.95
108.07
4,6)4
.30
.50
5.33
Total Radiology
63,783
$.30
6.68
12.75
42,021
4.63
5.07
10.88
9,5
4.76
5.25
15.06
60.226
4.60
4.53
10.95
71,461
4.62
7.74
9.79
728 Radioisotopes
8,028
.65
.82
16.25
6,332
.70
.77
12.84
2,635
.64
.71
32.94
2.569
.20
.29
11.17
730 Phar. Atom.
2.141
.17
.22
6.77
2,869
.22
.22
.08
1.345
.12
.30
,C5
721 Pharw. Prepack
53,124
4.28
5.40
168.06
32,779
3.61
3.96
1,49
20,424
5.00
5.51
1.21
37,826
2.90
2.91
1.12
70.261
4.54
7.61
1.73
732 Ptunn. OP
2,642
.20
.20
6.61
Total Pharmacy
55.265
4.45
5.62
174.83
32,779
3.61
3.96
1.49
20,424
5.C0
5.51
1.21
<3,347
3.32
3.33
7.81
72,106
4.66
7.Cl
1.77
7Si Anesthesiology
12,02
.97
1.22
.29
5,993
.56
.72
.14
1,852
.46
.50
.11
12,833
.98
.98
.18
18,223
1.18
1.97
.17
737 Respiratory Ther
16,584
1.34
1.63
1.47
16,292
1.79
1.96
2.90
11,143
2.73
3.01
2.23
8,855
.65
.66
.97
10,656
.69
1.54
.54
739 Pulmonary Func.
741 Physical Theraoy
7,7*1
.62
.79
3.79
2,15
.24
.26
1,472
.36
.40
1.45
5,874
.45
.45
9.44
9,933
.64
1.08
6.Cl
743 Occupational Ther
1,783
.14
.18
7.72
5,146
.57
.62
4.01
1,557
.12
.12
4.75
747 See. Therapy
4,963
.32
.54
.18
751 Hoars Health Care
4,993
.38
.38
22.C9
1.485
.13
.16
26.05
752 Social Service
887
.06
.10
4. ?9
753 Hed. Ulus.
3,332
.22
.36
6.61
754 Employee Health
1,832
.15
.19
2.07
2,233
.17
.17
1.86
755 Cardias Cath Lab
20,768
1.67
2.11
505.54
11,224
.86
.86
485.00
10,663
.69
1.15
426.52
756 01 Afflrln,
*
3,050
.23
.23
1.02
9,199
.59
1.00
1.05
757 ER Horsing
28,779
2.3t
2.92
22.02
14.033
1.63
1.79
6.19
4,154
1.03
1.13
13.75
18,351
1.41
1.41
6.14
39,198
2.53
4.24
4.47
Total ER
28,779
2.32
2.92
22.02
14,1133
1.63
1.79
6.19
4.19*
1.03
i.i:
13.75
21,451
1.54
1.64
7.16
48,397
3.12
5.24
5.52
758 Med Staff Med.
3,653
.29
.37
.37
7,048
.73
.5
.85
8,585
.56
.93
.93
759 f Peds
11,283
.73
1.22
1.22
7ft> -OtyCYJs
5,701
.37
.62
.62
7C1 -Opthai
3,095
.20
.34
.34
762 -Oral !
3,059
.20
.33
.33
763 -OrtiiOi
3,115
.20
.34
.34
?64 -Sara
6,675
.37
.6
S!
Total Medical Staff
3,653
.29
.37
.37
7,048
.78
.65
.8$
40,513
2.43
4.39
4.39
765 Intents l Resi.
13,495
1.09
1.37
710.76
2,710
.30
.33
$42.00
5,5?4
1.35
I.*
1,381.00
*4,075
2.es
4.77
1,120.13
766 tnt. 6 R*s 3HE!
1,962
.16
.20
981.00
17,965
1.38
1.38
1.195.11
47,079
3.04
5.10
1,001.66
767 Fan
4,851
.37
.37
1,617.00
Total Int. A Rest.
15,457
1.2S
1.58
716.05
2,7'iO
.30
.33
542.CO
5,524
1.35
1.49
1,381.0ft
22,816
1.75
1.75
1.901 33
91,154
5.89
6.87
1,059.93
?75 Med R-c Admin
2,574
.71
.26
1.27
14,714
1.62
1.76
4.90
13,913
3.4ft
3.76
18.19
5,243
.40
.40
1.19
3,482
.23
.38
.13
776 Filing
5,667
.44
.57
2.04
3,275
.25
.25
1.24
17.580
1.44
1.90
.64
777 Legal
841
.06
.6
773 Rescan
h
132
.01
.01
8.80
779 Stat
2.503
.19
.19
16.69
730 Trans.
12,486
1.01
1.27
.14
4,228
32
.32
.35
7,023
.45
.76
.05
Tctal Med, REc.
20,627
1.67
2.10
10.17
14,714
1.62
1.73
4.80
13,913
3.40
3.76
18.19
16,227
1.23
1,23
3.68
28,035
1.82
3.04
1.03


INSTRUCTIONS FOR COMPLETING THE ACTIVITY MEASUREMENT AND COST
DISTRIBUTION STATISTICS PATIENT LOCATION AREA FORM
The data collected on this form will be used for two purposes.
First, to measure the activity within the patient location areas.
Second, to distribute costs from primary areas that support only patient
location areas to the using or benefiting patient location area. Enter
the following information on the form under the appropriate column.
1. Patient Days Enter the number of patient days recorded
in each nursing service area in the row opposite the ap
propriate account number.
2. Nurse Supervision Effort Enter the hours that nurses
who supervise more than one unit spend in each unit.
This can be estimated by the nursing supervisors. Enter
the hours in the row opposite the appropriate account
number.
3. Float Nursing Hours Enter the hours float nursing per
sonnel spent on each nursing service. Enter the hours in
the row opposite the appropriate account number.
4. IV Units Started Number of intravenous units started in
each patient location area should be entered in the row
opposite the appropriate account number.
5. Hours of In-Service Instruction The hours of in-service
instruction given by the nursing department to members of
the staff assigned to each area should be entered in the
row opposite the appropriate account number.
6. Nursing Administration Enter the percentage of time
nursing administration takes to administer each area in
the row opposite the appropriate account number.
7. Number of Home Visits The number of home visits made to
patients from each area should be entered in the row op
posite the appropriate account number.
8. Number of Social Service Consultations The number of
consultations made by social service case workers with
patients from each area should be entered in the row op
posite the appropriate account number.
9. Number of Admissions The number of admissions made to
each area should be entered in the row opposite the ap
propriate account number.
10.Hours Residents Assigned Enter the hours residents are
assigned to each area in the row opposite the appropriate
account number.


I certify that I have read this study and that in my opinion it
conforms to acceptable standards of scholarly presentation and is fully
adequate, in scope and quality, as a dissertation for the degree of
Doctor of Philosophy.
Associate Professor of Management
This dissertation was submitted to the Graduate Faculty of the Depart
ment of Accounting in the College of Business Administration and to
the Graduate Council, and was accepted as partial fulfillment of the
requirements for the degree of Doctor of Philosophy.
March, 1974
Dean, Graduate School


21
principles as established in the profit-oriented sector of the economy
should be applicable to the not-for-profit units as well.
The foregoing discussion indicated the organization of this
chapter. First, the general cost accounting system as presently used
by industry will be reviewed. Second, the current cost-finding system
employed in the hospital industry will be discussed. Finally, a cost
accounting system model will be developed for the hospital industry
that is similar in nature to the one presently employed by industrial
firms. Before turning to the cost accounting system discussion, terms
frequently employed throughout this study will be defined.
Definition of Terms
The following terms will have the indicated meaning when used
throughout this study.
Cost Center
A cost center is defined as the smallest segment of activity or
area of responsibility for which costs are accumulated.^ Since the
cost center is the basis of the system developed, some concepts which
are useful in understanding the full implication of the cost center
approach, are listed below.
First, physical size of area has nothing to do with the establish
ment of cost centers, i.e., one supervisor might be responsible for a
large area of space and numerous employees 'while another supervisor is
only responsible for a small space and a few employees. An example
might be the comparison of the Housekeeping Department cost center
responsible for cleaning all floors, and the Laundry and Linen Depart
ment cost center responsible for mending torn linen. The former would
have a large number of personnel working in a large area while the


DATE:
ACTIVITY EASE:
COMPARATIVE COST REPORT
PAGE 1 OF 4
Acct.
Mo.
Title
1
Cost /
2
s S of 7
3
atal
4
5
1
Cost P
2
r Patier
3
t Day
4
5
1
Cost Per
2
Act1v11
3
y Base
4
5
'SALARIES AHI) WAGES
.001
Nursing Suoer./Suoer.
5.66
1.17
.25
.010
Head Nurse/Professional
4.40
16.22
1.27
3.35
.18
.72
.011
Charge Nurse
.012
Staff Nurse
26.17
7.54
1.08
.020
Pract. Nurse/Seini-Pro.
15.29
22.00
4.40
4.54
.63
.98
o
ro
O
Nursing Assist./Student
19.72
5.68
.82
.040
Unit Admin./Clerical
2.67
.55
.12
.041
Clerks/Tvoists
8.12
2.34
.34
.050
Technicians/Technicians
.060
Phvsicians/Phvsicians
.061
Interns & Residents
.070
General/General
24.86
5.13
1.10
TTACSL., WAGES, HRS.
73.70
63.40
71.41
71.25
21.23
14.47
14.74
18.30
3.05
2.96
3.17
3.05
FRINGE BENEFITS
.100
Social Security (FICAl
4.31
3.74
3.36
4.17
1.24
.85
.69
1.07
.18
.17
.15
.18
.110
Group Life Insurance
1.88
.85
.54
.22
.08
,04
.111
Group Health Insurance
3.29
1.10
.86
.75
.23
.22
.16
.05
.04
.112
Groub Disability Insur.
3.58
-.92
.15
.120
Retire. Plan Contribu.
.53
3.78
.96
.18
.86
.20
.03
.18
.04
X3G1
Workmen's Compensation
.34
.23
.10
.05
.01 .
.01
.140
State UnemDlov. Tax
.66
.24
.19
.05
.03
.01
.141
Fed. UnemDlov. Tax
.750
Uniforms
.72
.21
.03
.160
Meals
.3?
.03
.02
.170
.06
.62
-
.180
TOTAL FRINGE BENEFITS
8.60
10.81
6.26
9.46
2.48
2.46
1.30
2.43
.36
.50
.28
.41
FEES
f\l
o
CP
Leqal
.210
Auditinq
.220
Collection Agencies
i
.?-?n
Consulting
.240
Med. Spec.-Admin.
.250
Med. Spec.-Phvs. Serv.
260
.270
280
Fig. 12.--Example of a. completed Comparative Hospital Cost Report.


218
8. Would the cost information aid you in preparing any of the abov
information requests?
Response: 9 Yes
2 Qualified Yes
2 No
9. Would you use the cost data for reporting to (indicates number
of hospitals responding to the answer):
A. 4 Governmental agencies?
B. 4 Third-party-payers?
C. 2 Consumer groups?
0. 4 Planning groups?
E.- 5 Members of the Board of Directors?
F. Others? (Please indicate below)
10.Would the cost information aid you in (indicates number of
hospitals responding):
A. 5 Determining rates or prices?
B. 5 Justifying rates or prices?
C. 3 Allocating resources internally?
D. _____ Other? (Please indicate)
11. Would you use the cost system as a budgetary and planning
model?
Response: Yes 13 No 0
12. Would you find the cost information more important for internal
decision making or external reporting?
Response: Internal 13 External 0
13. Would you implement such a system? If not indicate why.
Response: 8 Yes
3 Undecided (qualified yes)
2 No (qualified)


135
Specific Functional Questionnaire
Cost Center: Admitting
9. Do cost center personnel collect patient's valuables?
10. Do cost center personnel perform other administrative
duties on night shifts? (If yes, explain in Remarks
Section)


HOSPITAL:
ACTIVITY MEASUREMENT AND COST DISTRIBUTION STATISTICS PATIENT LOCATION AREAS
PAGE 1 OF 4
DATE:
Acct.
No.
0}
Patient
Days
(2)
Nurse
Supver.
Effort.
(3)
Float
Nursing
Hours
(4)
IV
Units
Startec
(37-
Hours of
In Serv.
Instruc.
0
Nursing
Adminis
tration
17)
No. of
Home
Visits
(8)
No. of
Consult.
(9)
No. of
Admis
sions
O'o)
Hours
lesld.
Issign.
1)
Hours
Interns
Assigned
02)
No. of
itschar-
ges
(13)
No, of
Dischar
Rev lev:
(147
No. of
Cases
Review
05)
No. of
Records
Filed
(16)
No. of
Legal
lequest
07)
No, of
Reports
Preoared
(18)
No, of
Lines
Trans.
501
552
5T0~" '
611
bl 2
613
614
6T5
616
1
617
618
519
.. 520
621
622
623
624
625 .
52S
.
- 627
-628
629
lL,
1
631
- 632
633
623
,
636
.536
-637
m
533
640
641
642
- 543 ,
644
r
646
546
1
517
_J
i


SPECIFIC FUNCTIONAL QUESTIONNAIRE
Hospital: Person Interviewed:
Department: Radiology Date:
Cost Center: Diagnostic
1. Are all X-ray films developed by cost center employees?
2. Are all X-ray films filed and stored in the hospital?
3. Does this cost center employ a film librarian?
4. Does this cost center use automatic developing machines?
5. Does this cost center use standard solution and water baths
to develop films?
6. Who prepares & positions patient on table:
A. Radioloqist?
B. RN?
C. X-ray technician?
D. Other? (Explain in Remarks Section)
7. Who mixes barium enemas and/or barium meal:
A. Radioloqist?
B._ RN?
C. X-ray technician?
D. Other? (Explain in Remarks Section)
8. Are all patients admitted to the hospital given a chest
x-ray?
9. Do-s the hospital bill for radiologists services?
10. Are patient's x-rays identified by unit numbers assigned
by admitting?
11. Are all x-rays pertaining.to an individual patient stored
together? (If not, explain in Remarks Section)
12. Does the cost center maintain its own filing & identifica
tion system of patient x-rays?
127


Ill
Output Uses
The cost reporting requirements of 4 identified user groups were
reviewed. Based upon that review, it was concluded that externally
reported information should meet 4 requirements in order to be useful
for external decision makers. Those requirements were 1) specificity,
2) verifiability, 3) comparability, and 4) consistency. By collecting
costs by cost center, information is available for activities being
performed v/ithin departments. Given the detailed level at which cost
data are collected and reported, specificity seems to be met.
The cost accounting information called for by this system can be
fully integrated with the financial accounting system. As such, it is
subject to the same type of external verification the financial
records receive from independent certified public accountants. Addi
tionally, the distribution methods and activity bases are uniformly
defined and subject to test by any external party. All of this would
indicate that the requirement of verifiability is met.
The comparability of the cost accounting data generated was dis
cussed in the preceding section. That conclusion indicated that the
requirement of comparability, as established here, is met.
The requirement of consistency means that the costs are collect
ed, processed, and summarized in the same manner over time. Costs are
captured at the cost center level. This essentially measures the cost
for each activity performed within the hospital since each cost center
represents a separate activity. The costs for each activity are
developed. Consequently, the output does meet the requirement of con
sistency.
Given that the cost accounting system does meet the 4 require-


70
element of direct expense by that certain cost center's activity base
as defined in the "Activity" section of the Chart of Accounts is shown.
The cost accounting system calls for one such report to be prepared for
each cost center within each hospital.
Figure 9 is a copy of one completed Comparative Hospital Cost Re
port. The comparative report displays the same information as the
Hospital Cost Report, except it displays cost on a comparative basis
so that each hospital's direct expenses may be evaluated in comparison
with others in the community performing the same activity. That com
parison may even be carried down to each element of direct expense, if
desired.
Both of the detailed reports just discussed represent the col
lection of cost information before any cost distribution procedures.
In order to establish cost in accordance with the cost accounting
system model presented in Figure 6, Chapter II, it is necessary to
begin to recognize certain indirect expenses and distribute those ex
penses to the benefiting cost centers. Initially, the direct expenses
of all cost centers were adjusted to recognize the amount of depre
ciation, amortization of start-up costs, general insurance expense,
and interest expense that should be borne by each. This new cost
center expense was titled "Adjusted Direct Expense." At this point in
the processing, if the amounts reflected in those accounts for all
cost centers designated Hotel Support Service Cost Centers and Pro
fessional Support Service Cost Centers were summed, the total would
represent the costs of production through Stage I of the cost account
ing system model depicted in Figure 6, Chapter II.


198
HOSPITAL COST REPORT
HOSPITAL; 2 PAGE 3 OF 3
ACCOUNT NUMBER: 610 ACTIVITY BASE; Hours of Care DATE: One month
"
...... Account Title
% of Total
Patient Day
Activity Dollars
Postage
Non-Hospital Lab.
Serv. From Other Hosp.
Outside Monitoring
Laundrv
Printing
Housekeeping
Dietary
Security
Data Processing
Intergov. Agen. (Univer.)
Other
'0TAL PURCHASED SERV.
2.41
.70
10
m
OTHER EXPENSES
Depreciation
Deprec. Mai. Mov. Equip.
[ TT40
.40
.06
"750
Deprec. Fixed Equip.
.17
.05
.01
35
Deorec. Building
2.75
.79
.ii
575
Deprec. Building Serv.
3.41
.98
.14
711
Deorec. Land Improvement
.36
.10
.01
75
Amort, of Start-Up Cost
Interest
Interest Short Term Loan
.03
".02""
-
17
Interest Mortaaqes
3.94
~T 7VT~
'.16
823
Interest Bonds
1.62
A7
.07
338
Interest Other
Loss on Dis. of Assets
Loss on Dis. Stocks & Bonds
Credits to Expense
Credits to Exp. Research
Credits to Exp. Grants
Cre. to Exp. Cen. St. Sup
Credits to Exp. Pharmacy
Cre. to Exp. Rep. & Main.
Cre. to Exp. Other
TOTAL OTHER EXPENSES
13.73
3.95
.56
ZS5?
GRAND TOTAL
100.00
28.80
1 os
20881
OTHER DATA:
Sonare Feet
Full Time Equiv. Employ.
Fig. 11.--Continued


62
closed, no extremely high or low census as compared with the average
for the past 12-month period, and no other extenuating circumstances
which might cause operations to be out of the ordinary such as labor
disputes. Each administrator determined the "normal" month for his
hospital given the preceding guidelines. Three selected January,
1973, and two selected March, 1973.
Having selected the time period, the accounting personnel within
each hospital collected all necessary information by following the
activity definitions as per the Chart of Accounts. The personnel
collecting the data were to contact the researcher only if and when
problems were encountered with the activity definitions. It was
imperative that the integrity of the definitions be maintained so
that cost information, when completed, would be for identical activi
ties. Other than that one exception, the hospital personnel were to ac
complish the data collection using only the guidelines provided by the
Chart of Accounts. This served two purposes: first, to determine how
closely the definitions explained the activities within the various de
partments of the hospitals, and second, to establish how much effort
was required to develop the data in the required detail.
The current accounting systems employed by the participating
hospitals represented varying degrees of sophistication. As a result,
it took only a short period of data collection to determine that only
one of the hospitals was presently collecting information approaching
enough detail to satisfy the reporting requirements as per the pro
posed system. An investigation indicated that a major difficulty was
that the existing reports were prepared at a summary level. A vivid
example was found in the nursing service areas. All medical and


227
Dissertations
Andrews, C. T. Financial and Statistical Reports for Administrative
Decision-Making in Hospitals. Indiana University, 1968.
Veuleman, M. W. An Inquiry Into the Adequacy of Cost Information
Systems of Selected Arkansas Hospitals. University of
Arkansas, 1971.
Pamphlets
American Hospital Association. Hospital Administrative Services (HAS),
Departmental Handbooks. Chicago: American Hospital
Association, 1966.
American Hospital Association. Hospital Administrative Services (HAS),
Guide for Uniform Reporting. Chicago: American Hospital
Association, 1972.
American Hospital Association. Management Review Program Guidelines.
Chicago: American Hospital Association.
Blue Cross Association. "Blue Cross Payment Methods Summary,"
September 25, 1968. Mimeographed pamphlet.
Califormia Hospital Association Commission for Administrative Services
in Hospitals (CASH). Management Leadership in an Age of Change.
Sacramento, California: California Hospital Association.
Connecticut Hospital Association. Amendment to Agreement Between
Connecticut Blue Cross Incorporated and the Connecticut Hospital
Association, Incorporated. October 1, 1972. Mimeographed
pamphlet.
Ernst and Ernst, CPA. "Case Study: Filing for an Exception Under the
Economic Stabilization Program," Hospital Financial Managers
Association, Phase II Update Institute, Fall, 1972, August, 31,
1972. Mimeographed pamphlet.
Micah Corporation. The Micah System for Hospital Cost Analysis.
Ann Arbor, Michigan: Campus Publishers. 1968.
O'Leary, John F., J. D. "Certificate of Need Legislation: The Case
For and Against," Viewpoint. New York: Health Insurance
Association of America, 1971.
The Special Committee on the Nations Health Care Needs. Improving
Our Nation's Health Care System: Proposals for the Seventies.
Washington D. C.: Chamber of Commerce of the United States
of America, 1971.


