Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
Understanding the Absence of Accounting Innovation in Indonesian
Public Hospitals
Heru Fahlevi*
This paper provides empirical evidence about the failure of public hospital organizational
form and hospital payment reforms in introducing an enhanced role of accounting in the
Indonesian public hospitals. In particular, this paper seeks to explore (i) the current role
of accounting; (ii) change of hospital payment system; (iii) the impact of the recent
hospital financing reform to accounting practices in public hospitals. The linkage
between hospital financing payment and accounting innovation in public hospitals has
been poorly understudied, particularly in the context of a developing country like
Indonesia. Therefore, this paper attempts to fill this void in the literature by conducting a
multiple case study research in two selected Indonesian public hospitals. The
interviewees are financial directors, head of accounting department, senior physicians
and management accountants of two selected Indonesian public hospitals. To interpret
the interviews, this paper uses contingency theory. Insights from the interviews reveal
that the owners‟ traditional role and a conventional mindset of public hospital
management have hindered the infiltration of economic and accounting logics in the
hospitals. Moreover, the contingency factors have been changed insignificantly, and
thus, stimulate a limited increase in demand of management accounting information in
the public hospitals.
Key words: accounting innovation, physicians, hospital financing reform
I. Introduction
The persistent rise of healthcare sector expenditure within an unstable global economic situation
has caused repeated calls for healthcare reforms. Subsequently, recent reform proposals in
many countries (see for instance Geisller et al., 2011) have emphasized on cost containment and
efficiency improvement in healthcare system. In these reforms, hospital sector has become a
primary target of reconfiguration as it could absorb up to 70% of the overall health care budget1.
As a result, the past thirty years there has been an increased concern on hospital sector‟s
efficiency in developed countries, and more recently in developing countries.
The government of Indonesia has started both organizational reform of public hospitals and
hospital payment reform to improve efficiency in Indonesian hospital sector, particularly in public
hospitals. The former is represented by the creation of a more business-like public hospital under
a new organizational form called BLU (Badan Layanan Umum or Public Sector Agency). Such
autonomization of public hospital is intended to cut bureaucracy and to give more authority for
management of public hospitals particularly in financial management decisions. For example, a
BLU public hospital are allowed to manage and collect their own revenues with
Meanwhile, the latter intends to ensure efficiency improvement in public hospitals through the
adoption of Diagnostic Related Groups (DRGs) based provider payment system (PPS). In this
*A doctoral student of German University of Administration Sciences Speyer, Germany and lecturer at Syiah Kuala
University, Indonesia. Email address: hfahlevi@gmail.com
1
Hospital costs are responsible for 50 per cent of health care budget in many western European countries, and even 70 per cent
in the former Soviet Union countries (McKee and Healy, 2002)
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
new payment system, hospitals are paid per case rather than per day or per delivered service.
More importantly, the reimbursement fees are pre-determined and lump sums that are calculated
based on average actual costs of each DRGs case (Dismuke and Sena, 1999). Such fixed rates,
according to Sanford et al. (1987), demand the management of hospitals to seek a cheaper
alternative in curing patients in order to gain surplus or at least to avoid loss. Accordingly,
hospitals finally obtain the required incentive to contain costs (Sanford et al., 1987).
Both reforms could create a new demand of more detailed cost accounting information in
Indonesian public hospitals where accounting might traditionally play a marginal role. In fact, the
DRGs system requires such case-mix cost information that is not available before in hospitals. In
this new payment system, hospitals are required to measure profitability of each DRGs case, and
more importantly, improve efficiency of each DRGs group. Thus, accounting innovation in term of
its role and practices seems to be inevitable in the nowadays Indonesian public hospitals
activities.
As one of crucial elements, however, far too little attention has been paid to management
accounting system in public hospitals especially in countries under transition (Hassan, 2005) like
Indonesia. Therefore, this paper aims to explore the implication of previous reforms for
accounting practices and its role in two selected Indonesian public hospitals. It is worthwhile to
study because the capacity of hospitals accounting system and practices can determine the
hospitals‟ responses to the new payment system, and in turn, affect the effectiveness of the
hospital payment reform.