10
configuration through special studies called cost analysis op cost
finding. The former method refers to a system which allows for the
continuous collection of accounting data in the desired configuration
as part of the financial accounting system. This method is called cost
accounting. It is the purpose of this study to develop such a system.
The understanding of the difference between the two is important in
evaluating the literature.
What accounting writers have contributed to the subject under
study is limited. Several writers have attempted to treat the entire
not-for-profit field in a single publication, and as such have been
very limited in their discussions of the special problems related to
the hospital. Tenner,27 Mikesell and Hay,2** and Kerrigan,29 follow
this pattern. The subject of hospital accounting is treated rather
superficially and the emphasis upon hospital cost accounting is negli
gible. The few discussions of costs are relegated only to limited
mention of cost-finding and analysis.
Seawell,30 Taylor and Nelson2^ and Hay22 have written exclusively
upon the subject of hospital financial management and control. Seav/ell
and Hay both deal primarily with cost-finding techniques, however, and
only mention the development of a cost accounting system in a general
manner. Taylor and Nelson dealt at length with the problems of devel
oping a cost accounting system. Their work seems superior to the
others in that a system is devised that integrates the cost accounting
system with the general financial system so that "costs and operating
results are determined in an efficient manner and are reported cur
rently when they are of value and can be readily used for management
control."22 All of these works, however, fall short of solving the


3
groups be made regulatory agencies with extensive administrative
powers Some states have already recognized the importance of
regional planning groups through "certificate of need" legislation.^
This approach means that area planning groups must issue a "certificate"
indicating a "need" for a proposed addition to medical facilities before
a hospital may embark upon an expansion program. For a hospital to
expand facilities or services without the certification would mean
incurring the risk of losing all state and Federal moneys, i.e., Medicare
and Medicaid payments. Recent amendments to the Social Security Act
have strengthened the planning groups' position in this matter.^
The area-wide planning concept is a basic philosophical change
concerning the way in which hospitals finance both their daily operations
and their capital expansions. Historically, individual institutions
determined their resource requirements and obtained than in the best
manner possible, regardless of the effect on the total community's
health resources. This individual approach had, at its base, hospital
goals that were not always compatible with efficient operations. A
recent study indicates that the 4 major goals of a hospital's administra
tion are to: 1) remain solvent; 2) maintain or increase the quality
of service; 3) promote harmony within the institution; and 4) promote
growth of services and facilities.^ The research concluded, in part,
that until recently, demand and ability to pay for hospital services
were severely limited. This results in a constant struggle to keep costs
in line with income ceilings. Today, however, with a rising standard of
living and third-party-payers, hospitals can meet solvency goals and
improve their financial positions. This in turn has allowed the adminis
trations to concentrate on the quality, harmony, and growth goals, and


64
April 1, 1973, and completed May 31, 1973. The next operation was to
process the data.
Data Manipulation
The information collected was processed through the cost account
ing system model represented by Figure 6, Chapter II. The amounts
distributed from one cost center to another were calculated as per the
instructions in the Distribution" section of the Chart of Accounts,
Appendix E. For the reasons indicated in Chapter III, the step-down
procedure was used to distribute costs in accordance with the instruc
tions in the Chart of Accounts. The sequence for closing accounts as
outlined in Chapter III was followed. That called for 1) the distri
bution of depreciation, amortization of start-up costs, insurance ex
pense, and interest expense to all cost centers; 2) the closing of
hotel support service cost centers; and 3) the closing of the pro
fessional support service cost centers. Figure 7 is an example of how
the step-down method works and is extracted from one of the calcula
tions. It is used here for illustrative purpose only. Appendix II con
tains the entire step-down calculations for closing one hospital's
professional support service cost centers to the patient service cost
centers.
The entire cost allocation process for this project was completed
manually. It was determined that it would take several months to de
velop and to write a computer program to accomplish such an alloca
tion. Consequently, that would have extended the time frame for
completing this research. It would be advisable, however, to use a
computer for such a routine, repetitive function as this one should


53
recognition of the relationships resulting when one support service
cost center provides service to another support service cost center.
Those cost centers providing service to the greatest number of other
centers are closed first. Once a cost center is closed, nothing more
can be distributed to it. Consequently, a cost center being closed
subsequent to one of the larger cost centers would not be permitted
to allocate any costs to the larger cost center, even if it had pro
vided services to that cost center. Third, the double-distribution
procedure allows for one cost center to allocate its costs to any
other benefiting cost center on the first distribution. On the second
distribution the balances remaining in the support service cost centers
are closed directly to the patient service cost centers. This method
takes into account the interrelationships between cost centers.
Further, it can be accomplished by means of an iterative process that
allows numerous distributions, finally allocating directly to patient
service cost centers when the balance in the support service cost
centers reach some small, predetermined amount. The fourth, and last
procedure requires the development of a set of simultaneous equations
which represent the complex interactions among all cost centers. Once
the equations are defined, the solution can be calculated, usually with
the assistance of a computer.
Horngren^ explores rather extensively the direct, step-down, and
simultaneous equation method, and indicates that "little is known
empirically about the effects on decisions of alternative cost-alloca
tion bases (procedures).Implied is the inability to determine wha
method might be the most accurate, most accurate being defined as the
c\r


24
approximate full unit cost of the patient service is to be determined.
In order to accomplish the reapportionment of costs from the support
service to the patient location cost centers, some factor common to
both the amount of service used by the patient location cost center,
and to fluctuations in support service cost center costs, should be
selected as a basis for the distribution.^0 Each direct patient ser
vice cost center should absorb its share of the support service cost
center costs, based upon the amount of services it used. In the case
of housekeeping, the direct patient service cost center would be
charged based upon the number of hours of housekeeping services re
quired to clean the direct patient service cost center.
With these basic terms defined, it will now be possible to turn
to a discussion of the cost accounting syston to be developed during
the course of the research.
Current Industry Cost Accounting System Model
In its simplest form, manufacturing firms today generally employ
some version of the model represented by the schematic in Figure 1.
Stage I is an acquisition process. Raw materials needed to make
the product are purchased. At Stage II those raw materials are con
verted into a product as a result of operations performed by laborers
working directly with the raw materials. Assisting the direct laborers
are various employees performing indirect activities. These indirect
activities are commonly referred to as overhead.
The simplified model infers that there is only one type of materia
converted into a single product by direct laborers performing only one
operation, aided by one indirect service. In reality, the process is
much more complicated. Various products may be manufactured by using


SPECIFIC FUNCTIONAL QUESTIONNAIRE
Hospital: Person Interviewed:
Department: Personnel Date:
Cost Center: Employment
1. Are employment agency fees paid?
2. Are pre-employment medical examinations provided?
3. Are the following required for each applicant:
A. An application form?
B. Personnel tests?
C. Employment interview?
D. Reference investigations?
E. Credit investigations?
4. Is more than one applicant sought for each job?
5. Are advertisements for position vacancies placed in:
A. Newspapers?
B. Journals?
C. Other? (Explain in Remarks Section)
6. Do cost center employees conduct job analysis?
7. Do cost center employees write job specifications for
each job?
8. Do cost center employees write job descriptions for
each job?
9. Does the cost center maintain personnel records for each
hospital employee?
10. Do cost center employees conduct exit interviews?
136


Appendix D
COMPARISON OF PARTICIPATING
HOSPITALS' CHARTS OF ACCOUNTS
1 i .
(SELECTED ACCOUNTS)


101
the avoidance of unnecessary beds and expenditures to a broader, posi
tive promotion of needed programs. Hospitals would need considerable
assistance both in working out and maintaining relations with neighbor
ing providers in other communities J? What this program amounts to is
more consumer representation on the local hospital's board of trustees,
as well as a broader role for regional planning groups. Presumably, the
consumer would have more input to the local decision making process.
He also would have access to the information, cost or otherwise, re
quired for consideration of all the available alternatives. The de
tails of this plan have not been defined.
The State of New York recently enacted legislation meant to pro
vide assistance to hospitals that viere losing money on, and about to
close, emergency and outpatient services. A major innovation of that
plan was the requirement that each hospital, to qualify for state fi
nancial support, would have a community advisory committee with 51 per
cent consumer representation.^ jhe scope and responsibility of the
committee was outlined in a set of guidelines. The guidelines re
commend that the committee concentrate its energies and advise on
several matters, among them the following which affect revenues and
costs.
1. Maintenance of facilities
2. Fee schedules
3. Billing for self-pay patients
4. Staffing patternsJ9
While the experience of the New York plan has not been entirely satis
factory, it does provide a framework upon which other such plans may
build.
The 2 approaches just outlined run from the one extreme of having
consumer representation on, and control of, Blue Cross Association


Appendix C
PARTIAL LIST OF FINAL
COST CENTERS


61
determine the reporting requirements of external cost information
users, and to evaluate the cost accounting system's output against
those requirements.
The remainder of this chapter will be a detailed discussion of
the major parts of the method which were outlined briefly above.
Method Related to Procedural Aspects
and Discussion f Results
It was the aim of this particular portion of the research to de
velop the group of reports called for as the output of the cost as-
counting system. As such, the reports were developed from each
hospital's actual cost information and are intended to be represen
tative or typical of the reports which can be prepared on a continuing
basis to assist in both internal and external reporting situations.
There were 3 operations performed to arrive at the final output:
1) data collection, 2) data manipulation, and 3) report preparation
Each operation will be discussed in greater detail below.
Data Collection
The 5 Jacksonville hospitals participating in the project were
asked to provide the cost data for each activity defined in the Chart
of Accounts, which was being performed within that particular
hospital. Additionally, the statistics necessary to measure out
put and distribute indirect costs viere to be provided for each
activity. The forms displayed in Appendix G were used for that pur
pose. The data were to cover a 1-month time period. The month was
to be a "normal" month, with "normal" defined as a month in which
there were no major renovations causing areas of the hospital to be


ACKNOWLEDGMENTS
A dissertation could never be accomplished without the encourage
ment, guidance, and assistance of many individuals. For guidance and
assistance I am indebted to ny dissertation committee, Dr. D. D. Ray,
Chairman, Dr. Ralph H. Blodgett, Dr. John M. Champion, and Dr. W. W.
Menke. An especial note of gratitude goes to Dr. D. D. Ray, Chairman,
for the many extra hours of counseling he provided, and to Dr. John M.
Champion whose expertise in the health care field was most beneficial
to the completion of this work.
To Mrs. Etta Cashwell, Mrs. Janice Hawley, and Miss Becky Medlin,
a note of appreciation is extended for the technical assistance
provided concerning table design, and the many hours of typing and
retyping.
Finally, for all the encouragement, patience, and quiet accept
ance of the most difficult situations during the whole period of
graduate study, I will never be able to find words to express rry
gratitude to Sandy, Greg, and Mitch.


159
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
602: NURSING SERVICE SUPERVISION
Provide supervision and guidance to more than
one nursing unit.
Compensation of nurse clinicians, nursing super
visors, evening supervisors, unit administrators,
clerical and supportive staff who are responsible
for more than one nursing unit. Fees, materials,
supplies, miscellaneous and indirect expenses re
quired to perform this function.
Hours of supervision. Hours are determined from
paid hours of nursing service personnel assigned
to this function.
To patient location areas based upon number of
hours of supervision provided to each area.
603-609: One account should be used for each
major sub-division of supervisory
personnel that warrants review.


27
Stage I
Stage II
Stage III
Fig. 3.Complete manufacturing cost accounting system model.


81
cost accounting system development discussion, the reports called for
can be prepared. It will be the subject matter of the following
section of this chapter to evaluate that output.
Method Related to Output Evaluation
and Discussion of Results
After generating the required cost information, the next step was
to determine whether that output was the type of information antici
pated. There were 2 aspects to the test required to determine this.
First, did the reports help internal managers in their decision making,
by providing measures of 1) the activities within their hospital, and
2) the comparable activity within other hospitals in order to compare
operations? The answers to these questions were determined by provid
ing a group of hospital managers with the cost reports and then so
liciting their response to several questions concerning the reports.
Second, the question of the reports' being able to provide comparable
data for external parties remained. This problem was resolved by de
termining the reporting requirements of the identified external users
and comparing the system output with those requirements.
Evaluation by Hospital Managers
Copies of selected reports were presented to a panel of 13 eval
uators. The evaluators were the administrators, assistant adminis
trators for finance, financial directors, and chief accountants of the
5 Jacksonville, Florida hospitals participating in the research. Ap
pendix K lists the evaluators by name, position, and hospital repre
sented. The evaluation was accomplished by holding interviews with
each hospital's personnel separately. The interview procedure is
outlined below.


LIST OF FIGURES
Figure
1. Simplified manufacturing cost accounting system model 25
2. Expanded manufacturing cost accounting system model 26
3. Complete manufacturing cost accounting system model 27
4. Programatic cost accounting model .31
5. Cost accounting data uses 34
6. Proposed hospital cost accounting system model 35
7. Example of step-down cost allocation procedure 65
8. Example of a completed Hospital Cost Report 67
9. Example of a completed Comparative Hospital Cost Report ... .71
10. A partial copy of the Hospital Cost Summary Report 76
11. Example of a completed Hospital Cost Report 196
12. Example of a completed Comparative Hospital Cost Report ... 199


40
cost centers of the various hospitals to insure that the cost data
collected would be comparable. The accomplishment of this required a
survey of the tasks performed in each cost center. This survey was
called an activity analysis. The activity analysis was accomplished
by conducting a structured interview with each cost center supervisor.
A questionnaire was to be used as the guide for the interview.
An exhaustive search of the literature revealed that nothing had
been published which described such an activity analysis, and that no
questionnaire had been developed that could serve as a guide in devel
oping the type of questionnaire needed for this research. The next
step, then, was to develop such a questionnaire.
Develop Questionnaire
Since no data gathering instrument was available, one was devel
oped. The Graduate Program in Health and Hospital Administration at
the University of Florida v/as engaged in a research project for which
such a questionnaire would also be useful. As a result, John M.
Champion, Chairman of the Graduate Program in Health and Hospital
Administration, the faculty, and selected graduate students provided
direction and assistance in developing a set of questions for each
identified cost center. The questions were divided into 2 groups.
The first group contained questions aimed at determining general infor
mation about each cost center. The questions were used to determine
such information as staffing patterns, work hours, reporting practices,
and reporting frequencies. This group of questions was placed On one
questionnaire and titled "General Functional Questionnaire." Every
cost center supervisor was required to respond to the general questions.


121
List of Cost Centers cont.
4; Drug Distribution
5. Manufacturing & Compounding
6. Pre-packaged Drugs
7. Outpatient Dispensing
28. PUBLIC RELATIONS
1. Communications
2. Development
29. PURCHASING*
1. Buying
2. Receiving
3. Storage & Inventory Control
4. Distribution
30. RADIOLOGY*
1. Diagnostic
2. Therapy
31. REHABILITATION*
1. Physical Therapy
2. Occupational Therapy
3. Brace Shop
4. Audiology
5. Speech Pathology
32. SOCIAL SERVICE*
]. General
33. VOLUNTEERS*
1. General
Designates departments under usual hospital organization.
**A11 nursing service specialties come under one department--
Nursing Service.
\


113
the length of time industry has used cost systems, more advanced con
trol and cost distributions aspects have evolved. Standard costs,
probabilistic standard costs, control chart techniques, sophisticated
allocation techniques and intricate transfer pricing schemes are
examples of these advancements. All of these improvements, however,
were based upon the proper functioning of a basic cost system like the
one developed during this research. The fact that a basic system as
used by industry could be developed for use by a major section of the
not-for-profit sector is significant.
Second, the method used to complete this research, i.e., develop
a framework of cost reporting around the activities performed, can be
adapted to other not-for-profit agencies which either perform services
or make products. The activities required to accomplish each could be
determined and costed.
Third, it has been indicated by other accounting researchers that
all accounting information provided external and internal users should
meet 4 standards. It should be revel ant, free from bias, quantifi
able, and verifiable. This study, while not specifically attempting
to do so, determined that external users required information that was
specific, verifiable, consistent, and comparable. The fact that the
hospital cost information provided external users was quantified and
relevant to their needs was implied. In large part, then, this study
seems to concur with those earlier findings.
Finally, the state of cost accounting in not-for-profit institu
tions was generally found to be as indicated in earlier research.
Although this was not a random sample designed to determine the cost
accounting practices of hospitals, the lack of cost accounting systems


Appendix G
EXAMPLES OF DATA
COLLECTION FORMS


179
747Rehabilitation Recreational Therapy
748 Recreational Therapy Outpatient
749 Recreational Therapy Day Care
750 Recreational Therapy Partial Hospitalization
757 Emergency Service Nursing
782 Outpatient Clinics Patient Care
Patient Location Cost Centers
610' Nursing Service Medical
620 Nursing Service Surgical
630 Nursing Service Pediatric


63
surgical units were summed together and reported as Medical-Surgical.
The proposed cost accounting system called for each medical and surg
ical nursing unit to be identified separately. In order to separate
the various nursing units, both cost and statistical information had
to be reported for each unit individually. An examination of the hos
pitals' cost records indicated that the detailed cost information was
available, and it was used at the detailed level for this project. A
more serious problem, and the main reason why the existing cost re
ports viere used in summary form, was that the statistical data were
either not collected, or not collected below the summary level. The
latter difficulty required that the accounting personnel collecting
the data for this research perform special analyses in order to obtain
the necessary information.
The special analyses resolved all statistical data problems ex
cept two. First, for Central Sterile, only 2 hospitals maintained a
count of requisitions. Second, with one exception, none of the hospi
tals could provide relative unit values where such were required.
Only 2 hospitals viere able to do so for the laboratory, and that
measure was used for those 2 as a laboratory indicator. For all other
relative unit values, unweighted units were substituted, i.e., number
of x-ray exams instead of relative unit values of x-rays, and number
of cardiac catherization procedures instead of relative unit values of
catherization procedures.
Because of the time required to perform the special studies in
order to collect the statistical information, the data collection it
self took longer than had been anticipated. It required an average of
approximately <\ weeks in each hospital. This operation was begun


FUNCTION:
EXPENSES:
J
ACTIVITY BASE:
DISTRIBUTION:
952: PERSONNEL EMPLOYMENT
Recruit, screen and select hospital employees.
Compensation of recruiters, interviewers, clerical
and supportive staff. Fees, materials, supplies,
miscellaneous and indirect expenses required to
perform this function.
Number of new employees hired.
To primary and patient location areas based upon
the ratio of new employees assigned each area to
total new employees.
SUB-ACCOUNTS:
None


46
Activity Analysis
The 4 interviewers required approximately 5 working days each to
complete the activity analysis in each hospital. By contacting each
cost center supervisor a great amount of detail was generated. A
repeat of this research might be more efficient, and yield substan
tially the same results, if the number of interviews were reduced.
The activity analysis of all cost centers was important for this ini
tial project, but for future research, it would probably be more
important to know the activity for those cost centers which provide
unique services, i.e., Central Sterile, Patient Accounting, and Admin
istration are fairly standard. Consequently, using the cost centers
defined during this research as a base, the Administrator, Assistant-
Administrator, and Department Managers might be able to indicate for
which cost centers an activity analysis might not be necessary. As
such, a substantial amount of time could be saved during this phase
of the research.
Data Analysis
It was during this step of the system development procedure that
the elements required for the operation of the system were developed.
The elements were 1) a system framework (chart of accounts);
2) activity bases; and 3) distribution methods. The development of
each will be discussed below, but, first, the effect of the activity
analysis upon the number of and definition of cost centers will be
-./viewed.
As previously indicated, Appendix A represented the preliminary
: of 107 cost centers that were expected to be found within the


Appendix I
COST SYSTEM OUTPUT (REPORTS)


42
prior to the actual intervewing that would be required as part of the
research. Second, even though an extensive effort had gone into the
development of the questionnaire, there was the possibility that a
cost center might have been omitted or improperly identified. The test
would indicate such problems.
The test was conducted at the Shands Teaching Hospital and
Clinics, J. Hillis Miller Health Center, University of Florida. Shands
was selected because its teaching capabilities require a most complex
and up-to-date array of services. All cost centers identified in the
initial step of this procedure were found at Shands Teaching Hospital
and Clinics. The supervisors of those cost centers, by nature of the
complex teaching situation, had to remain abreast of current trends
in their particular field, and as such were able to indicate potential
problems in the construction of the questionnaire.
Perform Activity Analysis
After testing the questionnaire and making minor adjustments, the
next step was to perform the activity analysis. The Jacksonville
Hospital Council, Jacksonville, Florida, which consists of the Adminis
trators of the 9 Jacksonville hospitals, initially volunteered their
institutions for the research. The 9 hospitals represented a range of
sizes from 66 beds to over 445 beds, and a variety of ownership
patterns: 2 were city-county owned, 4 were privately owned, and 3
were affiliated with religious organizations. Of the latter 3, 2 were
Protestant and 1 was Catholic. All 9 were nonprofit institutions.
After extensive meetings with the administrators of the various
hospitals and their respective boards of directors, 4 hospitals decided


100
implemented. However, 2 major consumer groups can be identified:
those who consume the health services, whether they pay for them di
rectly or indirectly, and those who purchase health care services for
other individuals. The latter group consists of businesses that pur
chase health care as a fringe benefit for employees, and labor unions
who provide health care for their memberships. If each group partici
pates in Blue Cross plans, then they are represented by the various
Blue Cross Association Boards of Trustees. This, however, has become
a major point of contention. Recently, several people have been at
tempting to have more consumer representation on Blue Cross Boards.
Most notable among the proponents of this movement is Denenberg, the
Pennsylvania State Insurance Commissioner. During public hearings,
Denenberg informed Blue Cross "to reorganize its governing board by
appointing more consumers so that they, rather than doctors, would form
the majority."I5 To the extent that interested consumer groups are to
be represented in this fashion, they would use the same information for
decision making as would the Blue Cross Associations of whose board of
trustees they would be a member. Consequently, the cost information
required by them would be the same as outlined in the previous section.
Somers^ has presented an alternate proposal. State governments
would franchise hospitals to serve defined areas. The local hospital
board then would administer the hospital in accordance with the fran
chise agreement. The hospital board would consist of representatives
of all consumer groups. Consumer groups, however, are not defined.
At the next higher level of supervision, local hospitals would
come under regional or area-wide planning bodies. The regional
agencies would be required to expand their present role of focusing on


86
accounting system and could report comparable information. The other
2 evaluators indicated that the information would not have been help
ful for any of the reporting. This last opinion was expressed with
particular emphasis upon the reporting requirements of regulatory
agencies such as the Social Security Administration and the Price
Commission. The 2 evaluators giving a negative response stated that
both of the_cited regulatory agencies, while indicating cost and sta
tistical data could be submitted for evaluation, were reluctant to use
such data when it was submitted.
The evaluators then were asked to what agencies or groups they
would provide such cost information. All 13 indicated they would pre
sent the cost data to their boards of directors, while 11 of the 13
stated they would provide it to governmental agencies, third-party
payers, and volunteer planning agencies. When asked if such infor
mation would be made available to consumer groups, only 6 responded in
the affirmative.
All of the evaluators indicated they would use a cost accounting
system such as the one developed here as a budgetary and planning
model, but only 9 of the evaluators indicated they would use the in
formation produced by such a cost accounting system as the basis for
the internal allocation of resources. Concerning pricing decision,
however, all of the evaluators stated that they would use the output
of this cost accounting system for establishing and justifying rates
or prices. Finally, all 13 stated they felt the cost accounting
system would be of more benefit to internal decision making than to
external reporting.


30-
and indirect costs associated with providing room, board, and nursing
services. The second component is the Professional Support Service
which is required to provide patient care.
When the various program components are summed, the following is
the result.
Routine Service
^Professional Support Service
Basic Production Cost
+Nonproduction Cost
Accounting Cost
+Capital Cost
Financial Cost
+Revenue Reduction .
Full Cost
The programs have been defined as outlined above for a reason.
Linder most cost reimbursement schemes, all of the Basic Production
costs are reimbursable. Only a limited amount of the Nonproduction
and Capital costs are aVp^able, however. Research costs can only be
recovered to the extent that they relate directly to patient care.
Many educational programs such as resident and intern instruction are
reviewed closely before any reimbursements are allowed. Interest
expense can only be recovered to the extent that it exceeds interest
earned on monies invested. Finally, the items appearing in the
Revenue Reduction component are entirely nonallowable.
A schematic of the programatic model just outlined might appear
as Figure 4 below.
Moving from left to right, the program costs become less allowable
or subject to closer scrutiny under the various reimbursement schemes,
until the final module, Revenue Reductions, is entirely nonallowable.
In practice, then, it is the object to include as many costs as possi
ble in the Basic Production component.


119
List of Cost Centers'- cont.
3.Modified Diets
4; Purchasing & Inventory
5. Sanitation
6. Snack Shop
7. Inpatient Feeding
8. EMERGENCY SERVICES*
1. Nursing Duties
2. General
9. HOUSEKEEPING*
1.General
10. LAUNDRY & LINEN*
1. Laundry Collection
2. Laundry Washing
3. Mending
4. Folding & Sorting
5. Laundry Distribution
11. MAINTENANCE OF PERSONNEL
1. General
12. MEDICAL RECORDS*
1. General
2. Transcription
3. Filing & Retrieval
4. Reports
5. Legal Activities
6. Research
13. NURSING ADMINISTRATION*
1. General
14. NURSING EDUCATION
1. In-Service Education
2. Diploma Program
15. NURSING SERVICE GYNECOLOGY
1. General
16. NURSING SERVICE -ICU
1. Coronary
2. Pediatric
3. Surgical
4. Nursery
17. NURSING SERVICE MATERNITY
1. Labor


7
review cost increases nor was there much incentive to attempt to
contain those cost increases. Only after July 1, 1966, the effective
date of the Medicare legislation, did it become necessary to try to
define costs. Controlling costs was still not necessary until mid-1972,
when Phase II economic regulations became effective.
Second, hospitals have attempted to offer, as quickly as possible,
the services which have been developed by the nation's vast health
research industry. Given the legal and social structure of the medical
care industry, the physicians generally have been able to exert major
pressure in order to install the latest techniques and equipment. As
a result, many expensive and underutilized facilities have been dupli
cated within a community in order to placate the medical staffs of the
various hospitals.
Even if understanding the environmental factors just mentioned
would somewhat temper the earlier criticisms, the fact remains that
the environment is changing. Along with that change comes the need to
understand cost patterns and attempts to control costs. Governmental
regulatory agencies and consumer groups are requiring more information
to allow them to review adequately and to compare hospital costs and
rates on a community-wide basis. The problem, however, stems from the
fact that no information system presently available can provide the
comparable data required.


124
General Functional Questionnaire All Cost Centers (Continued)
Cost Center:
9. Is there a formal training program for new employees of
this cost center?
10. Are there in-service training programs for employees of
this cost center?
11. Do cost center employees attend conferences or seminars
at hospital expense?
12. Do cost center employees spend time in budgetary planning?
13. Does the cost center use volunteer help?
14. Do cost center employees regularly engage in purchasing
activities?
15. Does the cost center participate in shared services
arrangements with other hospitals or agencies?
16. Does the hospital furnish cost center employees with
uniforms?
A. Does the hospital launder uniforms?
B. Is a charge for laundering made to the employee?
C._ Do employees change uniforms on own time?
17. Who maintains machinery and equipment used in cost center:
A. Cost Center employees?
B. Maintenance service contract personnel?
C. Plant and Maintenance personnel?
D. Other? (Explain in Remarks Section)
18. Do cost center employees perform any routine cleaning?
19. Are any services, activities, or functions of this cost
center contracted to outside companies?
20. Do the employees of the cost center engage in any formal
ized research activities?
21. Is there anything unique about services, functions, person
nel, location, etc. about this cost center? (Explain in
Remarks Section)
22. Are personnel records maintained in this cost center for
each cost center employee?


FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
855: HOUSEKEEPING PATIENT ROOMS
Provide housekeeping services to patient rooms.
Compensation of supervisors, janitors, and maids
assigned to the patient rooms. Fees, contracts
for housekeeping services, materials, supplies,
miscellaneous and indirect expenses required to
perform this function.
Hours of housekeeping service.
To patient location areas based upon the ratio of
hours of service provided each area to total hours
of service.
SUB-ACCOUNTS:
None


TABLE OF CONTENTSContinued
SELECTED BIBLIOGRAPHY ... 222
BIOGRAPHICAL SKETCH 229
v


CHAPTER IV
COST ACCOUNTING SYSTEM EVALUATION
Introduction
The cost accounting system developed in the preceding chapter was
assumed capable of producing cost accounting information for use by
internal and external decision makers. It will be the purpose of this
chapter to indicate how that assumption was tested. Each step of the
method used to evaluate the cost accounting system will be detailed.
At the same time, a discussion of the results of completing each of
those steps will be included.
The method used to evaluate the cost accounting system consisted
of 3 major sections. First, actual cost data were collected from each
participating hospital and processed in accordance with the instruc
tions and guidelines developed in Chapter III. This represented a
test of the procedural aspects of the system. Second, an evaluation
of the cost output was conducted to determine if the information was
capable of providing assistance to internal and external decision
makers. This second section of the method, the output evaluation
section, was completed by having the administrators and the financial
and/or accounting managers of selected hospitals review and comment
upon the cost accounting system's final productthe 4 cost reports
described in Chapter III. The last phase of the evaluation was to
60


44
Uniform Hospital Definitions6 and the Connecticut Hospital Association
Accounting Manual.^ The chart of accounts, distribution methods, and
activity bases will be discussed later in this chapter.
Design Cost Reporting Format
The final step of the system development portion of the research
project was to design the forms to be used for collecting the cost and
statistical data, and reporting the results. Examples of the forms
will be presented and discussed when the results of the method appli
cation are reviewed later in this chapter.
All 6 of the steps that were completed to move from the conceptual
cost accounting system model to the operating cost accounting system
have been outlined in some detail above. The next section discusses
the results of completing each step of the procedure.
Evaluation and Results of the System
Development Method
Since each of the 6 steps was discussed separately in the pre
ceding section, each will be evaluated separately in the following
comments.
Identify Cost Centers
Appendix A is a preliminary list of the cost centers identified.
Initially, approximately 250 cost centers were identified, but they
were consolidated into the 107 shown on the preliminary list. The
consolidations were based upon the level and nature of the activity
within the cost centers. It was estimated that the cost to collect
information for all 250 cost centers would exceed the value of gaining
the information, particularly since some of the 250 cost centers were


165
714: BLOOD BANK
FUNCTION:
Procure, draw, process and store blood.
EXPENSES:
t
Compensation of medical technologists, tech
nicians, clerical and supportive staff who
perform services for the Blood Bank. Fees,
materials, supplies, miscellaneous and in
direct expenses required to perform this
function.
ACTIVITY BASE:
Number of transfusions.
DISTRIBUTION:
None
SUB-ACCOUNTS:
715: Transfusions


TABLE 7Continued
cost cam*
numbe* a
TITLE
661LA
hospital i
cerrar
Ter
TOTAL %
BTSrPTT
ACT CASE
T5HWT
hospital 2
TTSF £0St Ptft 0S1 PER
TOTAL t PAT CAT ACT BASE
HOSPITAL 3
uTOJS i of ST PSft COST P"A~
TOTAL $ PAT OAT ACT PASS
ttocott
HOSPITAL 4
-nsr
VlTTTn. C35T7DC
HOSPITAL 5
PAT OAT
T0CWS rcr
COST PER
TOTAL
PAT DAT
ACT WSE
TOTAL 8
PAT V
ACT BA.
18.195
4.45
4.47
25.67
176,572
It.41
19.11
17.9S
1,121
.09
.09
4.65
765
.05
.06
16.2R
60.081
4.60
4.62
23.61
176.572
11.41
19.11
17.9$
Pit. C.re
36,653
2.S5
3.72
76.49
Timor Reg.
Cental
36.653
2.96
3.72
78.49
Total OP
795 X-Ray Teth Scft
796 Mental Health Uni
B01 Dietary Admin
802 Food Pn
S03 Food C1
604 C1e*n1n
810 Cafe.
039 Communications
940 Courier Svs
950 Administration
951 Personnel Admin
952 ErcpTo
953 age
954 Train
Total Personnel
955 Purch. Admin
955 Buying
S57 Receivin'
953 Storage
Total Purchasing
959 Pub. Rel. town.
960 Pub. Rel. Special
961 Chaplain
963 Kit. Handl. Fre:
954 Recycle Fresein
970 Volunteer Svs
99
7,481
Total Hospital
1,240.564 109.00 125.01
907,57$ 100.00
403,56$ 100.00
1,755 .13
,305,767 100.00
100.43
1,547,519 100.00 167.52


50
Appendix E contains illustrative material from the recommended
chart of accounts. The format of each account description is standard
ized and included 6 major items of information. Those items are:
1. Account number and title. Each cost center has been assigned
an account number and title.
2. Function. This indicates the activity and/or activities to
be accounted for in the particular account.
3. Expenses. This indicates those expenses that should be
accumulated in the particular account.
4. Activity Base. This indicates the statistics used to measure
the level of activity within the particular account.
5. Distribution. This indicates the method to be used to
distribute costs from the support service cost center accounts
to the patient service cost center accounts.
6. Sub-Account. This indicates what account number should be
used if a more detailed collection of cost information is
desired.
It can now be demonstrated how the chart of accounts is used to
classify cost accounting data. A head nurse who works in a Nursing
Service-Medical cost center would have her salary recorded to account
number 610.010. The 610 represents the Medical Nursing Service cost
center (primary account) and the .010 indicates a head nurse's salary.
Group life insurance paid by the hospital for this particular head
nurse would be charged to account number 610.110. Any medical supplies
used on this head nurse's floor would be charged to account number
610.300. Consequently, the total direct cost of the Nursing Service-
Medical cost center would be accumulated in account number 610. The
various subclassifications indicate the type of expense.
Activity base. A common denominator is required in order to
measure the level of activity within an account and to provide compara
bility of the activity levels for 2 or more hospitals. That common


HOSPITAL 2
HOSPITAL COST REPORT
COST CENTER
COST CENTER
Tint
DIRECT EXPENSE
ADJUSTED DIRECT EXPENSE
FULL
COST
PER COST
CENTFR
^E&TtOST
CENTER CF TOTAL
n* pstilst
DAY
PER ACTIVITY
BASE
PER COST
CENTER
I EACH COST
CENTER OF TOTAL
PER PATIENT
MY
TER ACTIVITY
5ASE
PER VjST
rFNTER
TEACH COST
CENTER OF TOTA!
per" fatiWT
MI
'"PER ACTIVITY
BASE
SCI
N.S. Adicin.
4.942
.58
.60
5.58
5,378
.59
.65
6.08
602
N.S. Supervision
7,51!
.89
.90
5.68
7,643
.84
.92
5.78
610
N.S. Medical
13.053
2.14
24.90
3.57
20,881
2.30
28.80
4.13
42,739
4.71
611
N.S. Medical
16,231
1.92
23.73
3.78
18,866
. 2.01
32.33
4.25
36,376
4.01
614
N.S. Medical
16,252
1.92
22.74
3.60
18,$21
2.04
25.90
4.10
39,429
61b
N.S. Medical
16,666
1.52
24.33
3.63
79,776
2.18
28.87
4.30
41,073
620
N.S. Surgical
20,407
2.42
22.25
3.56
23,001
2.53
25.08
4.01
52,317
5.76
6?1
N.S. Surgical
16,827
1.99
23.63
3.58
19,635
2.16
27.58
4.17
42,055
4.63
623
N.S. Surgical
17,772
2.10
25.83
3.84
20,530
2.27
29.91
4.4$
42,844
624
N.S. Surgical
16,372
1.04
23.53
3.69
18,633
2.C5
26.77
4.20
37,756
625
N.S. Surgical
15,664
1.84
24.96
3.49
18,677
£.06
29.98
4.19
38.948
626
N.S. Surg. Ortho
16,497
1.95
21.51
3.58
19,347
2.13
25.22
4.19
40,864
£40
N.S. ZCU
15,757
1.86
83.37
4.45
16,757
1.85
88.66
4.73
26,665
641
N.S. 1CU Coronary
1i ,065
1.31
83.83
5.47
11,641
1.28
88.19
5.76
20,193
2.23
U-wl
N.S. Psych.
13,008
1.54
35.35
3.92
15,855
1.75
43.08
4.78
32,351
652
N.S. Newborn
15.362
1.82
30.36
4.33
15,912
1.75
31.45
4.48
29,048
660
N.S. OR
40,624
4.81
4.90
.81
42,613
4.70
5.14
.85
58,616
665
N.S. Rec. Roo
4,455
.53
.54
.03
5,026
.55
.61
.09
7,820
.86
670
N.S. Del. i Labor
14,636
1.73
1.77
133.05
16.281
1.79
1.96
143.01
23,354
2.57
675
Central Sterile
31,260
3.81
3.77
31,983
3.52
3.88
37,374
673
I.U. Therapy
12,950
1.53
1.56
2.94
13,318
1.47
1.61
3.03
690
NS Education
2,415
.26
.29
2.41
3,140
.35
.38
3.13
702
Lab Aaatom*C1
9.569
1.13
1.15
.25
10,095
1.11
1.22
.27
11,738
706
Lab Clinical
51,371
6.08
6.20
.20
52,491
5.78
6.33
.20
58,837
6.46
734
Blood Ban*
12,173
1.44
1.47
60.56
12,252
1.35
1.48
60.96
13,599
1.50
57.65
716
ECO
12.31*
1.46
1.49
12.89
12,500
1.38
1.51
13.09
14,064
1.55
71£
EEC
4,605
.54
.56
34.62
4,721
.52
.57
35.50
5,469
721
Radiology Olag.
40,562
4.8C
4.89
10.50
42,021
4.63
5.07
0.88
49.289
5.43
5.95
12.76
Radioisotope Lab.
6,233
.74
.75
12.54
6,382
.70
.77
12.84
731
Pharmacy ¡-repack & Ois.
32.343
3.83
3.90
1.47
32,779
3.51
3.96
735
Anesthesiology
5,795
.68
.70
.13
5,993
.66
.72
.14
6,834
737
Respiratory Therapy
16,017
1.90
1.93
2.85
16.2B2
1.79
1.96
2.90
18,946
739
Pulmonary Functions
2.070
.24
.25
2,159
.24
.26
2,685
5.96
744
*ehab. P.T.
4,286
.51
.52
3.34
5,146
.57
.62
4.01
7,647
757
E.R. Nursing
13,287
1.57
1.60
5.54
14,033
1.63
1.79
6.19
23,364
2.58
2.82
9.75
758
Medical Staff
6,887
.81
.83
.83
7.048
.78
.85
.85
755
Interns and Residents
2,707
.32
.33
541.00
2,710
.30
.33
542.00
775
Medics! Records
14,310
1.69
1.73
4.66
14,714
1.62
1.78
4.00
SCiZ
food Production
57.423
6.80
6.93
2.05
59,513
6.56
7.18
2.13
B.2
Dietary Cafeteria
29,404
3.48
3.55
1.05
30,334
3.35
3.67
1.09
830
fiperat.on of Plant
33,437
3.96
4.03
.19
43,405
4.78
5.24
.25
844
Security
3,717
.44
.45
.02
3,776
.42
.46
.02
550
Hci.>eVeepir.5
32,769
3.03
3.95
3.15
33,335
3.68
4.03
3.21
861
Laundry Coll. 6 Oist.
6,602
.78
.80
.06
6,913
.76
.83
.07
863
Laundry Processing
10,664
1.26
1.29
.10
10,654
1.29
1.29
.10
Fig. 10.--A partial copy of the Hospital Cost Summary Report.


171
FUNCTION:
EXPENSES:
i
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
802: DIETARY FOOD PRODUCTION
Preparation of food for consumption by patients,
employees, and visitors.
Compensation of food production manager, dieticians
chefs, cooks, bakers, salad makers, clerical and
supportive staff. Fees, contracts for food pro
duction, materials, supplies, miscellaneous and
indirect expenses required to perform this function
Meals served plus meal equivalents. Include only
regularly scheduled meals and exclude snacks and
fruit juices served between regularly scheduled
meals. Meal equivalents are calculated for the
cafeteria.
To cafeteria and patient location areas based upon
the ratio of meals and meal equivalents served in
each area to total meals and meal equivalents.
None


TABLE 4
HOSPITAL COST SUMMARY REPORT
COST CFNTER
COST CENTER
DIRECT EXPENSE
ADJUSTED DIRECT
EXPENSE
FULL
COST
PER COST
EACH COST
CENTER OF TOTAL
PER PATIENT
DAY
Hr activity
8ASE
rER COST-
CENTER
% EACH COST
CFNTER OF TOTAL
PER PATIENT
DAY
Hr activity
BASF
PER" CCST
CENIES
i EACH LUSi
.^CENTER, sr. TOTAL-
TtOJmiST
JA
PER aCUVITY
RASC
601
N.S. Ainjln.
4,942
.58
.60
5.53
5,378
.59
.65
6.08
6C2
N.S. Supervision
7,511
.89
.90
5.68
7,643
.84
.92
5.78
610
N.S. Medical
18,053
2.14
24.90
3.57
20,381
2.30
28.80
4.13
42,739
4.71
58.35
8.46
611
N.S. Medical
16,231
1.92
28.73
3.78
18,866
2.01
32.33
4.25
36,376
4.01
04.33
8.46
614
N.S. Medical
16,262
1.92
22.74
3.60
18.521
2.04
25.90
4.10
39,429
4.34
55.15
8.73
S'3
N.S. Medical
16,666
1.92
24.33
3.63
19,776
2.18
28.87
4.30
41,073
4.53
59.96
6.94
6?Q
N.S. Surgical
20,407
2.42
22.25
3.56
23,001
2.53
25.08
4.01
52,317
5.76
57.05
9.12
621
N.S. Surgical
16,827
1.99
23.63
3.58
19,635
2.16
27.58
4.17
42,0S5
4.63
59.07
8.94
623
N.S. Surgical
17,772
2.10
25.C3
3.84
20,580
2.27
29.91
4.45
42,844
4.72
62.27
9.27
o24
N.S. Surgical
16,372
1.94
23.53
3.69
18,633
2.05
26.77
4.20
37,756
4.33
57.12
8.97
625
N.S. Surgical
15,564
1.P4
24.96
3.49
18,677
2.06
29.98
4.19
33,94?
4.29
62.52
8.74
55
N.S. Sitq. Ortho
16,497
1.95
21.51
3.58
19,347
2.13
25.22
4.19
40,864
4.SC
53.28
8.86
640
N.S. 1CU
15,757
1.86
83.37
4.45
16,757
1.85
88.66
4.73
26.665
2.94
141.08
7.53
641
N.S. ICU Coronary
11,065
1.31
83.83
5.47
11,647
1.28
83.19
5.76
20,193
2.23
152.98
9.98
645
N.S. Psvch.
13.0C8
1.54
35.35
3.92
15,855
1.75
43.08
4.78
32,351
3.57
87.91
9.75
652
N.S. Newborn
15,362
1.82
30.36
4.33
15,912
1.75
31.45
4.48
29,048
3.20
57.41
8.19
660
N.S. OR
40,624
4.81
4.90
.81
42,613
4.70
5.14
.85
58.616
6.46
7.07
1.17
555
N.S. Rec. Roons
4,456
.53
.54
.08
5,026
.55
.61
.09
7,820
.86
.94
.14
670
N.S. Del. & Labor
14,636
1.73
1.77
133.05
16,281
1.79
1.96
148.01
23,354
2.57
2.32
212.30
5/5
Central Sterile
31,260
3.81
3.77
31,983
3.52
3.86
37,374
4.12
4.51
78
I.U. Therapy
12,950
1.53
1.56
2.94
13,318
1.47
1.61
3.03
6S0
NS Education
2.415
.28
.29
2.41
3,140
.35
.38
3.13
?Q2
Lab Anatomical
9,569
1.13
1.15
.25
10,095
1.11
1.22
.27
11,738
1.29
1.42
.31
7 Co
Lab Clinical
51,371
6.C8
6.20
.20
52,491
5.7ft
6.33
.20
58,837
6.48
7.10
.23
714
Blood Bank
12,173
1.44
1.47
60.55
12,252
1.35
1.48
60.96
13,599
1.50
1.64
67.66
7iC
ECC
12,314
1.45
1.49
12.89
12,500
1.38
1.51
13.09
14,064
1.55
1.70
14.73
713
EES
4,605
.54
.56
34.62
4,721
.52
.57
35.50
5,469
.60
.66
41.32
721
Radiology Diag.
<0,562
4.80
4.89
10.50
42,021
4.63
5.07
10.83
49,289
5.43
5.95
12.76
728
Radioisotope Lab.
6,233
.74
.75
12.54
6,332
.70
.77
12.84
7,347
.81
.89
14.78
73
Pharracy Prepack 4 Dis.
32,343
3.83
3.90
1.47
32,779
3.51
3.96
1.49
35,933
3.95
4.34
1.63
735
Anesthesiology
5,735
.68
.70
.13
5,923
.66
.72
.14
6.834
.75
.82
.15
737
Respiratory Therapy
16,017
1.90
1.5J
2.85
16,282
1.79
1.06
2.90
18,945
2.09
2.29
3.37
739
Pulmonary functions
2,070
.24
.25
2,159
.24
.26
2,585
.30
.32
5.96
744
Rehab. P.T.
4,285
.51
,52
3,34
5,146
.57
.62
4.01
7.647
.84
.92
737
E.R. Nursing
13,287
1.57
1.C0
5.54
14,033
1.63
1.79
6.19
23,364
2.68
2.82
9.75
753
Medical Staff
6,887
.81
.83
.83
7,048
.78
.85
.85
<65
Interns and Residents
2,707
.32
.33
541.00
2,710
.30
.33
542.00
775
Mtdical Records
U.310
1.69
1.73
4.66
14.714
1.62
1.78
4.30
Cr>2
Food Production
57,423
6.80
6.93
2.03
59,513
6.56
7.18
2.11
eio
Dietary Cafeteria
25,404
3.4S
3.55
1.05
30,334
3.35
3.67
l. 09
a.2
Operation of Plant
33,437
3.96
4.C3
.19
43,405
4.78
5.24
.25
844
Security
3,717
.44
.45
.02
3,776
.42
.46
.02
850
Housekeeping
32,769
3.88
3.95
3.15
33,385
3.68
4.03
3.21
861
Laundry Coll. & Dist.
6.602
.78
.80
.06
6,918
.76
.83
.07
33
Laundry Processing
10,664
1.26
1.29
.10
10,664
1.29
1-.29
.10


77
Tabla 1: Direct Expense Comparison
Selected Cost Centers as they appear on
the Comparative Hospital Cost Summary Report
1
2
3
4
5
Dollars
610 NS-Medical $
897 $ 8,053 $ 23,988 $
13,220 $
24,492
660 NS-O.R.
60,697
40,624
19,494
61,663
51,333
706 Lab-Clinic.Path.
57,846
51,371
31,071
-
83,036
757 ER-Nursing
27,885
13,287
3,858
15,083
35,637
864 Laundry-Proces.
10,949
10,664
4,485
10,017
9,929
910 Patient Acctg.
27,595
14,191
4,940
18,640
17,356
Total Hospital 1
,112,676
844,466
372,469 1
,110,483 1
1,305,254
Percent of Total
610 NS-Medical
.08%
2.14%
6.44%
1.19%
1.88%
660 NS-O.R.
5.44
4.81
5.23
5.54
3.93
706 Lab-Clinic.Path.
5.20
6.08
8.33
-
6.36
757 ER-Nursing
2.51
1.57
1.04
1.36
2.73
864 Laundry-Proces.
.98
1.26
1.20
.90
.76
910 Patient Acctg.
2.48
1.68
1.33
1.68
1.33
Cost Per Patient Day
610 NS-Medical
$ 14.47
$ 24.90
$ 17.42
$16.44
$ 20.79
660 NS-O.R.
6.17
4.90
5.26
4.74
5.56
706 Lab-Clinic.Path.
5.88
6.20
8.39
-
8.99
757 ER-Nursing
2.83
1.60
1.04
1.16
3.86
864 Laundry-Proces.
1.11
1.29
1.21
.77
1.07
910 Patient Acctg.
2.80
1.71
1.33
1.43
1.88
Total Hospital
113.02
101.89
100.53
85.35
141.29
Cost Per Activity Base
610 NS-Medical
$
$3,57
$ 3.57
$3.53
$3.47
660 NS-O.R.
1.18
.81
1.50
.89
1.74
706 Lab-Clinic.Path.
1.21
.20
1.90
-
.70
757 ER-Nursing
21.34
5.54
12.65
5.04
4.07
864 Laundry-Proces.
.05
.10
.12
.04
.19
910 Patient Acctg.
13.61
4.63
6.46
4.23
.63


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PRELIMINARY LIST OF COST CENTERS
1. ADMINISTRATION*
1. Administration General
2. Chaplain
3. Legal
4. Administrative Residents
5. Industrial Engineering
6. Credit Union
2. ANESTHESIOLOGY*
1. Anesthesia
2. Inhalation Therapy
3. BUSINESS OFFICE*
1. Financial Management Operations
2. Financial Management Cost Accounting
3. Financial Management Budget & Planning
4. Patient Business Accounts Fiscal Services
5. Patient Business Accounts Fiscal Services
6. Patient Business Accounts Delinquent Accounts
7. Data Processing Operations
8. Data Processing Systems Development
9. Admitting
10.Communications
4. CENTRAL STERILE SUPPLY*
1. Collecting & Dispensing
2. Sterile Processing
3. General
4. Stores & Inventory Control
5. CLINICAL LABORATORY*
1. General
2. Purchasing & Inventory Control
3. Blood Bank
4. EEG
5. EKG
6. COMMUNITY SERVICE
1. General
7. DIETARY*
1. Kitchen
2. Cafeteria
118


COMPARATIVE COST REPORT
DATE: ACTIVITY BASE: PAGE 2 OF 4
Acct.
Ho.
Title
1
Cost l
2
S % Of T
3
jtal
4
5
1
Cost P
2
>r Patlsr
3
t Day
4
5
1
Cost Per
2
Activl1
3
y Base
4
5
.290
TOTAL FEES
SUPPLIES
.300
Medical & Suralca'l
1.34
2.14
.14
,23
.38
.49
.03
.06
.06
.10
.m
m
.301
Inven. Count Adlust.
. 302
Instruments
.310
Druus
.03
.01
.320
Intravenous Solutions
.01
.330
Wear. AooareHex. Unl.l
.331
Uniforms
.340
General Ooeratlna
.95
.20
.04
.3 SO
Chiveen and Gases
.360
Film: and Chemicals
T3?F
.352
.363
.364
.370
Printed Ferns
.16
.03
.01
..380
Fuel
.390
Pub. (Books X Period.1
.400]
Beveraoes f, Nourish.
,
.410
Pepa It- A Maintenance
.420
Dishes. Glass.. Silver.
.421
DisDOsable Fat. Ut.en.
.430
Kitchen
.44(1
Fond

.441
Fnnd-Meat.T Fish. Poll! .
.4421
Food-Dairv
.443
Fond-Fresh Produce
.444
Food-All Other
-4F0
1ahoratorv
.460
Housekepnino
.461
House.-Paoer Products
.46?
House.-Sanlfarv Product
.470
! ?>mdrv
. 480
f iripnc
4cri
Printlrio
.500
Miscellaneous
.1R
.06
06
m
oi
.510
Fig. 12.--Continued.
ro
o
o


68
HOSPITAL COST REPORT
HOSPITAL: 2
ACCOUNT NUMBER: 610 ACTIVITY BASE: Hours of Care
PAGE 2 OF 3
DATE: One month
Account Title
% of Total
Patient Day! Activity
Dollars
Films and Chemicals
Printed Forms
Fuel
Pub. (Books & Periodicals)
Beverages & Nourishments
Repair & .Maintenance
Dishes. Glassware, Silver.
Disposable Eatinq Uten.
Kitchen
Food
Food-Heat. Fish. Poultry
*n
o
o
c.
rs
<
i
Food-Fresh Produce
Food-All Other
Laboratory
Housekeeoina
House. Paper Products
House. Sanitary Products
Laundry
Linens
Printino
Hiseellaneous
.18
in
P
.01
37
TOTAL SUPPLIES
1.56
.44
.u/
324'
PURCHASED SFRVTCE
Purchased Maintenance
Purchas. Main Contract
Purchas. Main Other
Utilities
Utilities Electricity
Utilities Gas
Utilities Water & Sewer
Garbaoe Collection
Telephone S TeleoraD.h
.47
.14
23
Insurance & Bondina
1.22
.35
JQ5
254
Dues and Memberships
Prof. Activity Study
y p1
Travel Education
Travel Other
Equipment Rentals
Equipment Leases
.72
.21
.03
150
Photnrnnv Fqinnnent
._JlLaE£Uffi
Fig. 8.Continued.