II. The infiltration of economic logic and accounting innovation in public hospitals
According to Hopwood (1992), the periods of economic instability associated with the World War
II have shaped a new ideology in how public sectors are managed and financed. Such continued
economic pressures have stimulated a greater call for efficiency improvement in public sectors,
including in health care sector (Hopwood, 1992). Hence, efficiency has been an important topic in
the discussion on the provision of hospital cares and proposals to improve the efficiency of health
care sector has been implemented across the globe.
As efficiency of public sector has become a primary concern, accounting has been playing a
more vital role as the increasing demand for financial rationality and accountability (Lapsley,
1996). The reason is, according to Hopwood (1992), accounting can make detection of inefficient
practices possible and ensure a better performance of the public sector can be attained in the
future. Similarly, Pettersen (2004) argue that the public hospitals particularly have been forced
not only to improve their medical service qualities, but also to contain costs. This demand can be
linked to the shift of governments‟ principle interest from quality and hospital care access toward
economic and financial issues (e.g. in the USA in the mid-1970s in Chua and Preston, 1994).
Consequently, utilization of accounting information has been expanded and improved within
hospital services (Broadbent, 1992).
According to Durán et al. (2011) who studied this topic in European countries, public hospitals
were led traditionally by directors who have little or no experience and educational background
on private sector management. The directors were also politically connected to and appointed by
the government as the representative of ruling political parties (Durán et al. 2011). More
importantly, traditional public hospitals were budgetary units of their owners while clinicians and
their professional norms dominated the hospitals‟ management decisions (Kurunmaki, 1999).
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
The inexistence of economic logic in the traditional public hospitals can be associated with their
main objectives. Alam and Lawrence (1994) argue that public hospital‟ activities were considered
as the implementation of social justice to ensure the fulfilment of citizens‟ rights. As a result, costs
were barely a concern. Meanwhile, power in public hospitals was greatly delegated to physicians
who have authorization to decide primarily have based on their own professional training and
code of conduct rather than any administrative consideration or economic sense (Alam and
Lawrence, 1994). This condition had caused budget overspent because the physicians had a
limited concern on patient‟s treatment costs (Alam and Lawrence, 1994). Consequently, it led to a
growing public distrust and the accusations that public hospitals were inefficient in the old system
(Kurunmaki, 1999).
Therefore, reform proposals have been implemented to remedy such inefficient system as well as
encouraged accounting reform in the public hospitals. In the past, accounting systems in public
sector were used mainly as planning tools and principally aimed to serve the external parties e.g.
preparing financial reports for the owner (Pettersen, 1994; Webster and Hoque, 2005). Cash
accounting was adopted widely in public sectors including in public hospitals because the needs
for detailed cost information barely existed. Besides, public hospitals were discouraged to
produce accounting information because cost controlling was centrally performed by the owner
(Webster and Hoque, 2005). Moreover, cost controlling was mostly conducted by comparing
budget and its realization (Durán et al., 2011).
More importantly, the activities and responsibilities of health professionals and hospital
managerial staffs were separately clear cut. The physicians were excluded from the managerial
efforts and cost controlling activities and encouraged only to focus on patients‟ life (see Alam and
Lawrence, 1994). On the contrary, the role of hospital administrators was merely as facilitators
rather than managers in the corporate concept (Sanford et al., 1987). They were responsible only
for maintaining the stability and financial feasibility of physicians‟ workplace (Sanford et al.,
1987). In fact, Pettersen (2004) believe that accounting information had been ignored by
clinicians in the past. For example, the functional managers have so limited information regarding
cost information about patient treatment that they cannot completely control the hospital
expenditure (Alam and Lawrence, 1994).
But, several significant changes have been taken place in health care sector and hospital sector.
Market mechanism and managerial principle have been introduced in many countries such as the
UK and Germany. Subsequently, the old role of accounting as well as the capacity of public
hospital accounting seems to be not fit anymore. In turn, the traditional accounting practices have
been changed gradually over the years.