Appendix F
SELECTED COST CENTERS BY CATEGORY


15
Chapter III will outline the system development procedure. The
procedure outlined was completed for the participating hospitals by
Health Systems Management, Inc. The researcher provided guidance in
developing the procedure and assisted in performing a substantial por
tion of the various procedural steps. For that effort the researcher
was reimbursed by Health Systems Management, Inc. Personnel of Health
Systems Management, Inc. assisted in the activity analysis step, and
the activity definition phase of the data analysis step of the system
development procedure. The cost accounting system developed is the
property of the participating hospitals.
Chapter IV will discuss the system evaluation phase of the pro
ject. That portion of the research project was completed entirely
by the researcher.
Finally, Chapter V will indicate conclusions reached and
recommended areas for future research.


88
Security Act (Medicare); 2) regulatory agencies that administer price
control programs; 3) third-party-payers; and 4) interested consumer
groups. The reporting requirements of each will be outlined below.
The Social Security Administration
In 1965 the Congress of the United States enacted Title XVIII of
the Social Security Amendment of 1965, commonly referred to as Medicare
Under the provisions of Title XVIII people over 65 years of age viere to
have medical payments made in their behalf by the Social Security
Administration. Section 139f(b) of Title XVIII states the following:
The reasonable amount paid to any provider of
services with respect to services for which
payment may be made under this part shall,
subject to the (deductible and co-insurance)
provisions of section 1395e of the Title,
be the reasonable cost of such services,
as determined under section 1395x(v) of this titled
The restrictions of section 1395x(v) were listed as follows:
The reasonable cost of any service shall be
determined in accordance with the regulations
establishing the method or methods to be used,
and the items to be included, in determining
such cost for various types or classes of
institutions, agencies and services...Such
regulations may provide for determination of
the costs of services on a per diem, per unit,
per capita, or other basis, may provide for
using different methods in different cir
cumstances, may provide for the use of esti
mates of costs of particular items or services,
and may provide for the use of charges or a
percentage of charges where this method
reasonably reflects costs.
Such regulations shall (A) take into account
both direct and indirect costs of providers
of services in order that, under the methods
of determining costs, the costs with respect to
individuals covered by the insurance programs
established by this subchapter will be borne
by individuals so covered and the costs
with respect to individuals not so covered
will not be borne by such insurance programs....


then to distribute costs from them to the benefiting patient service
cost centers. Appendix F is a partial listing of cost centers by cate
gory which identifies all cost centers by type of service provided.
With few exceptions the method of distribution is a ratio devel
oped from the activity base. For example, the Social Service cost
center, Account 752, has as an activity base the "number of consulta
tions" held with patients and patients' families. The distribution
method is to spread Social Service costs to patient service cost centers
base upon the ratio of consultations held with patients and patients'
families of each patient service cost center, to total consultations.
The costs of generating that output are distributed to the patient
service cost centers that supposedly benefit from such activities.
The distribution method for each support service cost center follows
this pattern with the exception of Medical Records-Research (Account
788), and all Data Processing cost centers (Accounts 936-938). Those
4 accounts require a special analysis in order to accomplish the dis
tribution.
Defining a distribution method for each account does not resolve
which of the recognized accounting procedures will be used to allocate
costs. There are a variety of ways in which this can be accomplished.
The American Hospital Association^ recognizes 4 major procedures.
First, there is the direct procedure which closes costs of the support
service cost centers directly and exclusively to the patient service
cost centers. This entirely overlooks the fact that one support
service cost center can provide service to another support service
cost center. Second, the step-down procedure provides for the


8
Justification for the Study
Based upon the preceding discussion, there is a need to provide
comparable cost information for area-wide planning purposes. Addition
ally, there is a more general problem.
The American Accounting Association's Committee on Accounting for
Not-For-Profit Organizations was critical in its recent report of the
efforts made by the accounting profession to provide meaningful guid
ance in the adaptability of accounting practices and techniques used
in the profit-oriented sector to the not-for-profit sector.^ One of
the areas of accounting practice scrutinized by the committee was cost
accounting. More specifically regarding cost accounting techniques
the committee stated: "Cost accounting has long been recognized in
the profit-oriented environment as a useful tool in promoting efficien
cy. This committee emphasizes that it (cost accounting) can be used
to plan future and control current operations of not-for-profit
organizations."^ In the group's summary of recommendations it stated:
"The potentials of cost accounting techniques have scarcely begun to
be realized in the not-for-profit field."23 Later in a detailed list
of recommendations the committee concluded that: "Cost accounting
system(s) be designed to provide for the collecting and reporting of
costs by management responsibilities, by budget programs, and by appro
priately determined units of service outputs. The system should permit
determination of total operational expenses for appropriate accounting
periods."24
Over the years the hospital industry has generally been considered
nonprofit. Of the 7,123 hospitals in the United States, 6,265 are non
profit institutions.25 in fact, the earlier cited committee report


190
16. Total hours recreational therapy was administered. Cal
culated by multiplying patients by number of hours of
instruction each patient received.
17. Total number of cardiac catherization procedures
administered.
18. Total number of emergency room visits.
'
19. Total number of outpatient visits. The speciality clinic
categories, 4a through 4f, allow for the calculation of
outpatient visits to each of the major speciality clinics.
Item 4g is to be used to indicate the number of visits
made by persons referred by private physicians for test
ing purposes.
20. Indicate the hours of instruction received by those
students enrolled in the X-Ray Technician Training Program
by the area in which the instruction was given.
21. Total number of Intravenous units started.
22. Total number of blood transfusions administered.


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AGREEMENT_INFO ACCOUNT UF PROJECT UFDC
FILES


EVALUATION INTERVIEW GUIDE
WITH RESPONSES
Questions used as Guide for Evaluation Interviews including Responses.
Interviewed thirteen Administrators, Assistant-Administrators for
Finance, Financial Directors, and Chief Accountants. The managers
interviewed represented five different hospitals.
1. Does the cost system generate costs on a programatic basis?
Response: Yes 13 No 0
2. Does the cost system generate costs on a product basis?
Response: Yes 13 No 0
3. Is there:
A. 4 Too much detail?
B. 9 Right amount of cost detail?
C. 0 Too little cost detail?
4. Are the activities defined such that they accurately represent
the activities being performed within your hospital?
Response: Yes 13 No 0
5. Are there:
A. 2 Too many, activities?
B. 11 The right number of activities?
C. Q Too few activities?
6. Do the activity bases reflect the output of the cost centers?
Response: Yes 11 No 2
7. Have you recently filed (indicates number of hospitals responding
to the answer):
A. 2 Annual Price Commission reports?
B. 2 A price exception report?
C. 5 Annual Medicare report?
D. 2__ Reports to public groups or press?
E. 1~ Special reports to third-party-payers?
217


41
The second group of questions was aimed at determining what
specific activities were being carried out within individual cost
centers. A separate set of questions was developed for each cost
center. This second part of the questionnaire was titled "Specific
Functional Questionnaire."
Source materials for this phase of the research included
McGibbony's Principles of Hospital AdministrationJ United States
Department of Labor's Job Descriptions and Organizational Analysis for
Hospitals and Related Health Services,^ Goldstein and Horowitz's
Restructuring Paramedical Occupations: A Case Study,^ Brown's
Hospitals Visualized,^ and various American Hospital Association
publications regarding selected departmental activity.5
Test Questionnaire
The purpose of developing the questionnaire was to use it as a
guide for interviews with the supervisors of each cost center. The
interviewing would take place in several hospitals. In order to com
plete the activity analysis within the time frame of this project, a
team of 4 interviewers was selected. Prior to sending the 4 inter
viewers into community hospitals to collect the information, some
training of those individuals was desirable. Additionally, since the
questionnaire used as the interview guide was new, some testing of it
was necessary. Consequently, there were 2 reasons for conducting the
test. First, it v/as necessary for the interviewers to become better
acquainted with hospital organizations, personnel, and procedures.
The test period enabled the interviewers to attain some degree of pro
ficiency in those skills required to question hospital supervisors


Appendix E
RECOMMENDED CHART OF ACCOUNTS
(SELECTED ACCOUNTS)


34
be able to provide information for product costing purposes. Figure 5
is a diagram of the relationships of the basic cost data to the ulti
mate purposes to which it is put.
BASIC DETAILED COST DATA
ir
SERVICE CENTERS RESPONSIBILITY CENTERS
REPORTS REPORTS
Cost Reimbursement Planning
Rate Justification Control
Pricing
Evaluation
Fig. 5.Cost accounting data uses.
A slightly modified version of the profit-sector cost accounting
system model is outlined below in Figure 6. That particular model was
used as the basis for the cost accounting system designed during the
course of this research.
-Figure 6 differs from Figure 3 in 2 respects. First, the assign
ment of total overhead is accomplished differently in each model. The
hospital model applies overhead on a more detailed basis than the
industry model. The latter generally uses 1 rate to apply overhead
to products. The former, by virtue of having a separate cost center
for each overhead item, charges overhead to the various products based
upon each supportive service's unit rate times the amount of that
service consumed.
Second, there are no clearly defined stages of production in the
hospital model as there is in the industry model. Each hospital cost
center primarily provides services, either supportive in nature and to


CHAPTER I
INTRODUCTION
Purpose of Research
The purpose of this research project was to develop and to evalu
ate a uniform hospital cost accounting information system. The system
developed will generate cost accounting and statistical data based on
comparable information provided by the individual hospitals which can
be used to aid community- or area-v/ide hospital planning.
Statement of General Problem
Health care expenditures in the United States have been increasing
dramatically over the past few years. In total dollar amounts the
figures have grown from $12 billion in 1949-50 to $75 billion in
1970-71J During the same period, total health care expenditures, as
a percentage of the gross national product, have risen from 4.6 percent
p
to 7.4 percent,. Even though some of this increase may have been
brought about by welfare legislation which made it possible for people
to pay for services which previously had been, to some extent, rendered
without charge, the rate and amount of growth is still substantial.
This upward trend is expected to continue and it has been estimated
that by the early 1930's health care expenditures will have reached
$200 billion.3
Perhaps this steady increase in costs would not seem out of line
if the major portion cf the increased outlay had been to provide more
1


22
latter would require only a small room and 2 or 3 employees. Both,
however, would be considered cost centers.
Second, a cost center is not identical with a department. In some
cases it may be, but in others the department may be so large and com
plex that it would be divided into several cost centers, Nursing
Services Department would be an example. It is divided into smaller
organizational groups such as Nursing Services-Medical, Nursing
Services-Surgical, Nursing Services-Pediatrics, and Nursing Services-
Operating Suite.
Third, cost centers should not overlap. There should be no
function jointly managed by 2 different supervisors.
Fourth, different cost centers may or may not include similar
operations. If an organization is so large that one function is accom
plished by 2 identical groups, each group under a different supervisor,
then there are 2 cost centers.
Finally, cost centers are not strictly distinguished according to
the supervising individual, but according to the supervisory occupation
An emergency room is a single cost center, yet it may be supervised by
Q
a different individual on each shift.
Activity Base
This term indicates the unit of measure for the level of activity
that takes place within a cost center. The activity base relates to
and approximates resource utilization within a cost center based upon
the output of that particular cost center. Examples are laboratory
tests for clinical laboratory cost centers, hours of housekeeping ser
vice provided for housekeeping cost centers, and patient days for
nursing cost centers.


11
problems which prompted this study because the system they recommend
is designed for use by managers of individual institutions and do not
deal with interinstitutional comparison of cost accounting data. The
studies by Seawell and Hay have the added problem of relying on cost
analysis as a basis for their cost information. To date there have
been no standards developed defining acceptable cost analysis work.
Vatter34 has made the only known attempt to develop standards for cost
analysis in the not-for-profit sector. The system developed by Taylor
and Nelson has many of the basic elements of an integrated cost ac
counting system but it is dated. The work was completed prior to the
enactment of Medicare legislation. As a result, their system needs to
be reviewed in light of present cost requirements.
It can be seen that the earlier cited criticism of the American
Accounting Association's Committee on Accounting Practices of Not-For
Profit organizations is well justified. What accountants have contrib
uted to the subject matter is not significant. In particular, those
works related to the hospital accounting problems are dated and appear
to need substantial review before they can be applied to current
problems. In fact, the systems recommended in the majority of the
accounting works are based upon the earlier work of professional organ
izations, and especially that of the American Hospital Association.
The major portion of the work accomplished to date has been by
professional and regulatory organizations. Those organizations in
clude the American Hospital Association, state hospital associations,
nonprofit service corporations sponsored by state hospital associ
ations, joint state hospital associations, state Blue Cross associ
ations, and certain state regulatory agencies.


226
Vatter, William J. "Excerpts from Standards for Cost Analysis,"
Federal Accountant, (September, 1970), 64-87.
Weide, Patricia. "Reimbursement Where Is It Going?" Hospital
Financial Management, (July, 1971), 3-4.
Wojdak, Joseph R. "A Comparison of Governmental and Commercial
Accounting Concepts," The New York Certified Public Accountant
(January, 1969), 29-38.
Wolkstein, Irwin. "Medicare Experiments with Hospital Reimbursement,"
Hospital Financial Management, (July, 1971), 28-30.
Wood, Jack C. "Deficiencies in the Medicare Reimbursement and Adminis
trative Review Process," The Texas CPA, (January, 1972), 24-31.
Government Publications
Barr, John, A. (Chairman). Secretary's Advisory Committee on Hospital
Effectiveness Report. Washington, D. C.: Government Printing
Office, 1968.
Federal Register, Volume 37, Number 242 (Friday, December 15, 1972),
26707.
Internal Revenue Service. Instructions for Form S 52. Washington,
D. C.: Government Printing Office, 1972.
United States Code, 1964 edition, Supplement IV, Title 42, Sub-Chapter
XVIII, Paragraph 1395, 1968.
U. S. Department of Labor. Job Descriptions and Organizational Analysis
for Hospitals and Related Health Services. Washington, D. C.:
Government Printing Office, 1971.
U. S. Department of Health, Education, and Welfare. Guidelines for
Producing Uniform Data for Health Care Plans. Washington, D. C.
Department of Health, Education, and Welfare (DHEW Pub. No.
HSM 73-3005), 1972.
U. S. Department of Health, Education, and Welfare. Health Insurance
for the Aged: Principles of Reimbursement for Provider Costs.
Washington, D. C.: Government Printing Office, 1966.
U. S. Department of Commerce. Statistical Abstract of the United States
Washington, D. C.: Government Printing Office, 1972.


184
11. Hours of Volunteer Service Enter the hours of service
donated by volunteers to each area in the row opposite
the appropriate account number.


Appendix A
PRELIMINARY LIST OF COST CENTERS


163
702:
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
CLINICAL LABORATORY ANATOMICAL PATHOLOGY
Provide histopathology and cytology laboratory
services and operate the morgue.
Compensation of physicians, medical technologists,
technicians, laboratory assistants, clerical and
supportive staff performing services for anatomical
pathology. Fees, materials, supplies, miscellaneous
and indirect expenses required to perform this
function.
Relative unit values of tests.
None
703: Histopathology
704: Cytology
705: Morgue


109
Chapter II, was developed. Cost data were processed through the cost
accounting system in the manner indicated. The output was as expected
in terms of the 4 cost reports. Those evaluators who reviewed the
output unanimously agreed that the cost accounting system provided the
type of data anticipated, i.e., costs by product and by program. In
addition, costs at various points in the production process were
developed. For this study, costs at 3 different points were display
ed: 1) at the point data were captured (direct expense), 2) after the
first allocation (adjusted direct expense), and 3) at the end of pro
duction (full cost). While these 3 points were selected for this
study, any other point or points could have been chosen and the costs
similarly determined.
Based upon the reports produced and the evaluation of those
reports, it can be concluded that the cost accounting system was
developed and did produce the expected results.
System Elements
The second major part of the purpose was to develop output that
would be. comparable for all reporting hospitals. The proper defini
tion of the elements of the cost accounting system was essential.
Those elements were 1) a system framework (chart of accounts), 2) uni
form activity bases, and 3) uniform cost distribution methods.
The central problem was to define correctly the various activi
ties that take place within a hospital. This was accomplished through
the activity analysis. Some 252 such activities were defined. Each
was assigned an account number and designated as a cost center. The
cost centers were classified as either a support service or patient


94
At present the cost information is aggregated at the total hospital
level. This is misleading, however, since a detailed written justi
fication is required when any one of the costs listed exceeds the maxi
mum allowed. To prepare such a document often requires detailed cost
information to at least the departmental level. Recently, the Director
of the Office of Exceptions Review of the Economic Stabilization Pro
gram commented: "Phase II was a 'price' control program, but Phase III
will be increasingly a 'cost containment' type of program.If that
becomes the case, even more detailed cost data might be required by the
Price Commission. The Internal Revenue Service and local State Ad
visory Boards take the reported data as accurate and valid. The regu
lations require the indication of the address where the books and
records are maintained so that an inspection and/or verification of
price changes can be accomplished if it is deemed necessary. Further,
the administrator of the reporting hospital must certify that all in
formation provided is factually correct and in accordance with appli
cable regulations.
Each report filed is reviewed, and in those cases where the guide
lines are exceeded, an exception is required. The basic revenue and
cost data are reviewed along with a substantial amount of narrative
which is pertinent to the particular exception being processed. Reg
ulatory agencies presently decide each individual case on its merits.
The information provided is considered factual, based upon the certi
fication of the administrator of the filing hospital. The only major
requirement is that all information be verifiable in case further in
vestigation is deemed necessary.


All hospitals participating in this research project indicated that
they were following the American Hospital Association's Chart of Accounts.
As such, that framework was to be the basis for the data collection. A
review of the hospitals' charts of accounts indicated substantial variance
from the American Hospital Association's chart. The following analysis
indicates the degree of the divergence for selected accounts.
The seven columns indicate:
1. The first column indicates the account description as
developed by the American Hospital Association.
2. AHA The account number recommended by the American Hospital
Association to correspond to the account title in column one.
3. The next five columns (1-5) indicate the account number used
by the hospitals.
a. If a number appears in the column, it represents the
number being used for the account title in column one.
b. If an abbreviated title appears in the column, it
indicates the activity being accounted for under the
number indicated in the AHA column.
c. If both a number and1 abbreviated title appear, neither
the recommended AHA account title or number were being
used.
146


224
Journals
Benninger, L. J. "Utilization of Multi-Standards in the Expansion of
an Organization's Information System," Cost and Management,
(January-February, 1971), 23-28.
Bouchard, J. Armand. "Budgeting: An Old Tool in a New Era," Hospital
Financial Management, (August, 1972), 25, 38.
Bugbee, George. "Hospitals Are Different," Hospital Financial
Management, (August, 1971), 3-10.
Caswell, Robert J. "Concepts of Cost Behavior for Decision-Making,"
Hospital Financial Management, (January, 1972), 10-12.
Committee on Accounting Practice of Not-For-Profit Organizations.
"Report of the Committee on Accounting Practice of Not-For-Profit
Organizations," The Accounting Review: Supplement to Volume
XLVI, (1971), 80-163.
Committee on Concepts of Accounting Applicable to the Public Sector,
1970-71. "Report of the Committee on Accounting Concepts
Applicable to the Public Sector, 1970-1971," The Accounting
Review: Supplement to Volume XLVII, (1972), 76-108.
Denenberg, Herbert S. and Mead, James M. "Health-Care Delivery-System
Reform via Blue Cross-Hospital Contracts," Hospital Topics,
(December, 1972), 16-20.
Eioicki, Richard A. "Effect of Phase II Price Controls on Hospital
Services," Health Services Research, (Summer, 1972), 106-117.
Elnicki, Richard A. "Recent Changes in Phase II Price Controls,"
Health Services Research, (Fall, 1972), 240-242.
Faltermayer, Edmund K. "Better Care at Less Cost Without Miracles,"
Our Ailing Medical System. Edited by Editors of Fortune.
New York: Harper & Row, 1969.
Forsyth, G. C. and Thomas, D. Glyn. "Models of Financially Healthy
Hospitals," Harvard Business Review, (July-August, 1971),
106-117.
Grotta, Daniel. "The Ralph Nader of Insurance," Saturday Review,
(July 1, 1972), 34-41.
Harrill, E. Reece and Richards, Thomas E. "A Total Systems Approach
to Governmental Accounting," Management Accounting, (May, 1972),
14-20.


COMPARATIVE COST REPORT
' DATE] ACTIVITY BASE: PAGE 3 OF 4
Acct.
Cost ,
sion
| i
ota!
Cost P
;r Patier
t Day
Cost Per
Activi
:y Base

No.
Title
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
.520
.530
.540
.550
TOTAL SUPPLIES
1-55
2.14
1.51
.23
.44
.40
.31
.06
.07
.10
.07
01
PURCHASED SERVICE
.600
Purchased Maintenance
.501
Purchas. Maln.-Cnr.tract
.
.60?
Piirchas. Main.-Other
610
iitlU-tias J
611
Utilities-Electricity
.£LL
Utilities Jas
.613
Util'iies-Water Sewer
.620
Garbaae Collection
.530
Telephone & Telearaph
.47
.14
_
.07
.640
Insurance S Bondinq
10.10
1.22
2.47
.20
1.45
3.76
.35
.66
.04
.37
.05
l?
.01
.06
.650
Dues ar.d Memberships
. 6bl
Prof. Activity Study
. .660
Travel
^ML
Travel-Education
.662
Travel-Other
,
JiZQj
Equipment Rentals
671
Equipment Leases
.7 2
.71
.03
,$21\
Photocopy Equipment
.Microfilm
.m
Postace

.7QQ
Hop-Hospital Lab.
JL
Serv, From Other Hosp.
.710
Outside Monitorina
.720
Laundrv
.721
Priotlnq
.722
Koysekeeuftro
.717
Dietary
2A.
.Security
Data Processing
-730
Intereov. Agen. Univer'
.. .7.40
Other
.4?
,10
.07
760
Fig. 12.--Continued.
ro
o


139
Specific Functional Questionnaire
Cost Center: Security
12. Do cost center employees force receive special training
from local law enforcement agencies?
13. Is security function completed on a shared basis with
other hospitals or organizations?
14. Do cost center employees maintain a file on all employees?
15. Are all new employees fingerprinted by cost center
employees when they are hired?


57
Detailed reports. The 2 detailed cost reports are titled
"Hospital Cost Report" and "Comparative Hospital Cost Report." The
first of the 2 is designed to display detailed information concerning
the elements of cost of each cost center. Displayed are: 1) the
dollar cost of each element 2) the percentage each element of expense
is to total cost center expense, 3) the expense per patient day of
each element of expense within the cost center, and 4) the expense
per activity base for each element of expense within the cost center.
A significant amount of detail is displayed for each cost center.
The "Comparative Hospital Cost Report" contains the same informa
tion as the "Hospital Cost Report" except it is displayed on a compar
ative basis. This allows for the comparison of cost elements within
the cost center, by hospital.
Both of the detailed reports display the cost information as
collected at the initial point of entry into the system, and prior to
any adjustments or allocations.
Summary reports. The 2 summary reports are titled "Hospital Cost
Summary Report" and "Comparative Hospital Cost Summary Report." The
first of these reflects total cost center costs for each cost center
within a hospital. The same 4 items, dollars of expense, percentage
of hospital total, cost per patient day, and cost per activity base,
are displayed on this report as they were on the detailed reports.
Additionally, this information is shown at 3 different points within
the model. First, the expenses as initially recorded are displayed.
This section is called the "Direct Expenses" section, and presents the
total cost center costs as displayed on the detailed reports. Second,
the direct expenses of each cost center are adjusted for depreciation,


128
Specific Functional Questionnaire
Cost Center: Diagnostic
13. Are x-rays microfilmed?
14. Does this cost center operate the tumor registry?
15. Is all x-ray equipment owned by the hospital?
16. Does the hospital's malpractice insurance cover the
radiologists?
17. _Does the hospital have a contract with local industrial
concerns to take routine chest x-rays for prospective
employees?
18. Are films loaned to physicians?
19. Are spearate records maintained for:
A. _Inpatient films?
B. Outpatient films?


112
merits of information required by external parties, it can be concluded
that the information meets the final goal of aiding external decision
making.
While the primary purpose of the system was to develop comparable
cost data for external users, it seems the system is of significance
also as an aid to internal management. Those hospital administrators
and accounting personnel who evaluated the system output indicated
that the information generated would be of more benefit as an internal
than an external management tool.
The system is capable of producing cost information that is
usable by external groups. This conclusion was reached based upon the
fact that the system output met all external users' requirements.
Additionally, hospital managers have indicated that a significant
amount of information can be extracted from the system that would
assist with internal decision making.
General
The 2 major justifications for this study were: 1) to develop a
cost system that could provide data to assist in filling a void of
usable cost information; and 2) to indicate how cost accounting tech
niques as employed in the profit-oriented sector of the economy could
be applied to not-for-profit sector institutions. The ability to
satisfy the former objective was demonstrated by producing cost data
as indicated in the preceding section. This section will make some
observations regarding the latter justifications.
First, the system developed here is of the same type as those
used by industrial firms in the profit-sector of the economy. Due to


114
in all hospitals participating was apparent. Only 1 of the 5 hospi
tals participating in this study accomplished any cost accounting on a
regular basis. The other 4 were completely without cost accounting
personnel, and had not attempted to establish any costing programs.
This is even more significant in light of the fact that Medicare pro
grams have been in existence now for approximately 7 years, and more
recently cost justified price increases have been the order under
price control programs.
Generally, this study did develop a cost accounting system that
produced data as anticipated. Further, this project demonstrated that
the cost techniques available in the profit-oriented sector of the
economy can be applied to the not-for-profit sector.
Recommended Future Research
This study was an initial attempt to develop a cost accounting
system for a not-for-profit environment, or, more specifically, for
the hospital industry. As such, the output measures were, in large
part, the result of synthesizing current practice. The whole area of
output measures requires further exploration. If the activities are
properly defined, then has the most appropriate measure of the output
of that activity been chosen?
There are possibilities to continue the work begun by the
development of this system. The whole area of work measurement,
standard costs, and control chart techniques needs to be explored.
This cost accounting system provides a solid data base from which to
begin such work.
As was indicated by those who reviewed and evaluated this system,


175
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
901: FINANCIAL MANAGEMENT
Provide general accounting, budgeting, cost account
ing, payroll accounting, accounts payable accouting,
plant and equipment accounting, and inventory
accounting.
Compensation of all employees engaged in this
function. Fees, materials, supplies, miscellaneous
and indirect expense required to perform this
function.
Total general fund expenditures.
To service and patient location areas based upon the
ratio of each area's general fund expenditure to
total expenditures.
902: General Accounting
903: Budgets
904: Cost Accounting
905: Payroll Accounting
906: Accounts Payable Accounting
907: Plant and Equipment Accounting
908: Inventory Accounting
909: Internal Auditing



PAGE 1

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Notes
1. John R. McGibbony, M. D., Principies of Hospital Administration,
2d. edition, (New York: G. P. Putnam's Sons, 1969). Chapters
9-29 are detailed explanations of the responsibilities and
activities of a hospital's departments.
2. United States Department of Labor, Manpower Administration, Job
Descriptions and Organizational Analysis for Hospitals and
Related Health Services, (Washington, D. C.: Government
Printing Office, 1971).
3. Harold M. Goldstein and Morris A. Horowitz, Restructuring Para
medical Occupations: A Case Study, (Boston: Department of
Economics, Northeastern University, 1972).
4. Ray E. Brown and Richard L. Johnson, Hospitals Visualized, 2d
edition, (Chicago: American College of Hospital Administra
tion, 1957).
5. Hospital Administrative Services, Departmental Handbook-House
keeping, Departmental Handbook-Nursing Services: Operating
and Recovery Rooms, Departmental Handbook-Dietary, Depart
mental Handbook-Laundry and Linen, Departmental Handbook-
Nursing Services: Obstetrical Nursery, Delivery and Labor
Rooms, Departmental Handbook-Plant Engineering, (Chicago:
American Hospital Association, 1966)7 and American Hospital
Association, Management Review Program-Food Services Depart
ment, and Management Review Program-Nursery Serviced (Chicago:
American Hospital AssociationTT
6. American Hospital Association, Uniform Hospital Definition,
(Chicago: American Hospital Association, 1960).
7. Connecticut Hospital Association, Connecticut Hospital Asso
ciation Accounting Manual, (New Haven, Connecticut:
Connecticut Hospital Association, 1970).
8. Cost Finding and Rate Setting for Hospitals, American Hospital
Association, 1968, pp. 31-34.
9. Horngren, Cost Accounting: A Managerial Emphasis, pp. 417-428.
1G. Ibid., p. 426.
11. Ibid., p. 424.
59


156
.730
Intergovernment Agency Purchases
(University Hospital only)
.740
Other
Other Expenses:
.800
Depreciation
.801
Depreciation Major Movable
/
Equipment
.802
Depreciation Fixed Equipment
.803
Depreciation Buildings
.804
Depreciation Building Services
.805
Depreciation Land improvements
.810
Amortization Start-up Costs
.820
Interest
.821
Interest Short Term Loans
.822
Interest Mortgages
.823
Interest Bonds
.824
Interest Other
.830
Loss on Disposal of Assets
.840
Loss on Disposal of Bonds and
Stocks
.850
Credits to Expense
.851
Credits to Expense Research
.852
Credits to Expense Grants
.853
Credits to Expense Central
Sterile Supply
.854
Credits to Expense Pharmacy
.855
Credits to Expense Repairs and
Maintenance
.856
'Credits to Expense Other
General Instructions
1. Primary accounts have been designated for many activ
ities within the hospital at a primary or patient
location area for which no information is now being
collected. For example, Dietary Department is di
vided into six areas. This system allows for the
collection of those costs necessary to perform each
activity(s) in each of the six areas. The level at
which the data are collected is based upon the activ
ities performed, as indicated by an earlier analysis,
and the ability to account for each activity. It is
important that each hospital collect cost information
in the detail called for so that comparability of in
formation can be maintained. There will be times,
however, that due to the size of a hospital it will
not be possible to collect cost data at the level of
detail recommended;when this occurs, the costs of
multiple activities should be placed in the following
accounts:


196
HOSPITAL COST REPORT
HOSPITAL; 2 PAGE 1 OF 3
ACCOUNT NUMBER: 610 ACTIVITY BASE: Hours of Care DATE: One month
A'"rr>i)nt Title Iof Total
Patient Day! Activity
Do!1srs
s/OTiESTUinrAEr
Nursing Super./Super.
Head Nurse/Professicnal
4.40
1.27
.IS
924
Charqe Nurse
Staff Nurse
26.17
. 7-54
1.03
5465
Pract. Nurse/Semi-Pro.
15.29
4.40
.53
3192
Nursing Assist./Stud ent
19.72
5.68
.82
4117
Unit Admin./Clerical
Clerks/Typtsts .
3.12
2.34
.34
7535
_ T c c h n i c i a n r> /T c- c h n i c i a n s
Phvsicians/Phvsicians
Interns & Residents
General/General
TOTAL SAL.. WAGES. HRS.
7T77D
2TT 23 '
3.05
T5393
FRINGE BENEFITS
Social Security fFICA1
OI
i .24
.¡8
gnu
Group Life Insurance
1.38
.54
.08
393
Group Health Insurance
Grouo Disability Insurance
Retire. Plan Contribution
.63
.18
. U3
132
Workmen's Compensation
.34
.10
.01
71
State Unemploy. Tax
.66
.19
.03
''
Fed. Umeplov. Tax
Uniforms
.72
.21
.03
151
Meals
Health Service
.06
.02
-
13
TOTAI FRTNGF RFNFFTTS
8.60
2.48
.36
1798
FFFS
Legal
Auditing
Collection Agencies
Consul ti na
Med. Spec. Admin.
Med. Snec. Phvs. Serv.

TOTAL FEES
SUPPLIES
Medical A Surgical
1.34
.38
.06
279
Inven. Count Adiust.
Instruments
Drugs
.03
,01
-
6
Jntravenous Solutions
.01
2
Wearing Apparel (ex. Uni.)
Uniforms
General Operating
. Dx ugxui JindJiis e a -
Fig. 11.-Example of a completed Hospital Cost Report.


92
the basis upon which such changes were determined. Likewise, if in
tensity increases, the detailed data to support such claims must be
provided.
For hospitals unable to provide the actual information from their
records a formula is provided which must be used. Using gross statis
tics of patient days and outpatient procedures, a factor to eliminate
volume changes is calculated for the entire hospital. This factor is
then divided by 1.02 to allow for a 2 percent increase in the inten
sity of care provided. The resulting percentage is then used to ad
just present year's revenue to the level at which it would have been,
given the prior year's volume and intensity of service. The difference
between prior year's revenue and the adjusted revenue represents the
price increase. Dividing that difference by the prior year's revenue
results in the percentage of the price increase. That increase must
be less than 6 percent.
Also established were 2 additional restrictions. First, all price
increases must be cost justified. Revenues cannot automatically be in
creased up to 6 percent. If justifiable cost increases are only 4
percent, then prices cannot be increased by more than 4 percent. In
this case, the 4 percent represents a ceiling above which revenues
could not be increased without the local State Advisory Board and Price
Commission approving such an exception. The second additional re
striction disallows price increases that result in the profit margin,
after increases, being greater than the average margin of any 2 of the
past 3 years.5
The justifiable costs must be determined in the same way that
price increases were determined in the price increase portion of the


Appendix K
SELECTED INFORMATION REGARDING PARTICIPATING HOSPITALS
AND COST ACCOUNTING SYSTEM EVALUATORS


223
Goldstein, Harold M. and Horowitz, Morris A. Restructuring Paramedical
Occupations: A Case Study. Boston: Department of Economics,
Northeastern University, 1972.
Harris, Walter 0. Institutional Cost Accounting. Chicago: Public
Administration Service, 1944.
Hay, Leon E. Budgeting and Cost Analysis for Hospital Management,
2d edition. Bloomington, Indiana: Pressler Publications, 1963.
Henrici, Stanley B. Standard Costs for Manufacturing, 3d edition.
New York: McGraw-Hill, 1960.
Horngren, Charles T. Cost Accounting: A Managerial .Emphasis,
3d edition. Englewood Cliffs, New Jersey: Prentice-Hall
Inc., 1972.
Kaitz, Edward M. Pricing Policy and Cost Behavior in the Hospital
Industry. New York: Frederic A. Praeger, 1968.
Kerrigan, Harry D. Fund Accounting. New York: McGraw-Hill, 1969.
McGibbony, John R. Principles of Hospital Administration, 2d edition.
New York: G. P. Putnam's Sons, 1969.
Mikesell, R. M. and Hay, Leon E. Governmental Accounting, 4th edition.
Homewood, Illinois: Richard D. Irwin, Inc., 1969".
Seawell, L. Vann. Hospital Accounting and Financial Management.
Berwyn, Illinois: Physicians1 Record Company, 1964.
Somers, Anne R. Health Care in Transition: Directions for the Future.
Chicago: Hospital Research and Education Trust, 1971.
Somers, Anne R. Hospital Regulation: The Dilemma of Public Policy.
Princeton, New Jersey: Industrial Relations Section; Princeton
University, 1969.
Taylor, Philip and Nelson, Benjamin 0. Management. Accounting for
Hospitals. Philadelphia: W. B. Saunders Company, 1964.
Tenner, Irving. Municipal and Governmental Accounting, 3d edition.
Englewood Cliffs, New Jersey: Prentice-Hal, Inc., 1955.


CHAPTER V
CONCLUSIONS AND RECOMMENDATIONS FOR
FUTURE RESEARCH
Introduction
This chapter will discuss conclusions regarding the cost account
ing system developed and evaluated during this project. Additionally,
several areas where future research might be warranted will be dis
cussed.
Conclusions
The purpose of this project was to develop a uniform hospital
cost accounting information system capable of producing camparable
cost data which could aid area-wide decision making. In order to
accomplish this purpose, 1) a system had to be developed, 2) the ele
ments of the system had to operate such that comparable data could be
produced, and 3) the comparable cost output had to be such that it met
the requirements of external cost information users.
This section will review conclusions reached regarding the major
points just indicated. Conclusions pertaining to 1) the overall
system, 2) the elements of the system, and 3) the system output will
be summarized. Additionally, some general observations pertaining to
the not-for-profit sector as a whole will be made.
Overall System
The cost accounting system as depicted by the model in Figure 6,
108


PATIENT SERVICES EXPENSE
NURSING DIVISION EXPENSE
Nursing Division Admin.
Nursing Service Admin.
Supervision of Nurs. Units
Med. and Surg. Nurs.
Pediatric Nursing
I.C.U. Units
Psych. Nursing Units
OB Nursing Units
Newborn Nurseries
Premature Nurseries
Float Personnel
Other Units
Operating Rooms
R ecovery Rooms
Delivery and Labor Rooms
Central Services
IV Therapy
Emergency Service
Other Units
Nursing Education Admin.
Diploma School
LPN Program
Other Ea. Programs
AHA 1 2 3 4 5
600
600
602
600
600
610
601
603
602-609
604
602-Gastroent
603-Pat. Svs. Coord 11
610-629
610-618
610-626
610-620
605-613, 626-629
612,622,623
630-639
631-632
633
613
640-642
640
640-641
640
625, 636-639
615,616
643-645
643
643
641
617
646-649
646
646
650-0B.651-GYN
618
650-654
650
650
653
614
655-656
655
657
657
657
621
House Phys.
658-659

660
660-664
650
660
660
660
665-669
665 *
665
665
665
660
670-674
670-671
670
670
670
674-Recovery
675-676
675
675
675
675
675
676-Comfort Kits
677
677
677
677
677
678-679
678
678
678
678
619,678
680-689
680-Cast
680-Cast
673-Cent.Abl.Svs.
Room
Room
680-Rehab.Nurs.Svs.
620-0/P Cl 1
690
691
691
692
692-Insulin iherp.
693-696
601-Inser.
693-
593-Inserv.
693-Elec. ConvuT.
Inser.
Therp.
694-MMPI Test
698-539
695-OP Surg. Unit
Other Units


LIST OF TABLES
Table
1. Direct Expense Comparison 77
2. Adjusted Direct Expense Comparison 79
3. Full Cost Comparison 80
4. Hospital Cost Summary Report 203
5. Comparative Hospital Cost Summary Report
Direct Expenses 205
6. Comparative Hospital Cost Summary Report
Adjusted Direct Expenses 209
7. Comparative Hospital Cost Summary Report
Full Cost .213
8. Selected Information About Participating Hospitals 220
vi


COMPARATIVE COST REFORT
DATE:
ACTIVITY BAS
E:
PAGE 4 OF 4
Acct.
No.
Title
1
Cost /
2
s Z of T
3
3tal
4
5
1
Cost P<
2
r Patier
3
t Day
4
5
1
Cost Per
2
Activii
3
y Be.se
4
5
.77C
.730
. 790
TOTAL PURCHASED SERV.
10.10
2.41
2.47
.69
1.45
3.76
.70
.56
.14
.37
-
.10
.12
.03
.06
OTHER EXPENSES
.800
Depreciation
.801
Deprec.-Mai. Mov. Eouip
1.40
4.91
1.24
2.53
.40
1.12
.26
.65
.06
.23
.05
.11
: .802
Deprec.-Fixed Equin:
.17 I
.04
-
.05
.01
.01
-
.803
Degree.-Building
33.38
2.75
8.80
13.08
10.11
14.47
.79
2.01
2.70
2.60
-
.11
.41
.58
.43
' .804.
Deprec.-Buildino Serv.
3.41
.98
.14
805
Deprec.-Land Improve.
ac|
05
.07
.10
.01
. .01
.01
_
_
.810
Amort. of Start-Up Cost.
29
.07
.01
3?n
.Interest'
.821
Interest-Short Trim Loan
.08
.02
.822
Interest-Mortgages
51.02
3.94
7.13
.30
18.98
1.14
1.63
.19
.16
.33
.04
.823
Interest-Bonds
1.62
4.80
4.97
.47
.99
1.28
.07
.21
.21
.824
Interest-Other
830i
Loss on Dis. of Assets
. .840
Loss Dis. Stocks & Bond
.850
Credits to Expense
.851
Credits to Exp.-Resear.
,
.852
Credits to Exd.-Grants
.353
Cre. to ExD.-Cen.St.Sup
.854
Credits to Exp-Pharmacy
.855
Cre. to E/p-Rep.&Main.
8S6
Cre. to Exp.-Other

TOTAL OTHER EXPENSES
85.90
13.73
21.18
20.13
17.61
33.45
3.95
4.84
4.16
4.53
.56
.98
.89
.75
GRAND TOTAL
100.00
10.0.., QO..
100.00
100.00
¡00.00
37.21
28.80
22.82
20.64
25.69

4.14.
4.68
4.43
4.28
OTHER DATA:
Souare Feet
Full Time Equiv..Employ
Fig. 9.Continued.


20
American Hospital Association. Those efforts have been cost-finding,
however, not cost accounting. As a result, cost data are collected and
analyzed, usually only annually, after the year has been completed.
There has been no effort to integrate existing cost systems with finan
cial accounting systems. The Committee on Accounting Practices of the
Not-For-Profit Organizations recommended:
1. Each NFP organization incorporates into its
information system appropriate cost accounting
records, techniques, and accounts so that
information useful to management and external
users will be produced and reported on a timely
basis.
2. The cost-accounting systems be designed to
provide for the collecting and reporting
of costs by management responsibilities,
by budget programs and by appropriately
defined units of service outputs.
3. The cost-accounting system be integrated
into the over-all accounting system and
employed on a continuing basis....4
It has been noted that a major problem in developing cost ac
counting systems for nonprofit institutions has been the inability to
identify output. One research group has indicated that "the problem
is one of identifying meaningful concepts of cost association and
allocation so that assignments of administrative costs become something
more than an exercise in arbitrary calculations."5 Horngren calls this
the identification of a "cost object" and states: "He (the manager)
needs the cost of something. It may be a product, a group of products,
a plant, a territory, a machine-hour, a labor-hour, an operating
division, a customer, an order, or a project.These are easier to
define for product-oriented concerns. It is somewhat more difficult
for service-oriented agencies but it can be accomplished. Since non
profit organizations deal with both products and services, the


SPECIFIC FUNCTIONAL QUESTIONNAIRE
Hospital: Person Interviewed:
Department: Pharmacy Date:
Cost Center: Administration
1. Does the pharmacy have a full time pharmacist? If no,
who has responsibility for the pharmacy:
A. Nursing?
B. Administration?
C. Other? (Explain in Remarks Section)
2. Does the pharmacy have a formulary?
3. Does the pharmacy use a standard published formulary?
(If no, explain in Remarks Section)
4. Does the hospital publish its own formulary?
5. Is the formulary complete to:
A. An approved list drugs?
B. A list of widely used drugs with pharmacology, dosage,
etc."
6. Do the employees of the pharmacy calculate charges on
drugs?
7. When the pharmacy is closed who is responsible for dispensing
drugs?
A. Pharmacy assistant?
B. Nurse supervisor?
C. Floor nurse?
D. Other? (Explain in Remarks Section)
8. Does the pharmacy dispense:
A. Medical supplies (drug related):
B. Medical supplies (non drug related):
C. Sterile solutions?
D. Other? (Explain in Remarks Section)
9. Does the pharmacist assist doctors:
A. In rounds?
132


FINAL LIST OF COST CENTERS
PATIENT SERVICES EXPENSE
Nursing Division Expense
601 Nursing Service Administration
602 Nursing Service Supervision
610-619 Nursing Service Medical
620-629 Nursing Service Surgical
62-0-639 Nursing Service Pediatric
640-696
Other Professional Services Division Expense
702 Clinical Laboratory Anatomical Pathology
703 Histopathology
704 Cytology
705 Morgue
706 Clinical Laboratory Clinical Pathology
707 Bacteriology
708 Biochemistry
709 Chimistry
710 Hematology
711 Serology
712 Emergency Laboratory
713 Outpatient Laboratory
714 Blood Bank
715 Transfusions
716-746
747 Rehabilitation Recreational Therapy
748 Recreational Therapy Outpatient
749 Recreational Therapy Day Care
750 Recreational Therapy Partial Hospitalization
751 Home Health Care
752 Social Service
143


78
Table 2 reflects the adjusted direct expenses for selected cost
centers. This cost information represents the direct expenses ad
justed for depreciation, insurance, amortization of start-up costs,
and interest expense. The effects of adding those 4 major categories
of indirect expenses to the direct expense can be easily traced by
comparing the data in Table 1 with the data in Table 2.
Table 3 indicates the effect of distributing the costs of support
service cost centers to patient service cost centers. It should be
noted that the support service cost centers show no "full cost." They
have been closed to the patient service cost centers. Those cost
centers which still remain open and for which a full cost is displayed
are those cost centers selling a service/product to the patient/phy
sician. The price or charge of the service offered by the cost
centers should be equal to the full cost if each cost center is to
"break even," i.e., to operate at neither an accounting profit nor ac
counting loss.
The foregoing discussion attempted to explain the procedural por
tion of the evaluation method. The discussion centered around the de
tails of collecting, processing, and reporting the cost data which
were later evaluated. As such, copies of, or extracts of, infor
mation from all reports viere provided in the text of this chapter.
All reports are shown in Appendix I. The only problem related to
these 3 steps was encountered during the data collection operation.
The manner in which the problem was alleviated was discussed. In all
cases, the procedures called for in the cost accounting system de
velopment discussion in Chapter III were followed. This section has
demonstrated that by carrying out the instructions included in the


36
both patient location and other support service cost centers, or
directly to patients in patient location cost centers. If a comparison
were to be made, Stage I might be equivalent to the purchase of indi
rect labor and materials by the Support Service Cost Centers. Stage II
might be compared to the production of service by the Patient Service
Cost Centers. This service production, however, is made with the aid
of the outputs of the various Support Service Cost Centers and the addi
tion of more direct labor and materials. Stage III might be the same
as the provision of the services to the patient or physician. The
direct parallel between the two is not easily seen, however.
Summary
In this chapter, the types of cost accounting systems found in the
industrial, profit-oriented sector were compared to the cost accounting
system currently used by the hospital industry. The weaknesses of the
current hospital cost accounting system were indicated. Finally a cost
accounting system for hospitals similar to the current profit sector
cost accounting system was outlined. It will be the purpose of the
remainder of this research to develop and evaluate such a system as it
applies to the hospital industry. Chapter III will discuss the system
development phase of the research. Chapter IV will discuss the system
evaluation phase of the research. Both will begin with statements
about the methods used to develop the system and evaluate the system,
respectively. The latter portion of each chapter will discuss the
results of applying the particular method.


104
Verifiability. The information must be capable of being verified
by independent reviewers. This is specifically called for in some Blue
Cross plans. Medicare and price control requirements also indicate
such to be the case.
Comparability. The data must represent the costs for the like
functions within the various institutions. This is necessary since it
is the stated purpose of both Blue Cross plans and consumer groups to
compare the costs of services provided.
Consistency. The information must be collected in the same fash
ion for the same time periods, and for the same functions over time.
This is explicitly called for by the New Hampshire-Vermont plan where
comparative data over time are required.
The reports prepared from the information contained in the pro
posed cost accounting system were presented earlier in this chapter.
A review of those reports in light of the above requirements is
appropriate.
Specificity. As the reports presented show, costs can be collect
ed and reported at a detailed level. Costs are collected for each cost
center. The cost centers represent activities within departments.
Further, several elements of the costs within a cost center are dis
played. For this research, it is possible to collect cost information
for 252 activities, with the ability to expand that number to 400.
Verifiability. Since all cost information, activity bases, and
distribution methods are defined, any independent reviewer could verify
if the data has been collected, processed, and reported correctly. In
fact, all of the cost data are integrated with the financial accounting


HOSPITAL 2
TO CLOSE PROFESSIONAL SUPPORT SERVICE COST CENTERS
WORKSHEET "C"
Adj. Exp,
Cost Bal. from Total
Center
Work. A
601
602
690 758
765
775
920
921
Cost
601
7189
7189
602
9114
188
9302
675
36987
126
167
94
37374
690
5132
50
65
5247
758
11522
11522
765
3103
3103
775
17731
17731
920
17023
17023
921-678
15120
117
157
89
15483
702
11738
11738
706
53837
58837
714
13599
13599
716
14064
14064
718
5469
5469
721
49289
49289
728
7347
7347
731
35933
35933
.735
6791
14
19
10
6834
737
18946
18946
739
2685
2685
741
7647
7647
757
22416
308
403
232
23364
660
53532
643
854
484
3103
58616
Fig. 7.-
-Example of
step-down cost allocation procedure.