Under the mission to achieve higher efficiency and contain costs, the accounting innovation that
have been taken in public hospitals could be categorized: (1) improved role of accounting in
public hospitals, (2) the adoption of new accounting techniques, (3) the encouragement of health
professionals‟ involvement in hospital accounting and controlling.
Firstly, the role of accounting in public hospitals has been expended from a reporting tool to a
controlling device. For example, Lapsley (1994) confirmed how market reforms in the U.K.
National Health Service (NHS) as well as the creation of self-government hospital trusts have
encouraged the application of budgetary control in the UK hospitals. Previously, the public
hospitals were not primarily established by the need to produce and sell its products. But, the
self-governing hospital trusts seeks profit since they must earn a return on capital employed
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
(Lapsley, 1994). Thus, he argues that the role accounting in the organizations depends on the
nature of the organization itself.
Secondly, new management accounting techniques that originated from private sector have been
adopted in public hospitals. These adoptions are aimed to serve greater demand of more detailed
and relevant accounting information. As the milestone, accrual accounting has been adopted to
replace cash accounting in public hospitals (see Eriotis et al., 2011, the adoption of accrual
accounting in Greek public hospitals; Pettersen and Nyland, 2011, for the adoption of accrual
accounting in Norwegian public Accounting). More recently, public hospitals in many countries
have also adopted private sector originated management accounting techniques e.g. Activity
Based Costing (ABC). For example, Järvine (2006) studied the motivation behinds the adoption
of ABC in two Finnish university hospitals. Similarly, Pomberg et al. (2013) found the intention of
Vietnamese government hospitals to improve their accounting system as a response to the
rapidly changing environment through ABC and other private business approaches.
Thirdly, the initiatives to involve hospital physicians in managerial process have been started
(Fitzgerald, 1994). This is apparently the most significant stage in establishing a new role of
accounting in medical area, in turn, achieving the ultimate goal of the hospital accounting
innovation. Pettersen (1995) suggests that physicians play a key role in hospital management
accounting because they control hospital resource allocation (Pettersen, 1995). The accounting
innovation, thus, needs to penetrate to their clinical actions; otherwise the accounting change
might fail to meet its objectives (Pettersen, 1995).
Specifically, the development of DRGs based PPS could trigger accounting innovation in public
hospitals. Based on contingency theory approach, Rayburn and Rayburn (1991) have
demonstrated how the role of accountant in hospitals has increased after the introduction of
DRGs based PPS Medicare reform in the U.S hospitals. The new PPS has raised several new
accounting issues e.g. reporting losses on Medicare in-house accounts and offsetting profits on
Medicare in-house accounts and accelerated financial risk in hospital sectors as the environment
become more hostile and uncertain. Consequently, accountant in the hospitals have gain a more
vital position in key decision making process followed by increasing demand on cost-benefit
studies.
In another major study, Hill (2000) also confirmed that DRGs system has caused the adoption of
more complicated costing systems over the 1980s in the U.S hospitals. These adoptions are
required as the hospitals can only optimize their profit through managing and controlling costs as
prices are dictated by external parties in DRGs payment system (Hill, 2000).
Such accounting innovation could be understood by using contingency theory. The proponents of
contingency theory assume that accounting design including the adoption of new accounting
techniques could be triggered by change of its environment, technology, organizational structure,
and strategies (Jones, 1985). This theory assumes that a universal accounting system which
equally fit for all organizations in all situations is assumed to have never existed (Jones, 1985,
Islam and Hu, 2012). On the other words, the optimal organizational structure, including
accounting, for a given situation cannot be separated from the nature of the external environment
and the level of task uncertainty (Rayburn and Rayburn, 1991). Accordingly, configuration of the
internal accounting system, according to this theory, is contingent on the differing constraints on
organizations, namely (1) organizational attributes, (2) environment and technology and (3)
decision making styles (Rayburn and Rayburn, 1999). Hence, accounting change can be seen as
an organizational response toward occurred changes in order to remain effective (Jones, 1985).