141
Specific Functional Questionnaire
Cost Center: Sanitation
7. Are dishes washed in one central location?
8. Which of the following methods is used for cleaning dishes:
A. Hand washing by aides?
B. Specialized dishwasher?
9. Which of the following methods is used for washing pots:
A. Pot washing device?
B. Jhree compartment sink?
10. Are garbage disposables used in this cost center?
11. Are garbage bags used in this cost center?
12. Is the garbage disposed of by use of:
A. Dumpster?
B. Incinerator?


FUNCTION:
EXPENSES:
/
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
173
844: SECURITY
Provide hospital security services.
Compensation of the department head, guards,
clerical and supportive staff. Fees, materials,
supplies, miscellaneous and indirect expenses
required to perform this function.
Square feet.
To primary and patient location based upon the
ratio of square feet of each area to total
square feet.
None


TABLE 6
COMPARATIVE HOSPITAL COST SUMMARY REPORT
ADJUSTED DIRECT EXPENSES
COST CENTER
NUK2ER JW3
HOSPITAL 1
HOSPITAL 2
HOSPITAL 3
HOSPITAL 4
"COLLARS
% OF
TOTAL $
coir
PAT OAT
COST PER
ACT EASE
OOLLARS
To?
TOTAL $
COST PER
PAT DAY
COST PER
ACT BASE
DOLLARS
X OF
TOTAL %
COST Pe.
PAT DAY
COST Per
ACT BASE
* OF
JQTAL- % .
CUSI PER
PAT. CAY...
COT N.S. -
Adairs
13,348
1.C8
1.35
S.63
5,373
.59
.65
6.08
8,060
1.97
2.18
6.63
6,299
.48
.48
602 N.S. -
7,643
.84
.92
5.78
14,044
1.08
1.03
610 N.S, -
Med.
2.307
.19
37.21
.
20,881
2.30
28.80
4.13
31,418
7.6S
22.82
4.68
16,596
1.27
20.64
61T -
16.295
1.31
20.14
4.32
18.866
2.01
32.33
4.25
12,061
.98
20.19
612 *

17,903
1.44
23.25
4.79
18,242
1.40
19.20
Si 3 *
*
7,081
.57
8.45
23.29
20,502
1.72
22.55
614 *

7,852
.63
10.47
6.86
18,521
2.C4
25.90
4.10
615 *

20,033
1.51
.
2.48
19,776
2.18
28.87
4.30
Tout N.S.
- Medical
71,476
5.75
22.14
4.15
77,444
8.53
28.79
4.20
31,418
7.69
22.82
4.68
70,201
5.37
20.71
620 N.S. -
Sure.
9,372
.75
33.96
5.80
23,001
2.53
25.08
4.01
54,456
13.32
24.74
4.76
17,115
1.31
22.34
621 *

13,255
1.47
21.73
4.36
19,635
2.16
27.58
4.17
16,967
1.30
20.44
622
"
19,832
1.60
24.10
4.59
623 *

3,509
.28
13.00
_
70.580
2.27
29.91
4.45
20.802
1.59
23.35
624

16,587
1.34
25.62
2.73
18.633
2.05
26.77
4.20
8,256
.63
28.97
625
"
4,403
.35

2.49
18,677
2.06
29.98
4.19
19,608
1.50
22.33

19,347
2.13
25.22
4.19
21,966
1,68
23.24
627 "
12,992
.99
32.73
Total N.S.
- Surg.
72,009
5.79
31.85
4.01
719,873
13.20
34.39
6.49
54,456
13.32
24.74
4.76
117,705
9.00
23.58
Total N.S.
- Ked/Surg
r 143,425
11.54
26.14
4.10
197,317
21.73
21.95
4.20
85,874
21.01
23.99
4.73
187,907
14.37
22.42
630 N.S. -
Peds.
22,951
1.85
27.29
n ??
27,427
2.10
32.69
631 -
"
30,115
2.43
33.4?
5.53
1,460
11.00
60.83
633 '

1,047
.08

-
Tot?! N.S.
- Peds.
54,113
4.36
31.44
10.95
28,887
2.21
33.47
640 N.S. -
1CU
19,739
1.59
88.12
6.30
16,757
1.85
88.66
4.73
9,587
2.35
76.09
5.30
641 "
11,641
1.28
88.19
5.76
19,468
1.47
90.55
642

043 *

21,822
1.67
57.83
644 -
*
14,002
1.13
-
6.04
Total N.S.
- ICU
33,741
2.72
150.62
6.19
23,398
3.13
88.47
5.11
S.587
2.35
76.09
5.30
41,290
3.16
67.75
645 N.S. -
Psych.
15,851
1.23
21.67
4.71
15,855
1.75
43.08
4.78
21,647
1.66
25.23
650 N.S. -
08
13,361
1.08
25.94
5.32
16,344
1.25
23.96
651 N.S. -
GYH.
20,383
1.56
22.42
Total N.S.
C-B/GYN
13,361
1.08
25.94
5.3?
36,727
2.81
23.02
652 N.S. *
Newwrn
12,102
.93
21.50
5.51
15,912
1./5
31.45
4.4S
18,449
1.41
26.51
657 N.S. -
Float
9,067
.69
.70
660 N.S. .
OR
£4,957
5.24
6.60
1.26
42,613
4.70
£.14
.35
20,843
5.10
5.63
l.CO
72,9e8
5.88
5.61
555 N.S. -
Rec. Rm.
7.334
.59
.75
M
5,025
.55
.61
.09
3,832
.94
1.03
.23
8,236
.63
.63
670 N.S. -
Del. Rm.
15,231
1.23
1.55
113.66
76,28!
1.79
1.96
14,602
1.12
1.12
673 N.S. -
Del. Ree Ri
3,457
.23
.35
26.02
2,909
.22
.22
675 CSft Admin.
1,230
.10
.12
31.933
3.52
3.86
10,236
2.52
2.78
4.64
1,69/
.13
.13
676 CSS -
Coll, & Dis

19,212
1.47
1.43
677 CSR -
recessing
35.445
2.86
3.60
2,720
.21
.21
Total CSR
35,676
2.96
3.71
31,983
3.52
v. db
10,286
2.52
2.78
4.64
23,629
1.81
1.82
678 IV Therapy
13,313
l.<7
1.61
3.03
7,695
1.88
2.08
6.4!
5,5 2?
j %
600 H.S. -
Inservice
4,543
.37
.46
1.64
3,140
.35
.38
3.13
976
.24
.26
5.6!
5,492
m 4-Yr.
!ars. Prog.
34,720
2.66
Total Nursina Ed.
4,543
.37
.46
1.64
3,140
.35
.38
3.1.1
976
,24
.25
5.8!
40,212
3.08
3.11
701 Lab. -
Admin.
4.457
.36
.46
.09
20,738
1.59
1,59
7C2 Lab. -
Anatom.
n.oio
.59
1.12
8.02
'0,035
1.11
1.22
.27
2.712
.21
.21
704 lab. -
Cytolocv
108
.01
.01
Total Anatom. Path.
2.827
.22
.22
706 Lab. -
Clinical
61,290
4.99
6.29
1.30
52,491
5.78
6.33
.20
32,273
7.90
8.71
1.97
HOSPITAL 5
COST PER
- COLLARS
t OF
COST PER
COST PER
ACT £&SF
TOTAL j
PAT DAY
ACT CASE
5.51
' 15,025
1.04
1.73
7.23
5.10
4.43
i 30,258
1.96
25.96
4.29
4.72
25,432
1.64
19.53
4.51
4.64
l 28,834
1.86
84.56
4.21
5.00
I
4.71
, 84,524
5.46
29.96
4.32
IX)
4.£9
30,274
1.96
24.39
4.29
o
4.40
| 24,306
1,57
21.73
4.14
4.65
6.65
4.52
5.02
4.61
5.77
54,580
3.53
24.12
4.22
5.32'
139,104
8.99
2 7.35
4.28
4.85
27.U94
1.75
39.73
5.33
24.21
5.05
27,094
1.75
39.73
5.33
25,626
1.65
165.33
5.63
4.90
13,198
.85
85.15
7.62
5.15
5.03
38,824
2.51
125.24
6.22
4.78
45,521
2.94
31.24
4.01
5.34
18,157
1.17
2C.92
5.43
4.91
13,157
1.17
20.92
5.43
3.67
23.165
1.60
27.68
4.39
2.45
7,998
.52
.87
3.32
1.05
59,473
3.84
6.44
2.03
.20
12,078
.78
1.31
.03
73.93
25,137
1.62
2.72
108.82
15.72
.12 .
2,452
.16
.27
1.38
.20
35,64?
2.30
3.86
1.70
33,099
2.46
4.13
1,560
.10
.17
17.33
1,569
.10
.17
.06
18,879
1.2 2
2.04
.16
.07
8.664
.56
.34
1.17
.01
.06
3,664
.56
.94
1.17
92,048
5.75
9.93
.78


144
753-756
757 Emergency Service Nursing
758-781
782 Outpatient Clinics Patient Care
783-
792 Speciality Clinics
793-798 *
OTHER SERVICES EXPENSE
General Service Division Expenses
802 Dietary Food Production
803-830
831 Operation of Plant Power Generation
832-843
844 Security
850-854
855 Housekeeping Patient Rooms
856-870
Fiscal Division Services
901 Financial Management
902 General Accounting
903 Budgets
904 Cost Accounting
905 Payroll Accounting
906 Accounts Payable Accounting
907 Plant and Equipment Accounting
908 Inventory Accounting
909 Internal Auditing
910-940
Administrative Services Division Expense
950-951
952 Personned Employment
953-992


I certify that I have read this study and that in my opinion it
conforms to acceptable standards of scholarly presentation and is fully
adequate, in scope and quality, as a dissertation for the degree of
Doctor of Philosophy.
(-o/) A A
D. D. Ray, Chairman /
Professor of Accounting
I certify that I have read this study and that in my opinion it
conforms to acceptable standards of scholarly presentation and is fully
adequate, in scope and quality, as a dissertation for the degree of
Doctor of Philosophy.
Professor of Economics
I certify that I have read this study and that in my opinion it
conforms to acceptable standards of scholarly presentation and is fully
adequate, in scope and quality, as a dissertation for the degree of
Doctor of Philosophy.
a
Jph.i M. Champion
Professor of Health
Administration
/
and Hospital


TABLE OF CONTENTS
ACKNOWLEDGMENTS
LIST OF TABLES vi
LIST OF FIGURES vi i
ABSTRACT vi i i
Chapter
I.INTRODUCTION 1
Purpose of Research 1
Statement of General Problem 1
Statement of Specific Problem 5
Justification for the Study 8
Related Literature 9
Summary 14
Notes 16
II.THE COST ACCOUNTING SYSTEM 19
Introduction 19
Definition of Terms 21
Current Industry Cost Accounting System Model 24
Current Hospital Cost Accounting Model 28
Uniform Cost Accounting System 33
Summary 36
Notes 37
III.DEVELOPMENT OF THE UNIFORM COST ACCOUNTING SYSTEM
Introduction 38
Method Used to Develop the Uniform Cost
Accounting System 38
Evaluation and Results of the System
Development Method 44
Summary 58
Notes 59
111


26
many different materials and performing numerous operations upon the
materials. An expanded schematic might appear as follows in Figure 2.
Stage I
Stage II
Stage III
ffl vtf
Work-in-Process
til
A
Finished Goods
ffi
Over
head
Customer
Cash
Sales
Reductions
Raw Materials
£
Purchase
of Goods
=
Direct
Labor
I
t A
1. Machinists
A f 1
2. Assembly
3. Painters
Purchase
of Goods &
Services
A
Fig. 2.--Expanded manufacturing cost accounting system model.
In the expanded model, the multiple lines from raw materials to
work-in-process indicate many types of materials being moved into pro
duction. At Stage II, the purchases of labor services are indicated
for the various types of labor services required to convert the materi
als into products. Finally, the multiple lines from work-in-process
to finished goods represent a diverse number of final products manu
factured. In the expanded model, all indirect services used to support
the conversion process are lumped together.
The identification of the various indirect services and the addi
tion of them to the expanded cost accounting system model transform the
expanded model into the complete model. It might appear as Figure 3.


35
Stage I
Stage II
Stage III
Fig. 6.--Proposed hospital cost accounting system model.


INSTRUCTIONS FOR COMPLETING THE DATA COLLECTION FORM
This form is used to collect the expenditure data for each primary
account by subclassification "type of expenditure." Most of the items
are self-explanatory. Some exceptions should be noted.
1. In order to complete the wages and salary section note
that there are two descriptions. The first is always to
be used for nursing units (600 accounts) and the second
for non-nursing units. Include the payroll hours for
each of the classifications.
2. On the Data Collection Form no classification has been
designated for float nursing personnel. The expenditures
for salaries and benefits for float nurses will be col
lected in a separate account (657) and allocated to areas
where those personnel were assigned.
3. The subclassification for Physicians, and Interns and
Residents should be used only for those who are assigned
to laboratories, radiology, emergency rooms, anesthes
iology, employee health service, and cardiac catheri-
zation laboratory. All other medical staff, interns and
residents will be charqed to either Medical Staff (756) or
Interns and Residents (760).
4. Fringe benefits do not include employee health service
costs. A separate account, Employee Health Services
(754), has been established to collect those costs.
5. Physicians' liability insurance is to be accounted for in
a separate primary account (S87).
6. The "Other Expense" subclassifications are subsidiary
accounts for the like titled primary accounts. The sum
of all the sub classifications entries should agree with
the primary account balance.
7. Additional non-expenditure information is requested at
the end of the data collection form. The data requested
is necessary in order to complete all cost allocations.
One data collection form should be completed for each primary
account. The primary account number must be inserted in the account
number (Acct. No.) column.
T8T


8?.
I.Distribute Reports to Managers. Copies of the following reports
were given each manager.
A. Hospital Cost Report. Due to the detailed nature of this
report, copies were provided for only 6 cost centers.
Those cost centers were:
610 Nursing Service-Medical
660 Nursing Service-Operating Room
706 Laboratory-Clinical Pathology
757 Emergency Room-Nursing
863 Laundry-Processing
910 Patient Accounting
This group of reports was selected because it contained at
least one of each type of cost center.
B. Comparative Hospital Cost Report. Copies of this report for
the same 6 cost centers listed in A. above were provided.
C. Hospital Cost Summary.
D. Comparative Hospital Cost Summary.
II.Discuss Reports. During this period of time the researcher dis
cussed each report and its purpose. Questions from hospital
managers concerning the method used to prepare the reports, and
the interpretation of the reports, were answered during the
discussion.
III.Managers' Evaluation. At the conclusion of the discussion, the
hospital personnel were asked to respond to several questions.
Appendix J contains the list of questions used for this purpose
and a recap of the responses. Additionally, each manager was
asked for comments regarding the output of the cost system in
relation to his needs.


2
or improved health care service. There is some doubt that such has
been the case. According to one researcher, 47 percent of the increase
in health care spending between 1949-50 and 1970-71 was consumed by
rising prices.4 While the cost-of-living index was rising by 61 percent
during this period, the index of medical care prices was rising twice
as fast: 125 percent.^ Even more significant was the increase in
hospital daily charges at that time: 398 percent.6
Another recent research study indicates that this rapid rise in
hospital charges may be attributed to price increases, the addition of
newer and more advanced technical services, and an expansion of already
existing services.7 This study indicates also that as much as 40
percent of the price increase may be due to "increased services per
discharge."^ Even allowing for this factor, hospital daily charges
have increased approximately 200 percent during the period 1950-70, a
rate far in excess of the price increase of the general cost-of-living
index and the index of medical care prices. Since almost one-half
of all health care expenditures are paid directly to hospitals, the
importance of controlling costs in the hospital becomes significant.
The rapid increase in hospital costs has generated considerable
interest at the legislative, community, and individual level regarding
programs aimed at controlling costs. One manifestation of this concern
is the area-wide regional planning groups that have been formed. It is
the intent of these planning groups to oversee the entire "pool" of
health resources within a given geographical area and attempt to plan
for the orderly and economical growth of medical service within that
area. To date, most efforts at regional planning have been through
volunteer agencies. Somers, however, has suggested that the planning


126
General Functional Questionnaire All Cost Centers (Continued)
Cost Center:
Remarks:


115
valuable information for internal management can be produced. A
planning model can be constructed using the relationships expressed by
this cost accounting system. Such a model could be used as a simula
tion tool to be used in assisting with decisions concerning area-wide
health care delivery.
Finally, the problem of determining the proper manner in which
health care should be delivered has been of central importance recent
ly. All indicators point toward the possibility of some form of
national health insurance. All national health insurance schemes have
one item in common: each must resolve the problem of financing the
health care delivery. Some propose financing based upon budgets.
Others recommend reimbursement based upon a standard amount for each
type of diagnosis handled by a specific institution. The latter
scheme has much popular support. To implement such a reimbursement
program, however, would require the determination of a standard allow
able and reimbursable cost, or range of costs, incurred treating each
diagnosis. Certain reports are not available that indicate the diag
nosis of every patient admitted to a hospital. Selected revenue data
also are available concerning these same patients. However, since
costs and prices do not have a resemblance in many cases, a determina
tion of costs per diagnosis has been impossible. The lack of cost
data required for price setting has been one of the reasons prices do
not resemble costs. A system such as this one resolves this problem
and can be used to develop a data base which, v/hen coupled with the
patient diagnosis and charge information, can begin to attack the
problem. Hopefully, a standard cost, or range of standard costs, can
be developed for each diagnosis.


SPECIFIC FUNCTIONAL QUESTIONNAIRE
Hospital: y Person Interviewed:
Department: Dietary Date:
Cost Center: Sanitation
1. Are standardized cleaning procedures used in this cost
center?
2. Are specialized employees used for sanitation in the
dietary department?
3. Are sanitation functions and activities part of each
dietary employees job?
4. Do kitchen employees clean:
A. Floors?
B. Windows?
C. Walls?
D. Ceiling?
E. Machinery?
F. Other? (Explain in Remarks Section)
5. Do cafeteria employees clean:
A. Floors?
B. Windows?
C._ Walls?
D. Ceilings?
E. Equipment?
F. Furniture?
G. Other? (Explain in Remarks Section)
6. Do snack shop employees clean:
A. Floors?
B. Windows?
C. Walls?
D. Ceilings?
E. Equipment
F. Furniture?
G. Other?
140


160
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
610: NURSING SERVICE MEDICAL
Provide medical nursing services.
Compensation of nursing service personnel, unit
administrators, clerical and supportive staff
assigned to medical nursing services. Fees,
materials, supplies, miscellaneous and indirect
expenses required to perform this function.
Hours of nursing care. Hours are determined from
paid hours of nursing service personnel assigned
to this function.
None
611-619: One account should be used for each
designated medical nursing service
area.


83
The questions asked of the hospital managers were designed to de
termine 4 types of information. First, questions 1 and 2 were directed
at determining the general cost accounting system's effectiveness.
Second, questions 3 through 6 were directed toward evaluating the
various elements of the cost accounting system. Third, questions 7
through 12 were directed toward determining the uses of cost ac
counting system's output. Finally, the last question was directed
toward possible implementation of the cost accounting system. The re
sponses to the questions will be grouped below by the 4 major topics
indicated.
General System Effectiveness
The 2 questions relating to the overall effectiveness asked if
the cost accounting system could produce costs by program and by prod
uct. "Program" in this case referred to the various programs identi
fied in the current hospital cost accounting system model as depicted
by Figure 5, Chapter II. "Products," on the other hand, referred to
the outputs of the cost centers which are part of the proposed hospi
tal cost accounting system model as depicted by Figure 6, Chapter II.
All evaluators indicated that the system provided both program and
product costs, but one evaluator (an administrator) did indicate that
there should be an additional calculation for the purpose of review
ing costs of activities that provide a substantial amount of service
for outpatient clinics and emergency rooms. In essence, this would
result in a more finely defined product cost.


131
Specific Functional Questionnaire
Cost Center: Operating Room
22. Have studies been made to determine effective utilization
of operating rooms?
23. Do employees on evening shift contribute to the days
work by preparation of patients, cleaning of rooms, etc.?
24. Are cabinets, floor, lavatories, lounges, etc. cleaned by:
A. Operating room employees?
B. Housekeeping?
25. Can you provide some indication of the complexity of
operations performed? If yes, do so in Remarks Section.


12
The first efforts exclusively in the field of hospital accounting
were made by the American Hospital Association in 1922 with the publi
cation of its first chart of accounts. Since that time the Association
has been the leader, on the national level, of developments in hospital
accounting. Their work has culminated in 3 recent publications: Chart
of Accounts for Hospitals,^5 Uniform Hospital Definitions,^ and Cost
Finding and Rate Setting for Hospitals.3? These 3 works are used as
the basis for most hospital accounting today. Problems have arisen,
however, in attempting to define accounts uniformly. Also, different
responsibility structures within various hospitals have caused differ
ing reporting patterns even though the same basic chart of accounts has
been implemented by all.
This particular weakness became apparent when the American
Hospital Association initiated a new program entitled Hospital Admin
istrative Services.33 That particular program attempted to collect
accounting data classified as per the Association's chart of accounts.
The information collected was then measured using certain "activity
bases" and the resulting indications were used as a broad type of
standard allowing for interhospital evaluations. Each hospital's
individual changes to the basic chart of accounts has caused the
actual results to fall short of expectations.
As a mechanism for an individual hospital to use as the basis of
its accounting system, the American Hospital Association's publications
have provided basic leadership. As a tool for interhospital compari
sons, the results have been less than successful. In addition, the
American Hospital Association has adhered to a cost analysis approach,
not a cost accounting approach, i.e., the only publication in the area


Full Cost
Financial Cost
Revenue
Reductions
Accounting Costs
Capital:
Working & Plant
Capital
Basic Production
Nonproduction
Cost
1. Education
2. Research
Nonproduction
Cost
Nonproduction
Cost
Routine Service
Direct & Indirect
Cost of Providing
Professional
Support Services
Basic
Production
Costs
Basic
Production
Costs
Basic
Production
Costs
Direct & Indirect
Costs of Providing
Room, Board, and
Nursing Service
Routine
Service
Fig. 4. Programatic cost accounting model. Current hospital cost accounting model.


168
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
752: SOCIAL SERVICE
Provide social counseling and engage in liaison
activities.
Compensation of the department head, case workers,
clerical and supportive staff. Fees, materials,
supplies, miscellaneous and indirect expenses re
quired to perform this function.
Number of consultations.
To patient location areas based upon the ratio
of consultations with patients of each area to
total consultations.
SUB-ACCOUNTS:
None


48
it was first planned to use that particular chart as the basis for the
collection framework required by this research. A thorough review of
each of the hospitals' charts, however, indicated such an action would
be impossible. First, the chart recommended by the American Hospital
Association allows individual hospitals considerable latitude in the
interpretation and adoption of the chart. This resulted in the hospi
tals assigning the same numbers to different activities, and, con
versely, different numbers to the same activity. Appendix D is a
partial copy of the analysis of the hospitals' charts which indicates
the extent of the problem. If the only difficulty had been the latter
one, an easy solution could have been reached. The former difficulty,
however, rendered the use of that particular chart hazardous at best,
since accounting data were being collected for heterogeneous activities
in the same account.
Second, some activities of major proportion were not indicated in
the charts of some of the hospitals. For example, a major expense is
involved as a result of admitting people to the hospital for care.
However, 2 of the hospitals were not collecting costs for that partic
ular activity.
Finally, the charts which were being used did not provide for the
collection of detailed enough information to allow for costing at the
level of activity indicated. This shortcoming was two-fold. First,
there was not enough flexibility to permit an account for each cost
center. Second, the amount of data which could be collected concerning
each cost center (activity) was severely limited.
For the 3 reasons indicated above, it was determined that a new
chart of accounts should be developed. The new chart followed the


153
3* Indirect Expenses This cost accounting system will pro
vide for the determination of full costs for each function
performed. As such, the indirect expenses of building
depreciation, insurance, and interest must be collected
in each account.
4. Meal Equivalents This is used to measure cafeteria
activity. It is calculated as follows:
A. Accumulate cafeteria sales by breakfast, lunch and
dinner. Include morning coffee break in breakfast,
afternoon coffee break in lunch. The cash value of
all "free meals" will be included in the appropriate
meal.
B. Price the inpatients' breakfast, lunch and dinner at
cafeteria selling prices. Include snacks and juices
served between regularly scheduled meals in the meal
selling price.
C. Divide the cafeteria sales from breakfast (from A) by
the "priced" meal for a breakfast (from B). The re
sult will represent the number of "meal equivalents"
for breakfast served in the cafeteria. Repeat these
steps to obtain lunch and dinner "meal equivalents."
5. Full-Time Equivalent Employee A full-time equivalent
employee represents one employee who works a full 40-hour
week for 50 weeks per year. As an example, if two em
ployees are employed part-time, and each works a 20-hour
week, they represent one full-time equivalent employee.
Secondary Subclassifications of Chart of Accounts
1. Salaries and Wages (Nursing Areas):
.001
.010
.011
.012
.020
.030
.040
.041
.050
.060
.061
Nursing Supervisor
Head Nurse
Charge Nurse
Staff Nurse
Licensed Practical Nurses
Nursing Assistants and Orderlies
Unit Administrators
Clerks
Technicians
Physicians
Interns and Residents
2. Salaries and Wages (Non-Nursing Areas):
.001
.010
.020
.030
Supervisors
Professional
Semi-Professional
Students


183
INSTRUCTIONS FOR COMPLETING THE ACTIVITY MEASUREMENT AND
COST DISTRIBUTION FORM ALL AREAS FORM
The data collected on this form will be used for two purposes.
First, to measure the activity within the primary areas. Second, to dis
tribute costs of primary areas to other primary and patient location
areas benefiting from the services provided. Enter the following in-
formation on the form under the appropriate column.
1. Employee Health Service Enter the number of employees
from each area seen by the employee health service phy
sician and/or nurse in the row opposite the appropriate
account number
2. Number of Meals Served Enter the lumber of meals served
in each area in the row opposite the appropriate account
number. Meal Equivalents should be entered by Account
810, Cafeteria.
3. Hours of Housekeeping Service ~ Enter the hours of house
keeping service provided each area in the row opposite the
appropriate account number.
4. Pounds of Soiled Laundry Enter the pounds of soiled laun
dry received from each area in the row opposite the appro
priate account number.
5. Number of Persons Living In Enter the number of persons
from each area living in hospital facilities in the row
opposite the appropriate account number.
6. Number of Telephone Lines Enter the number of telephone
lines into each area in the row opposite the appropriate
account number.
7. Number of New Hires Enter the number of new employees
hired by each area in the row opposite the appropriate
account number..
8. Hours of Personnel Training Enter the number of hours of
training provided employees of each area by the personnel
department in the row opposite the appropriate account
number.
9. Dollar Value of Items Requisitioned Enter the dollar
value of items requisitioned from purchasing by each area
in the row opposite the appropriate account number.
10.Carts Processed (Fresein) Enter the number of carts pro
cessed for each area in the row opposite the appropriate
account number.


Notes
1. Committee on Accounting Practices of Not-For-Profit Organizations,
The Accounting Review, Supplement to Volume XLVI, 1971, p. 133.
2. L. J. Benninger, "Utilization of Multi-Standards in the Expansion
of an Organization's Information System," Cost and Management,
Oanuary-February, 1971, pp. 23-28.
3. Ibid., p. 25.
4. Committee on Accounting Practices of Not-For-Profit Organizations,
The Accounting Review, p. 134.
5. Committee on Concepts of Accounting Applicable to the Public
Sector, 1970-71, "Report of the Committee on Conepts of
Accounting Applicable to the Public Sector 1970-71," The
Accounting Review, Supplement to Volume XLVII, 1972, p. 99.
6. Charles T. Horngren, Cost Accounting: A Managerial Emphasis, 3d
Edition (Englewood Cliffs, New Jersey: Prentice-Hall, Inc.,
1972), p. 22.
7. Ibid., p. 691.
8. Stanley B. Henrici, Standard Costs for Manufacturing, 3d Edition
(New York: McGraw-Hill, 1960)7"Chapters 1 and 2.
9. Richard Elnicki, "Hospital Productivity Measures," paper delivered
to Committee on Health Services Industry, Economic Stabiliza
tion Program, Phase II, Washington, D. C., May 15, 1972.
10. Horngren, Cost Accounting: A Managerial Emphasis, pp. 395-399.
11. Howard J. Berman and Lewis E. Weeks, The Financial Management of
Hospitals, (Ann Arbor, Michigan: Bureau of Hospital Admini
stration, School of Public Health, University of Michigan,
1971), pp. 148-167.
12. Sylvester E. Berki, Hospital Economics, (Lexington, Massachusetts:
Lexington Books, 1972), pp. 31-48.
37


133
Specific Functional Questionnaire
Cost Center: Administration
B. In formulary problems?
C. In pharmacology?
D. Dispensing drug information?
E. Other? (Explain in Remarks Section)
10. Does the pharmacy maintain the emergency room stock
of drugs?
11. Does the pharmacy maintain drug profiles on patients?
12. Does a comnunity pharmacist provide a full pharmacy
service for the hospital under contract?
13. Does a community pharmacist provide drug merchandise
only?
14. _Is the pharmacy service provided by a nearby larger
hospital?
15. Does the hospital share a pharmacist with one or more
hospitals?
16. Is any kind of arrangement made with local pharmacies
in regard to prices and after hour deliveries? (If
yes, explain in Remarks Section)


758
Adj. Exp.
Cost Bal. from
Center Work. A. 601 602 690
665
7495
106
140
79
670
21652
302
399
227
610
36676
431
566
322
1008
611
31389
375
492
280
786
614
33543
383
511
290
994
615
35270
392
511
290
953
620 -
44163
487
640
354
1274
621
35418
372
492
280
990
623
36148
428
566
322
: 956
524
33545
400
548
311
968
625
33517
411
539
306
865
626
35396
403
548
311
1066
640
23218
257
362
290
263
641
16794
386
511
206
183
645
27656
291
380
217
512
652
24480
319
427
243
703
TOTAL 907574
775
920
921
Total
Cost
774
23354
1512
1450
774
42739
1163
1117
774
36376
1496
1438
774
39429
1475
1408
774
41073
2119
2029
1241
52317
1507
¡448
1548
42055
1468
1408
1548
42844
1479
1421
1084
39756
1296
1239
774
38948
1601
1539
-
40864
371
' 356
1543
26665
289
276
1548
20193
881
856
1548
32351
1074
1028
774
29048
907574


27.
l
Irving Tenner, Municipal and Governmental Accounting, 3d Edition,
(Englewood Cliffs, New Jersey: Prentice-Hall, Inc.), 1955.
See especially Chapters 19 and 21.
28. R. M. Mikesell and Leon E. Hay, Governmental Accounting, 4th
Edition, (Homewood, Illinois: Richard D. Irwin, Inc.), 1969.
See especially Chapters 20 and 21.
29. Harry D. Kerrigan, Fund Accounting, (New York: McGraw-Hill),
1969. See especially Chapter 20.
30. L. Vann Seawell, Hospital Accounting and Financial Management,
(Berwyn, Illinois: Physicians' Record Company), 1964.
31. Philip Taylor and Benjamin 0. Nelson, Management Accounting for
Hospitals, (Philadelphia: W. B. Saunders Company), 1964.
32. Leon E. Hay, Budgeting and Cost Analysis for Hospital Management,
2d Edition, (Bloomington, Indiana: Pressler Publications),
1963.
33. Taylor and Nelson, op. cit., p. 30.
34. William J. Vatter, "Excerpts from Standards for Cost Analysis,"
Federal Accountant, September, 1970, pp. 64-87.
35. American Hospital Association, Chart of Accounts for Hospitals,
Chicago, 1966.
36. American Hospital Association, Uniform Hospital Definitions,
Chicago, 1960.
37. American Hospital Association, Cost Finding and Rate Setting for
Hospitals, 1968.
38. American Hospital Association, Hospital Administrative Service
(HAS), Guide for Uniform Reporting, Chicago, July, 1972.
39. Connecticut Hospital Association, Connecticut Hospital Association
Accounting Manual, (New Haven, Connecticut: Connecticut
Hospital Association), 1970.
40. California Hospital Association Commission for Administrative
Services in Hospitals (CASH), Management Leadership in an
Age of Change, Sacramento, California.
41. For details concerning MICHA, see Andrew McCosh, "Computerized
Cost Finding Systems," Hospital Financial Management, November,
1969, pp. 18-21, or send inquiry to MICHA, Incorporated,
Ann Arbor, Michigan.


distribution of costs to the area benefiting most. Horngren further
states: "The use of linear algebra (simultaneous equation method) may
make a difference in decisions upon occasion,"^ inferring that the
great effort required to develop the simultaneous equations might not
be worth the additional expense.
It is not the purpose of this research to indicate the one best
procedure for cost distribution. In fact, that would require a separate
project. What this brief discussion has done is indicate the various
acceptable distribution procedures in order to place in its proper
perspective the one chosen for this research the step-down procedure.
First, it does, to some extent, rectify the intercost-center relation
ships problem. Second, while a double-distribution or algebraic method
might afford a more precise answer, the additional time required to
achieve a result using that method was deemed impractical for this
research, particularly when the "more accurate" assertion was neither
a fact, as the brief preceding discussion indicated, nor was it to be
tested within the scope of this research.
The distribution method for those support service cost centers
displayed as part of the standardized chart of accounts format can be
seen in Appendix E.
Design Data Collection and Report Formats
The last step of the procedure was to design the forms required
to collect the cost and statistical information, and the reporting
formats. Several different forms are necessary for the collection of
the cost and statistical data. Examples of each have been placed in
Appendix G. The purpose of each will be discussed below.


51
denominator is the activity base. As defined earlier, it is important
that it reflect the output of a cost center and fluctuate as that out
put fluctuates. The latter fact becomes important for cost distribu
tion purposes.
While the activity analysis was helpful for developing the
activity bases, most activity bases selected tend to conform to current
American Hospital Association and Medicare guidelines. The base which
was selected in some instances, however, represents a statistic that
is not currently being collected. For example, the recommended activ
ity base for the laboratory cost centers relative unit values of the
laboratory tests performed is a case in point. At present, few
hospitals collect this information. Instead, the number of unweighted
laboratory tests are summarized without considering the complexity of
the various tests or whether those tests were completed manually or
mechanically.
The bases selected, when applied consistently and uniformly to
the corresponding cost centers, represent a measure of the level of
activity which allows for comparative analysis. It also provides a
means of internal control for managers. An activity base has been
indicated for each cost center. The activity bases for those cost
centers (accounts) displayed as part of the standardized chart of
accounts format can be seen in Appendix E.
Distribution method. If the full-cost of services rendered is to
be calculated it is necessary to distribute the costs incurred by the
support service cost centers to the benefiting patient service cost
centers. In order to accomplish this it is necessary, first, to iden
tify those cost centers that are support service cost centers, and


TABLE 5Continued
. ? *J :
COST CENTER HOSPITAL 1 HOSPITAL 2 HOSPITAL 3 twwmi / HfKPmi n
NUMBER AND TITLE
DOLLARS
% OF
TOTAL S
COST PER
PAT DAY
COST PER
ACT BASE
DOLLARS
CF
TOTAL S
COST PER
PAT DAY
COST PER
ACT BASE
MBrs
I OF
TOTAL
COST PER
PAT DAY
COST PER
ACT BASE
DOLLARS
% OP
TOTAL $
COST PER
PAT OAY
COST PER
ACT BASE
DOLLARS
5 OF
TOTAL $
COST PER
PAT OAY
COST PER
ACT BASE
711 tab.- Micro.
7,952
.72
.61
.15
312 Lab.- ER
4.412
.40
.34
.22
713 Lab.- OP
2,720
.25
.21
.05
Total Clinical Path.
51,638
4.65
3.97
.18
83,036
6.36
8.99
.70
Total Lab.
72.130
6.11
6.91
1.47
60,940
7.21
7.35
.21
31,071
8.33
8.39
1.90
54,465
4.91
4.19
.16
89,374
6.85
9.68
.76
714 Bleod Sank
15,723
1.41
1.60
89.85
12,172
1.44
1.47
60.56
4,721
1.27
1.27
62.12
11,483
1.03
.11
24.33
22,154
1.70
2.40
45.86
715 ECG
11,464
1.03
1.16
12.81
12,314
1.46
f .49
12.89
3,561
.96
.96
10.09
9,249
.83
.71
7.84
2,246
.17
.24
1.87
718 EEG
4,213
.38
.43
30.98
4,605
.54
.56
34.62
2,726
.73
.74
33.37
4,634
.42
.36
34.33
609
.05
.07
7.00
719 Sch. of Med Tech
1.746
.15
.IB .
.95
2,341
.21
.18
1.59
1,4CO
.12
.17
1.19
720 Rad. Admin.
3,499
.31
.36
.68
40,562
4.80
4.89
10.50
4,298
.39
.33
.78
21,620
1.62
2.29
2.89
721 Rad. Diagnost.
25,503
2.29
2.59
6.62
18,095
4.86
4.88
14.02
39,869
3.58
3.06
7.41
37,182
2.85
4.02
5.78
724 Rad. Therapy
16,553
1.49 .
1.68
12.70
10,780
.97
.83
93.74
3,634
.28
.40
4.27
Total Radiology
45,555
4.09
4.63
8.83
40,562
4.80
4.89
10.50
18,095
4.86
4.88
14.02
54,947
4.S4
4.22
3.99
62,011
4.75
6.71
8.49
728 Radioisotopes
7.U0
.64
.73
14.49
6,233
.74
.75
12.52
2,625
.71
.71
32.94
2,020
.18
.16
8.78
730 Pham. Admin.
2,C80
.19
.21
6.58
2,772
.25
.21
.08
1.796
.14
.19
.04
31 Pharm. Prepack
52,482
4.72
5.33
166.02
32,343
3.83
3.90
1.47
20,214
5.43
5.46
1.20
36,972
3.32
2.64
1.10
67,765
5.19
7.34
1.66
732 Pharm. OP
2,545
.23
.20
6.36
Total Pharmacy
5*,562
.91
5.54
1.73
32,343
3.83
3.90
1.47
20,214
5.43
5.46
1.20
42.269
3.80
3.25
7.54
69,561
5.33
7.53
1.71
735 Anesthesiology
11,642
1.05
1.18
.27
5,795
.68
.70
.12
1,862
.50
.50
.1!
12,657
1.14
.97
.18
17,521
1.34
1.90
.16
737 Respiratory Thera
15,019
1.35
1.53
1.33
16,017
1.90
1.93
2.85
10,977
2.95
2.96
2.20
7,873
.71
.61
.87
1C,172
.78
1.10
.51
739 Puhenary func.
2,070
.24
.25
.
741 Physical Therapy
5,533
.59
.65
3.2C
4,286
.51
.52
3.34
1,068
.29
.29
1.06
4,284
.39
.33
6.89
6,130
.47
.66
3.71
743 Occupational The"
1,580
.14
.16
6.84
1,399
.13
.11
4.27
747 Rec. Therapy
3,484
.27
.38
.13
751 Home Health Care
4,358
.44
.37
21.50
1,000
,C8
.11
17.54
752 Social Service
258
.02
.03
1.28
753 Med. lllustra
2,919
.22
.32
5.79
754 Employee Health
7 ,730
.15
.18
1.95
1,924
.17
.15
1.60
755 Cardiac Cath Lab
17.450
1.56
1.77
424.76
9,518
.86
.73
339.93
5,600
.43
.61
224.00
756 ER Admin.
2,794
.25
.21
01
8,957
.69
.97
1.02
757 ER Nursing
27,885
2.61
2.S3
21.34
13,287
1.57
1.60
5.54
3,858
1.04
1.04
12.65
15,083
1.36
1.16
5.04
35,637
2.73
3.86
4.07
Total ER
2),80S
2.51
2.83
21.34
13,287
1.57
1.60
5.54
17,877
1.61
1.37
5.97
44,594
3.42
4.83
5.08
753 Med Staff Med.
2,829
.25
.29
.29
6,887
.81
.83
.83
8,051
.52
.87
.87
750 Pods
10,459
.80
1.13
1.13
760 -0B/GYN
5,289
.41
.57
.57
761 -Optham
2,329
.22
.31
.31
762 -Oral $.
2,793
.21
.30
.30
753 -Orthop
2,849
.22
.31
.31
764 -Surgery
5,263
.40
.57
.57
Total Kidlcal Staff
2,829
.25
.29
.29
6.887
.81
.83
.83
37,533
2.83
4.06
4.06
'55 Interns & Resi
13,495
1.21
1.37
710.26
2,707
.32
.33
541.00
5,524
1.48
1.49
,331.00
3:,m
2.75
3.83
920.79
766 Int. & Res-JHCP
1,962
.13
.20
981.QO
17.415
1.57
1.34
,935.00
38,915
2.98
4.21
827.93
767 -lam.
1,337
.12
.10
446.00
fetal Irt, and Res.
15,457
1.39
1.57
736.05
2,707
.32
.33
541,00
5,524
1.48
1.49
,381.00
13,742
1.69
1.44
,561.83
74.S26
5.73
8.10
870.07
775 Med Rec -Admin.
2,449
.22
.25
1.21
14,310
1.69
1.73
4,65
2,128
.19
.16
.48
3,386
.37
.12
7/b -Hiinq
4,621
.47
.47
1.63
13,601
3.65
3,65
17.78
3.275
.29
.25
1.24
13,631
1.04
1.48
.49
777 -Legal
841
.08
.06
.
?78 -Research
132
.01
.01
8.80
779 44 -Stat
2,503
.23
.19
16.68
7uG ** -Trans.
12,098
1.C9
1.23
.14
4,223
.38
.32
.06
6,127
.47
.66
.04
Total Med. Rec.
19,168
1.73
1.9b
9.45
14,310
1.C9
1.73
4.C6
13,601
3.65
3.65
17.78
13,107
1.18
.99
2.97
23,144
1.77
2.51
.85
731 OP Admin
13,635
1.23
1.05
5.35
28,125
2.15
3.04
2.86
782 OP Pat. Care
21,778
l.?6
2.21
46.63
3,241
.29
.25
1.43
28,670
2.20
3.10
2.92
783 OP Tunr Reg.
664
.06
.05
2.87
?G4 OP Dental
2C5
.03
.02
5.63
letal CF
21,778
1.36
2.21
46.63
17.8C5
1.61
1.37
7.00
56,795
4.36
6.14
5.77
795 X-Ray Teen Sch
3,557
.36
.30
.83
2,475
.19
.27
.51
7S6 Mental Health 0
17,205
1.55
1.32
.35
10,353
.79
1.12
.21
SCI Dietary-Admin.
1,939
.17
.20
.04
4,048
.36
.31
.09
2,266
.17
.25
.03


SELECTED BIBLIOGRAPHY
Books
American Hospital Association. Chart of Accounts for Hospitals.
Chicago: American Hospital Association, 1966.
American Hospital Association. Cost Finding and Rate Setting for
Hospitals. Chicago: American Hospital Association, 1968.
American Hospital Association. Uniform Hospital Definition.
Chicago: American Hospital Association, 1960.
Anthony, Robert N. Planning and Control; A Framework for Analysis.
Boston: Division of Research, Graduate School of Business,
Harvard University, 1965.
Berki, Sylvester E. Hospital Economics. Lexington, Massachusetts:
Lexington Books, 1972.
Berman, Harold J. and Weeks, Lewis E. The Financial Management of
Hospitais. Ann Arbor, Michigan: Bureau of Hospital
Administration, School of Public Health, the University of
Michigan, 1971.
Brown, Ray E. and Johnson, Richard L. Hospitals Visualized, 2d. edition.
Chicago: American College of Hospital Administration, 1957.
Commerce Clearing House. Medicare and Medicard Guide, 2 vols. Chicago:
Commerce Clearing House, Inc., 1972.
Connecticut Hospital Association. Connecticut Hospital Association
Accounting Manual. New Haven, Connecticut: Connecticut
Hospital Association, 1979.
Curran, William J. Special Legislative Report National Survey and
Analysis of Certification-of-Need Laws: Health Planning and
Regulation in State Legislatures. Chicago: American Hospital
Association, 1973.
Folsom, Marion (Chairman). Report of the Governor's Committee on
Hospital Costs. Albany, New York: Office of Public Health
Education, New York State Health Department, 1965.


197
HOSPITAL COST REPORT
HOSPITAL: 2 PAGE 2 OF 3
ACCOUNT NUMBER: 610 ACTIVITY BASE: Hours of Care dATE; One month
Account Title
% qf Total
Patient Day
Activity
Dollars
F.ilms and Chemicals
Printed Forms
Fuel
Pub. (Books & Periodicals)
Beverages & Nourishments
££&flr-..S J:i3intfinaiic£
Dishes., Glassware. Silver.
Disposable Eating Uten.
Kitchen
Food
Food-Meat, Fish. Poultry
Food-Dairy..
Food-Fresh Produce
Food-All Other
Laboratory
Housekeeoino
House. Paper Products
House. Sanitary Products
Laundry
Linens
Printing
Miscellaneous
.18
.05
.01
37
TOTAL SUPPLIES
1.56
.44
- .u/
324
PURCHASED SERVICE
Purchased Maintenance
Purchas. Main Contract
Purchas. Main Other
Utilities
Utilities Electricity
Utilities Gas
Utilities Hater & Sewer
Garbage Collection
Telephone & Teleoraoh
.47
.14
.02
QR
Insurance & Bonding
1.22
.35
.05
254
Dues and Memberships
Prof. Activity Study
T ravl
Travel Education
Travel Other
Equipment Rentals
Equipment Leases
.72
.21
.03
150
Pho.tnc.QDFnmnm.ent.
...JlijacQJLiljii 1 -
Fig. 11.--Continued


167,
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
751: HOME HEALTH CARE
Provide home health care services.
Compensation of the department head, nursing per
sonnel, therapists, clerical and supportive staff.
Fees, materials, supplies, miscellaneous and in
direct expenses required to perform this function.
Number of home visits.
To patient location areas based upon the ratio
of home visits to patients of each area to total
home visits.
SUB-ACCOUNTS:
None


<%
Abstract' of Dissertation Presented to the Graduate Council
of the University of Florida in Partial Fulfillment of the Requirements
fop the-Degree of Doctor of Philosophy- S?
C 1
THE DEVELOPMENT AND EVALUATION
OF A UNIFORM HOSPITAL COST
ACCOUNTING INFORMATION SYSTEM
By
Gary R. Fane
March, 1S74
Chairman: D. D. Ray
Major Department: Accounting
Purpose
The purpose of this research project was to develop and to evalu
ate a uniform hospital cost accounting information system. The system
developed will generate cost accounting and statistical data based on
comparable information provided by the individual hospitals which can
be used to aid community-or area-wide hospital planning.
Rising health care costs have been a major problem in recent
years. A suggested approach to solving the problem has been to develop
regional or area-wide health care planning groups. Several recent in
vestigations have concluded, however, that the comparable cost account
ing data required to make regional decisions are not available. The
findings of the American Accounting Association's Committee on the
Accounting Practices of Not-For-Profit Organizations indicated the
lack of cost accounting throughout the not-for-profit sector generally.
That committee suggested an attempt be made to apply cost accounting
techniques as used in the profit-sector of the economy'to the
VI1 i


33
This approach, however, is being challenged by those who propose
prospective rating, a plan whereby hospitals would be reimbursed by
third-party-payers based upon budgeted or anticipated expenses.
As previously indicated, the major difficulty of establishing the
profit-sector model in the not-for-profit sector has been the problem
N\s/ of output or product identification. Berki^ explains the various
attempts that have been made to resolve this problem in the hospital
industry. Of the 6 different approaches outlined, one relates to the
identification and weighting of service outputs. Service outputs are
defined in 2 ways. An all inclusive output index is used such as a
patient-day, weighted by whether it is an adult, pediatric, or nursery
type of day. At the other extreme is the identification of the
service or output of each hospital department. In this scheme th
weighting is implicit since for the medical departments the units of
suggested service is either in terms of the numbers of operations,
^Nj treatments, or procedures, or the time dimension of service. It is
the latter concept that was used in this research to develop the cost
accounting system.
Uniform Cost Accounting System
Any uniform cost accounting system needs to allow for the cost
data to be displayed several different ways. The current hospital
cost accounting model indicates that program costs are needed. To
reap the more general benefits of planning and control, the data must
be capable of being displayed along organizational lines in order to
allow for responsibility accounting. Finally, the same data must also


166
747:
FUNCTION:
EXPENSES:
*
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
REHABILITATION RECREATIONAL THERAPY
Provide recreational therapy services.
Compensation of therapists, therapy aides, cler
ical and supportive staff. Fees, materials,
supplies, miscellaneous and indirect expenses
required to perform this function.
Hours of therapy.
None
743: Rehabilitation Recreation Therapy:
Outpatient
749: Rehabilitation Recreation Therapy:
Day Care
750: Rehabilitation Recreation Therapy:
Partial Hospitalization


164
706:
FUNCTION:
EXPENSES:
ACTIVITY BASE:
DISTRIBUTION:
SUB-ACCOUNTS:
CLINICAL LABORATORY CLINICAL PATHOLOGY
Provide bacteriology, biochemistry, chemistry,
hematology, serology and emergency laboratory
services.
Compensation of physicians, medical technologists,
technicians, laboratory assistants, clerical and
supportive staff performing services for clinical
pathology. Fees, materials, supplies, miscellaneous
and indirect expenses required to perform this
function.
Relative unit values of procedures.
None
707: Bacteriology
708: Biochemistry
709: Chemistry
710: Hematology
711: Serology
712: Emergency Laboratory
713: Outpatient Laboratory


154
.040
Cleri cal
.041
Typist
.050
Technicians
.060
Physicians
.061
Interns and Residents
.070
General
Fringe Benefits:

.100
Social Security (FICA)
.110
Group Life Insurance
.111
Group Health Insurance
.112
Group Disability Insurance
.120
Retirement Plan Contribution
.130
Workmen's Compensation
.140
State Unemployment Tax
.141
Federal Unemployment Tax
.150
Uniforms
.160
Meals
Fees:
.200
Legal
.210
Audi ti ng
.220
Collecting Agencies
.230
Consulting
.240
Medical Specialists Administra
ti ve
.250
Medical Specialists Physicians
.260
Open
.270
Open
.280
Open
.290
Open
Supplies:

.300
Medical and Surgical
.301
Inventory Count Adjustments
.302
Small Instruments
.310
Drugs
.320
Intravenous Solutions
.330
Wearing Apoarel (Exclude
Uniforms)
.331
Uniforms
.340
General Operating
.350
Oxygen and Gases
.360
Films and Chemicals
.361
.362
.363
.364
.370
Printed Forms
.380
Fuel


no
service cost center. The hospital accounting personnel who collected
the cost data which were used to prepare the reports indicated that
no problems were encountered with the activity definitions. Further,
evaluators who reviewed the system elements unanimously agreed that
the activities, as defined, accurately represented the activities
being performed within their particular hospitals. From this it can
be inferred that the cost data collected were for similar activities
within the various hospitals.
Those who evaluated the system also reviewed all activity bases
and agreed that the measures selected represented the cost center out
puts. Only one exception was noted. In the nursing services the
activity base selected was not termed inaccurate, but a suggestion was
made that was felt would make it a better measure. The activity bases
were found to be representative measures of the activities performed
within the various cost centers.
Since the distribution methods were based upon the activity
bases, they were deemed appropriate since the bases themselves were
considered adequate. All cost distributions were based upon the uni
form methods recommended in the chart of accounts, and accomplished by
applying the identical step-down procedure.
Given that the activities were properly defined, the costs col
lected for like activities within the various hospitals, the activity
bases were accurate measures of outputs, and that the costs were dis
tributed via uniform methods, it can be concluded that the cost output
contained a high degree of comparability.