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
As the importance of efficiency improvement in Indonesian public hospitals, accounting should
play a more significant role in public hospitals. However, the infiltrate of economic and accounting
logic in public hospitals can be problematic because the core hospital activities are controlled by
head of physicians who might not ready for such change e.g. transparent organizational
evaluation (Llewellyn and Northcott, 2005). Subsequently, any efficiency inspired reforms
including accounting innovations could be challenged or even rejected by physicians.
III. Research Method and Methodology
A multiple-case study method has been selected as the research method in this study. Preston
(1992) believes that accounting changes cannot be understood separately without linking them
with environmental changes or the internal structure. Case study research provides “[…] the
ability to undertake an investigation into phenomena in its context” (Humphrey and Scapens,
1996: 89). It can be used to improve our understanding about daily function of accounting and
their paradoxes within hospitals (Humphrey and Scapens, 1996).
Moreover, it seeks the answer of: „how‟ do the new payment system and new organizational form
encourage innovation in the public hospitals. Thus, this explorative and explanatory case study
was carried out on two Indonesian public hospitals. Both hospitals operate in the same region
(Jakarta and surrounded areas) but have different type, sizes and number of staffs.
In this research, there are four sources of evidences that have been used to collect required
research data, namely interviews, documentation, archival records and direct observation. For
example, direct observation to the office of senior or head of physicians, accounting and DRGs
coding software and its procedures facilitates the author to understand the role of physicians in
cost controlling, the role of accounting in medical activities and the usefulness of DRGs fees
information. However, the main source of data in this research is in-depth semi-structured
interviews. This method is selected due to its ability to capture more information and behaviour of
interviewees (Yin, 2009). In a depth interview, the researcher can ask about the fact of the matter
along with the opinion of the interviewees (Yin, 2009).
Criteria
Type
provision
Legal form
Alpha Hospital
Delta Hospital
of Maximal medical care Intermediate medical care
(Type A)
(Type B)
State
owned Provincial
government
Enterprise (BLU)
owned enterprise (BLUD)
Owner
MoH
A provincial government
Number of staffs 2,226 (2012)
808 (2012)
Number of beds 770 (2012)
282 (2012)
Table 1: Comparison of selected public hospitals
Sources: Hospitals‟ website and Profile of hospitals
The interviewees were top management and senior officers, accountants, head of physicians,
and other related senior officers. All interviews were conducted in the office of the interviewers
during the working hours, and most of them were tape-recorded.
IV. Result of the empirical study
Case 1: Alpha Hospital
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
Alpha Hospital is one of the biggest public hospitals in Indonesia. However, its management
accounting system has been partly functioned which mainly aims to calculate physicians‟ service
fees and unit costs as well as updating receivable account.
“Our management accounting unit has not functioned optimally as it suppose to be. We are
not able to provide financial analysis tool for each unit. We just provide unit cost information.
We have recently enhanced the system capacity because in the past there is no such
demand for detailed cost information” (Management accountant, Alpha hospital).
Furthermore, the previous organizational and payment system changes have not stimulated an
enhanced role of accounting in the hospitals although the hospitals have adopted accrual
accounting and Activity Based Costing (ABC) since the last several years. Accrual accounting
was adopted as one of the requirement of the new hospital organizational form (Perjan).
Meanwhile, ABC is adopted to respond to significant change of patient composition that affects
cash flow of the hospital2. The management of Alpha Hospital has realized that they need more
valid and detailed unit cost information to be able to negotiate tariffs with the insurance
companies (or the guarantee).
Physicians are still disjoined from accounting and cost controlling system while the accounting
department mainly deals with financial reporting activities. Thus, either demand or supply of
accounting information in clinics seems to be unchanged. On one hand, doctors are not
supported with sufficient accounting information for controlling. On the other hand, they mainly do
not have any interest in it and in fact, they ignore it.