169
757: EMERGENCY SERVICE NURSING
FUNCTION:
Provide nursing services to emergency patients.
EXPENSES:
Compensation of nursing service personnel assigned
to Emergency Service. Fees, materials, supplies,
miscellaneous and indirect expenses required to
perform this function.
ACTIVITY BASE:
Hours of nursing care. Hours are determined, from
paid hours of nursing service personnel assigned
to this function.
DISTRIBUTION:
None
SUB-ACCOUNTS:
None


TABLE 7-Continued
COST CEMTE*
flMBER AW 1
TITLE
TOD\SS~
HOSPITAL 1
issrpar
TXT
TOTAL $
(CCSTPBT
PAT OAT ACT RASE
DOLLARS
703 Lab. Mise.
709 Lab. Che.
710 lab. Heno.
711 Lab. Micro.
712 Lab. ER
713 Lab. 0*>
Total Clinical Path.
Total Lab.
714 Bleed Sank
716 ECS
718 EES
719 Sch. cf Med Tech
720 Rad. Mnn.
721 Rad. Oiagnost.
724 Rad. Therapy
Total Radiology
723 Radioisotopes
730 Phana. Adain.
731 Pham. Prepack
732 Pharr.. OP
Total Pharmacy
735 Anesthesiology
737 Respiratory Thera
739 Pulmonary Fune.
741 Physical Therapy _
743 Occupational Ther
747 Rec. Therapy
751 Florae Health Care
752 Social Service
7C3 Med. Illustra.
754 Employee Health
755 Cardiac Cath Lab
756 ES Admin.
757 ER Nursing
Total ER
758 Med Staff Med.
81,805
6.59
8.31
1.72
97,240
7.83
9.88
1.98
18,439
1.49
1.87
105.37
13.246
1.07
1.35
14.30
5,507
.44
.56
40.49
43,780
3.52
4.45
11.36
39,756
3.21
4.04
30.51
83.536
6.74
8.49
15.20
11,360
.92
1.15
23.00
61,800
4.98
6.2
T.96
61,890
4.98
6.28
1,96
15,239
1.23
1.SS
.35
20,472
1.65
2.08
1.31
11,776
.95
1.20
5.76
2,723
.22
.28
11.79
26,236
2.12
2.66
639.90
39,393
3.18
4.00
30.14
39,393
3.18
4.00
30.14
759
750
7f 1
762
763
764
' feds.
-Ofi/GYN
-Opthaf
-Oral S
-Crthcp
-Surgei
Total Medical Staff
765 interns & Residen :
766 Int. I Res JHLP
767 -Fa.
Total Iftl. and Res.
775 Med Rec Admin
776
777
778
779
78Q
-Filing
-Legal
-Research
-Slat
-Trans.
58,517
70,575
13,599
14,064
5,469
49,289
49,289
7,347
35,9
35,933
6,334
18,946
2,585
7,£47
23,364
23,364
Total Med. Rec.
761 OP Admin
HOSPITAL 2
TTJF CJ5TTBT
TOTAL S PAT OAT
.48
7.10
7.11
8.52
1.50
1.64
1.55
1.70
.60
.66
5.43
5.55
5.43
5.95
.81
.89
3.96
4.34
3.96
4.34
.75
.82
2.09
2.29
.30
.32
.84
.92
2.53
2.82
2.58
2.82
HOSPITAL 3
H0SPITA1 4
HOSPITAL 5
COST FEA
ACT BASE
3 UF
TOTAL J
LOST rtx
PAT OAT
COS Pt
ACT SASE
DOLLARS
i or
TCTAL $
COSTPDT
PAT DAY
ACT BASE
OlLAfti
X OF
TOTAL S
COST PER
fAf DAT
~tCST PER
ACT BASE
15,315
1.17
1.18
.81
t
20.890
1.58
1.9
.24
16,S?2
1.30
1.31
.20
14,131
1.08
1.09
.26
5,332
.41
.41
.26
3,315
.25
.25
.06
-23 :
38.378
iQ.35
2.35
89.222
6.82
n.K
.31
131,953
8.53
14.28
10. J6
2. 3b
97,460
7.45
7.50
.29
146,202
9.48
6/.M>
5,071
1.24
1.37
66.72
12.C84
.99
.99
27.30
25,266
1.63
14.73 i
3,958
.97
1.07
71.24
13,107
1.00
1.01
11.12
3,141
41.32
1,300
.81
.89
40.00
5,42b
.41
.42
40,19
1,13?
.07
.12
13.01
12.76
24,042
S.68
6.49
18.62
66,549
5.08
5.11
12.36
85,198
5.50
9.22
13.?4
16,927
1.29
1.30
147.19
8.822
.57
12.76 i
24,042
5.88
6.49
18.62
83.476
6.37
6.41
15.13
94.920
6.07
10.17
14.78 >
2,959
.72
.60
36.99
4.521
,3S
.35
19.6S
1.63 ;
22,425
5.49
6.05
1.33
6,491
3.55
3.57
1.38
83,818
5,*2
9.07
2.06 .
3,627
.28
.28
.91
1.63
22,425
5.49
6.05
1.33
50,118
3.84
3.65
1.05
83,816
5.42
9.07
.75
2,365
.58
.64
.14
15,398
1.18
1.18
.21
21,612
3.37
5.96
13,463
3.30
3.63
2.70
11,992
.92
.92
1.22
12,000
.78
1.30
.uO
2,523
.62
.68
2.51
9,099
.70
.70
14.63
14,360
.93
1.55
8.69
2,193
.17
.17
6.69
i
t
14,714
1.13
1.13
525.5-3
18,085
1.17
1.96
722.40
.7S !
20,697
5.07
5.53
67.
29.219
2.24
2.25
8.77
103.554
7.92
11.75
12.38
9.75 !
20,697
5.07
5.59
67.86
29,219
2.24
2.25
9.77
108,564
7.02
11.75
12.38


87
The preponderance of the responses to these questions tended to
favor this cost accounting system as an internal management decision
making tool. However, most evaluators would provide the output to
those groups outside the hospital who had a requirement for such data.
System Implementation
The last question asked if the evaluator would implement such a
system in his hospital. Of the 13 evaluators, 8 indicated they would;
3 gave a qualified "yes," stating they would prefer to study the Medi
care implication further; and 2 indicated they would not. These last
2 indicated that the cost accounting system was adequate but that they
had to consolidate their records with other hospitals under the same
ownership, and the proposed cost accounting system would make them in
compatible with existing reporting schemes.
In total, the evaluators who reviewed the cost accounting system
and its output generally were favorable toward the cost accounting
system. As the responses discussed have indicated, the cost account
ing system seems to provide useful information. Most indicated they
would implement such a cost accounting system.
Requirements of External Users
The procedural aspects of the cost accounting system were tested
by generating the reports required. Hospital managers then evaluated
the output. The remaining step of the evaluation procedure is to de
termine the reporting requirements of external cost information users
and to compare the output with those requirements.
Identified were 4 different external groups. They were 1) the
Social Security Administration, under Title XVIII of the Social


95
Cost Information Required b.y
Third-Party-Payers
Third-party-payers are those who make payments to a health pro
vider for a patient. Basically, there are 2 groups of third-party-
payers, the commercial insurance companies and the various Blue Cross
Associations. Both provide the same function, the payment of health
claims for clients. There is, however, a marked difference between the
ways in which each reimburses the hospitals. The commercial companies
usually cover a client up to a certain amount for a given medical pro
cedure. If hospital rates exceed that amount, the individual must
provide the balance. Consequently, the extent to which hospital rates
are or are not based upon costs is of little concern to the commercial
carrier.
The Blue Cross Associations, on the other hand, have been inter
ested in reimbursing hospitals based upon costs. Of the 74 plans in
existence in 1968, 51 reimbursed providers based on costs.8 Costs are
defined differently by each Blue Cross Association, but generally it
is agreed that all direct costs of operation plus varying allowances
for depreciation, bad debts, charity, and a "plus-factor" to cover
other items are allowed.
Essentially, this analysis deals only with cost requirements of
those Blue Cross Associations that reimburse on the basis of costs.
Those plans fall into 2 broad categories. The first category includes
those that reimburse for costs and are quite flexible in their defi
nition of costs. The Michigan and the proposed Florida plans are rep
resentatives of this group. The other broad category consists of
plans that require substantial cost data and that base reimbursements


56
The professional support services, however, provide services to
the patient location areas only. To collect statistics which will be
the activity base for this group of cost centers, the form titled
"Activity Measurement and Cost Distribution Statistics Patient Loca
tion Cost Centers" has been developed. The information collected
thereon will also serve as a basic input into the distribution method
for professional support service cost centers.
Finally, since it is the ultimate purpose to determine the full
cost of the patient service cost centers, both primary and patient
location, the distribution of costs stops at that point. No costs
will be distributed from patient service cost centers. As a result
the statistics collected from each of these cost centers will be used
only as an activity base. To collect the data required to accomplish
this, the form titled "Activity Measurement Statistics" has been
developed.
Finally, the report formats were designed. Eased upon the type
of data that were collected and the manner in which it is processed
through the system, 4 reports were developed. Of these, 2 represent
detailed cost information which reflects the costs by element within
each cost center. Additionally, the summary reports reflect total
cost center costs at 3 different points within the model: 1) at
initial entry point; 2) after adjusting for depreciation, interest,
start-up, and insurance costs; and 3) after all distributions, or
at "full-cost." Appendix I contains completed copies of each report
which indicate the reporting format. A detailed discussion of each
is presented below.


155
.390
Publications (Books and
Periodicals)
.400
Beverages and Nourishments
.410
Repair and Maintenance
.420
Dishes, Glassware, Silverware
.421
Disposable Eating Utensils
.430
Ki tchen
.440
Food
,.441
Food Meat, Fish, Poultry
.442
Food Dairy
.443
Food Fresh Produce
.444
Food All Other
.450
Laboratory
.460
Housekeeping
.461
Housekeeping Paper Products
.462
Housekeeping Sanitary Products
.470
Laundry
.480
Linens
.490
Printing
.500
Miscellaneous
Purchased Services:
.600
Purchased Maintenance
.601
Purchased Maintenance Contracts
.602
Purchased Maintenance Other
.610
Utilities
.611
Utilities Electricity
.612
Utilities Gas
.613
Utilities Water and Sewer
.620 ,
- .Garbage Collection
.630
Telephone and Telegraph
.640
Insurance and Bonding
.650
Dues and Memberships
.651
Professional Administrative
Services
.660
Travel
.661
Travel Educational
.662
Travel Other
.670
Equipment Rentals
.671
Equipment Leases
.672
Photocopy Equipment
.680
Microfilm >,
.690
Postage
.700
Non-Hospital Laboratory
.701
Services from Other Hospitals
.710
Outside Monitoring
.720
Laundry
.721
Printing
.722
Housekeeping
.723
Dietary
.724
Security
.725
Data Processing


not-for-profit sector. This research attempts to do that through the
development of a cost accounting system for a major segment of the not-
for-profit sector, the hospital industry, based upon the type of cost
accounting systems employed in the profit-sector. Additionally, such
a cost accounting system would provide comparable cost data to aid in
health care decision making.
Procedure
In order to accomplish both objectives, the research was divided
into 4 major sections. First, models of cost accounting systems pres
ently used in the profit-oriented sector and the hospital industry
were reviewed, compared, and contrasted. A new cost accounting system
model was proposed for the hospital industry.
Second, the elements necessary to make the proposed cost account
ing system operational were defined and developed.
Third, data were collected from a group of community hospitals and
processed through the proposed cost accounting system.
Finally, the output of the system was evaluated to determine the
ability cf that output to aid decision making internally and externally.
This was accomplished by providing cost reports to a panel of eval
uators consisting of hospital administrators and financial managers.
Further, the requirements of those external groups who use cost data
were examined, and the ability of the cost accounting system output to
meet those requirements was evaluated.
Conclusions
The conclusions are grouped into 3 major categories. The first
group of conclusions is concerned about the overall cost accounting
ix


While there may be many ways to classify the various programs, Berman
and Weeks^ have developed a programatic format that seems to be all
inclusive and which will be used as the basis for this discussion.
Accordingly, the activities of a hospital are divided into 4 major
programs which are listed below.
Basic production. This program component includes all direct and
indirect costs of producing a service. This includes labor, materials,
depreciation, and the appropriate portion of support service cost
center costs. The cost of providing a service may be calculated de
partmental ly or on a per diem basis such as daily room charges. The
sum of all such service production costs represent "Basic Production
Costs."
Nonproduction. This program component includes all direct and
indirect costs associated with providing activities not related to
service production. This includes labor, materials, depreciation, and
the appropriate portion of support service cost center costs which are
required to support such activities as community health programs,
education programs, and research programs.
Capital needs. This program component includes interest paid for
monies required to provide either working or plant capital. Also
included are those expenses which are necessary to complete the fi
nancing transactions such as legal fees and other debt service charges.
Revenue reduction. This program component includes all bad debts
written off, discounts allowed, and all direct and indirect costs of
free services provided.
For this research, the Basic Production program is divided into
2 programs. One is called Routine Service and consists of those direct


9
recognized hospitals as a major segment of the not-for-profit sector
and devoted several paragraphs to discussing the particular problems
of hospitals. The report states: "The larger hospitals have developed
costs for determining prices for services but have seldom developed
those (costs) necessary for control by hospital management. The
emphasis has been on 'easy' or 'acceptable' methods rather than on the
best methods of cost calculations."26 This study will help resolve
this particular problem relating to hospitals, and at the same time
provide insight into the larger, more general problem of applying
proven accounting techniques of the profit-oriented sector to the not-
for-profit sector.
In summary, there are 2 major reasons for undertaking this study.
First, to resolve the problem resulting from the lack of an area-wide
cost accounting information system that can generate comparable data
for area-wide decision making, and second, to demonstrate that ac
counting practices and techniques as developed for use in the profit-
oriented sector of the economy can be successfully adapted to the
not-for-profit sector.
Related literature
There is an expanding body of literature concerning hospital
costs. For purposes of this study the majority of the pertinent
research studies and publications have been completed by accountants
and/or professional hospital organizations. Before reviewing the ac-
counting literature, it is necessary to differentiate between "cost^
accounting" and "cost-finding," the 2 principal methods used for col
lecting cost information. The latter refers to a procedure used to
rearrange past financial accounting information into the desired


4
in each case to carry out actions that have enhanced the individual
hospital's position, but have contributed to the rapid rise in costs
noted earlier.^
Many health economists, politicians, and consumer groups support
some form of area-wide health planning as a solution to this problem.
Various plans have been proposed. Each plan considers the total health
resources of a community as a "pool" from which to meet total health
needs. Even the plan causing the least change frcm existing practices
would result in severe curtailment of the individual hospital's autonomy.
It would mean that a single hospital management would: 1) no longer
be singularly responsible for its future since all expansion plans would
require review and approval; 2) new services could not be provided
unless approved; 3) the ability to generate additional working capital
might be impaired since no new profitable service could be implemented
without demonstration of need for such service. This is an extreme
change from present practice.
At the other end of the spectrum, the individual hospital would
cease to exist as an entity. It would become part of a national health
organization. The only input the hospital would have would be to submit
an operating and capital budget to a regional director. The budget
would be considered along with all the other hospitals from the same
designated area and funded according to the manner iri which that indi
vidual hospital contributed to the overall plans for the area.
Regardless of whether either one of the 2 extreme plans or some
compromise plan is instituted, there is a growing concern that control
of rising costs and proper allocation of resources can be accomplished
only through better area-wide resource management.


152
1 Account Number and Title
2. Function This indicates the activity and/or activities
that are included in the account,
3. Expenses This indicates those expense items that should
be included in the account.
4. Activity Base A common denominator is required in order
to measure the level of activity within an account, and
to provide comparability of the activity levels of two or
more hospitals. That common denominator is the activity
base.
The activity base selected for each account is com
patible with current AHA and Medicare guidelines. The
activity base selected is the most appropriate presently
available. However, certain weaknesses are evident. For
example, diagnostic radiology and clinical laboratory
activity should be measured on a basis of relative value
of tests given instead of the unweighted number of tests.
In order to do so at this time, however, would require a
significant modification of existing practices. This
should, though, be considered as a desirable action to
take at a later date.
5. Distribution This is the method that should be employed
to distribute costs accumulated in the account to other
accounts benefiting from the expenditures.
6. Sub-Accounts In many instances the function, or func
tions accounted for, in >a particular account may be
further divided. In order to do so another account should
be established. The additional accounts and the numbers
assigned them are listed under this heading. Whan pos
sible information should be collected at the sub-account
level.
The following additional definitions are provided to clarify
standardize terminology used throughout the chart of accounts.
1. Primary Areas These are the service areas of the
hospital that support patient care. They consist of such
areas as housekeeping, dietary, accounting, purchasing,
operation and maintenance, administration and personnel.
They have traditionally been termed indirect or support
areas.
2. Patient Location Areas These are the locations in the
hospital where the patient receives care; either as an
inpatient or outpatient. They include such areas as
radiology, nursing service areas, outpatient clinics, and
the emergency room.


189
INSTRUCTIONS FOR COMPLETING ACTIVITY MEASUREMENTS STATISTICS FORM
In order to measure the level of activity in various areas and
calculate a cost per unit of measure, selected statistics are required.
The following indicates the information requested by the corresponding
item on the attached form.
1. .jCost of drugs requisitioned by all sources during the
period covered. Break information into inpatient and
outpatient categories.
2. Cost of drugs dispensed by the outpatient pharmacy.
3. Total time an anesthetic agent was being administered to
patients.
4. Total relative unit values of all clinical laboratory
tests and procedures conducted during the period. The
remaining categories, 4a through 41, allow for a-detailed
breakdown of relative unit values by area within the
clinical laboratory.
5. Total time patients were in the operating room.
6. Total time patients were in the recovery room.
7. Total electrocardiology examinations administered.
8. Total number of electroencephalography examinations ad
ministered.
9. Total relative unit values of all radiology diagnostic
procedures.
10. Total number of radiation therapy treatments administered.
The additional items, 4a and 4b, allow for a detailed
breakdown to coincide with primary subaccounts.
11. Total relative unit values for all radioisotope and
nuclear medicine procedures.
12. Total hours of respiratory therapy.
13. Total relative unit values of all tests performed in the
Pulmonary Functions Laboratory.
14. Total modalities in Physical Therapy Department.
15. Total hours a therapist instructs patients. Calculated
by multiplying the number of patients times hours of
instruction each patient received.


system that would accommodate the required data collection and manipu
lation at the cost center level, several steps were required. They
were: 1) identify cost centers; 2) develop a questionnaire to be
used in completing an activity analysis; 3) test the questionnaire;
4) perform an activity analysis; 5) use the activity analysis to
develop a system framework, uniform cost distribution methods, and
uniform activity bases; and 6) develop report formats. Each step
will be discussed in detail below.
Identify Cost Centers
At the core of any accounting system is the framework which allows
for the systematic accumulation of the data which are to be analyzed.
That framework usually follows organizational lines. The same was true
for this study, except it was necessary to divide the hospital organi
zation into extremely small parts. Those small segments have been
defined as cost centers.
The first step of the procedure, then, was to identify all the
possible cost centers that might be found within a hospital. The
recommended charts of accounts of the American Hospital Association
and the Connecticut Hospital Association were initially reviewed for
guidance in completing this task. Additionally, departmental handbooks
published by the American Hospital Association's Hospital Administra
tive Services Program were reviewed.
Identifying what cost centers might be found within a hospital
'was just the beginning. It also had to be determined that a hospital
had one of the identified cost centers. If so, then it had to be estab
lished that the same activities were being performed within the same


55
The first form titled "Data Collection Form," is used to collect
the basic cost and selected statistical information for each cost
center. One set of forms must be completed for each cost center. The
data on this form provides the basic input into the cost system. The
Data Collection Form, along with the instruction page provided is
self-explanatory. A significant amount of detailed cost information
is collected concerning the elements which make up each cost center's
total cost.
The next 3 forms in Appendix G are titled "Activity Measurement
Statistics," "Activity Measurement and Cost Distribution Statistics -
All Cost Centers," and "Activity Measurement and Cost Distribution
Statistics Patient Service Cost Centers." Data entered upon these
fomis become the activity bases used for measurement and distribution
purposes.
There are 3 separate groups of statistics required at this point
as indicated by the 3 different collection forms. This requirement
exists because of the various types of cost centers identified:
support service and patient service. Of the 2 types of support serv
ice cost centers, professional and hotel, the hotel support service
cost centers provide service to other cost centers within the hospital
For example, housekeeping and maintenance perform services for all
other hospital cost centers. Consequently, the statistics collected
on the "Activity Measurement and Cost Distribution Statistics All
Cost Centers" form are used as the activity base within the hotel
support service areas. Additionally, they also provide the means for
distributing the costs of providing such services to all areas within
the hospital that benefit from such services.


93
revenue restriction calculation. If actual data were used to demon
strate volume or intensity increases for revenue, those same statis
tics must be used to adjust present costs. If the formula method were
used, then the percentage resulting from that calculation is used to
adjust present year costs.
The adjusted costs are consolidated into 2 major components, wage
and nonwag. The adjusted costs are then subtracted from the prior
year's costs to determine the percentage change. If the wage expenses
have increased by 5.5 percent or less, and the nonwage expenses by 2.7
percent or less, the amount is a justifiable cost increase.6 Any
amount in excess of that limitation is nonallowed unless a special
item-by-item justification is made and accepted by the local State
Advisory Board and Price Commission.
Consequently, it is necessary to know the detailed costs of the 2
major components for both the prior and current years. In accordance
with Internal Revenue Service reporting formats, the minimum cost data
required are:
1. Wage Component:
a. Wages and salaries
b. Fringe benefits
2. Nonwage Component:
a. Pensions, group insurance, disability, and
health plans
b. FICA and unemployment taxes
c. Compensation and fees paid to hospital-
based physicians
d. Drugs
e. Raw food (or purchased dietary services)
f. Utilities
g. Special purpose expenses
h. Other expenses
i. Depreciation
j. Interest
k. Insurance