“We „close our eyes‟ on that (controlling), we do not want to know how much money the
hospital receives from our patients or from the guarantee. We rarely discuss it with the
management accountant. We discussed only about our service fees. We have also no
interest in it” (Senior Doctor, Alpha Hospital)
Apparently, the DRGs payment system has not stimulated case mix accounting practice in the
hospital. Cost controlling and costing are still focused in aggregate/ department costs rather than
unit cost of each DRGs case. Consequently, the management does not have information to
evaluate the profitability and efficiency of each DRGs case.
“Cost controlling is still centralized (in management). The doctors are not yet attached to our
control system. They supposed to know the DRGs code of their patients. The system
(managerial duties and medical duties) is not integrated” (Head of Accounting Department,
Alpha Hospital)
Lastly, the absence of accounting innovation in the Alpha Hospital is accompanied by
unexpected hospital responses to the DRGs system. In fact, the management seem to disregard
the new PPS and its consequences, although it has caused financial losses due to unrecovered
patients‟ costs. In fact, the interviewees reported that the management has no specific strategies
to encounter the DRGs implication.
Case 2 Delta Hospital
Similar findings have been documented in case study of Delta Hospital. The hospital does not
have a separate cost controlling or management accounting department. Besides, the controlling
activities have been focused on cash flow than cost controlling. This can be associated with the
BLU status in which hospital need to cover the salaries of non-civil servant staffs.
2
Since 2013, the hosptial have more patients with insurances rather than general patients. The medical bills of the patients with insurances are paid directly
and the tariffs have to be negotiated with the payer. Meanwhile, the general patients pay their bills direclty and in cash after discharge. Such shift of patient
composition has disrupted the hospital cash flow because the claim process of the medical bills of patients with insurances might take one or two month.
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Proceedings of 5th Asia-Pacific Business Research Conference
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Furthermore, a modified accrual accounting is adopted in the early 2000s as Delta Hospital was
transformed to a Swadana Hospital3. In addition, fully accrual accounting and ABC were adopted
after the hospital was transformed as a pure corporate public hospital (PT or corporation) in
2004. Thus, it might be concluded that substantial accounting innovation had taken place when
the hospital gained a more autonomous organizational form.
“Before gaining BLU status or PT status, the hospital duty was only to manage hospital
(core) activities, no requirement to develop the hospital at all. The financial reporting was
not mandatory because these accounting tasks were done by the local government as the
owner. The reporting was centralized because the assets were recognized as the owner‟s
assets rather than the hospital‟s asset. Our duties were only to report our activities and how
much revenues we had generated” (Head of Accounting Department, Delta Hospital)
Furthermore, the segregation of function between medical activities and managerial activities is
clearly observable. The physicians believe that they do not have responsibility of cost controlling
and calculation. Besides, they argue they do not have time to involve in cost controlling due to
overload patient number. This seems to be the common reason of physicians‟ reluctance to
participate in cost controlling activities in hospitals.
“The relationship between hospital and doctors is like a railway track. We work together but
have never been united. Regarding accounting information, we receive only our pay check.
Other accounting information is not accessible. The management does not open this
information to us. We receive only information regarding our consultation tariff, medical
check-up tariff, Rontgen tariff” (Head of Medical Committee, Delta Hospital)
Alike Alpha Hospital, change of hospital strategy due to the adoption of DRGs system is not
documented. The common and classical hospital behaviour e.g. Average Length of Stay (ALOS)
reduction has not occurred in the hospital. In fact, the management might not need to do so as its
owner covers the hospital‟s deficit.
V. Discussion and conclusions
Previous management accounting studies have documented the linkage between DRGs based
PPS adoption with accounting innovation in hospitals (e.g. Hill, 2000).In this context, contingency
theory argue that such linkage can be viewed as hospitals „responses to the change of hospitals‟
contingent factors that are resulted from the introduction of DRGs based PPS (Rayburn and
Rayburn, 1999). However, this study finds the absence of such expected accounting innovations
in the public hospitals although DRGs system has been adopted since 2008.
Moreover, the DRGs system has not stimulated accounting innovations both in Alpha Hospital
and Delta Hospital. Accounting still plays a secondary role and financial reports are still the
primary output of the accounting department. The latest adoption of new accounting techniques,
namely accrual accounting and ABC can be attributed to the new organizational form of the
hospitals rather than DRGs based PPS adoption. Additionally, the expected case mix accounting
has not emerged in both hospitals.
This study found that the Alpha Hospital and Delta Hospital are still traditionally managed. Firstly,
Alpha and Delta Hospitals are still substantially controlled by their owners. As the trade off, the
owners provide such financial protection by covering hospitals‟ deficits and providing subsidies.
This situation apparently blocks the infiltration of economic logic in the public hospitals that have
been encouraged by the previous organizational and payment reforms. Secondly, domination of
physicians in the hospitals‟ top management has hindered the establishment of economic logic in
the hospitals because the management have different priorities and concern, rather than
efficiency improvement.
3
Before this transformation, the hospital was a budgetary unit of the owner in which reporting was less important
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
“I have been working here for ten years and we never have surplus in our financial report to
the government. The deficits are not a problem. In fact, the government will question us if
we gain surplus because this hospital is not for profit but to improved service quality. Thus,
we do not need to use full costing in our tariff because part of them is covered by the
government. If our tariffs are high, the government will not afford to reimburse them all”
(Head of Accounting Department, Delta Hospital)
Furthermore, the absence of accounting innovations in both hospitals could be attributed to the
traditional role of the owner and conventional mindset of the public hospital managements. Both
owners and managements of Alpha Hospital and Delta Hospitals are still following the traditional
mind-set of public service provision. They believe that public hospitals are not profit-oriented
organizations, rather cost centres. Such traditional mind-set shapes priority of the hospitals
mission. In fact, the owner‟s ultimate priority apparently is not cost-efficiency, but quality,
capacity, and productivity of public hospitals.
“In Indonesian public hospitals, the main focus of management is the medical services, not
financial administration. Financial administration follows the medical service. They concern
more on the quality rather than efficiency. Even the MoH give more rewards for quality
improvement to their hospitals (Head of Planning and Budgeting Department, Alpha
Hospital)
In line with the contingency theory, this study also suggests that the selection of internal
accounting depends on hospitals‟ strategies (Islam and Hu, 2012). The DRGs based PPS have
changed significantly neither hospital environment nor organizational setting. Accordingly, it has
not introduced the required financial uncertainty in the hospitals as the owners are remaining act
as the financial guarantor of the hospitals. Consequently, management of the hospitals are not
incentivized to contain costs and to implement new strategies to encounter the new payment
system implication. Therefore, the existing management accounting practices are still considered
fit to the management‟ needs.
“There is no such punishment if the hospital has deficit at the end of the year. This hospital
is a public service provider. We do not focus only in financial aspect but most important is
the hospital benefit for the people” (Financial Director, Alpha Hospital)
“If the hospital has deficits, the owner will cover that. We do not need to be worried. We just
need to tell the owner that we has deficit, and the owner immediately will cover it” (Vice
Director for Financial Affairs, Delta Hospital)
Additionally, this case study research confirms that hospital payment reform is unlikely lead to
accounting innovation if a powerful economic interest does not exist in the public hospitals
(American Accounting Association, 1965 as cited in Kurunmaki, 1999). The BLU status of the
hospitals does not construct the required economic interest in both hospitals because the status
only allows the hospitals to manage their own collected revenue while other crucial decisions in
the hospitals are under the owners‟ intervention. On top of that, the public hospitals are financially
protected by their owners, and in turn, the managements are discouraged to control the hospitals
costs. The primary management financial priority is to ensure a positive hospital cash flow in
order to pay the salary of non-civil servant staffs.
Finally, this research suggests the needs of further study on how accounting system should be
changed in order to survive in the DRGs system. Such study is imperative because the capacity
of hospital accounting can determine its response to DRGs system. Moreover, other study that
seeks required changes on public hospitals to establish powerful economic interest in the
hospitals could be worthwhile as the government initiatives efficiency improvement in the
healthcare sector.
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Proceedings of 5th Asia-Pacific Business Research Conference
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