Tropical Medicine and International Health
doi:10.1111/j.1365-3156.2007.01815.x
volume 12 no 4 pp 554–563 april 2007
Effect of costing methods on unit cost of hospital medical
services
Arthorn Riewpaiboon1, Saranya Malaroje1 and Sukalaya Kongsawatt2
1 Faculty of Pharmacy, Mahidol University, Bangkok, Thailand
2 Bureau of Health Policy and Planning, Ministry of Public Health, Bangkok, Thailand
Summary
objective To explore the variance of unit costs of hospital medical services due to different costing
methods employed in the analysis.
methods Retrospective and descriptive study at Kaengkhoi District Hospital, Saraburi Province,
Thailand, in the fiscal year 2002. The process started with a calculation of unit costs of medical services
as a base case. After that, the unit costs were re-calculated based on various methods. Finally, the
variations of the results obtained from various methods and the base case were computed and compared.
results The total annualized capital cost of buildings and capital items calculated by the accountingbased approach (averaging the capital purchase prices throughout their useful life) was 13.02% lower
than that calculated by the economic-based approach (combination of depreciation cost and interest on
undepreciated portion over the useful life). A change of discount rate from 3% to 6% results in a 4.76%
increase of the hospital’s total annualized capital cost. When the useful life of durable goods was
changed from 5 to 10 years, the total annualized capital cost of the hospital decreased by 17.28% from
that of the base case. Regarding alternative criteria of indirect cost allocation, unit cost of medical
services changed by a range of )6.99% to +4.05%. We explored the effect on unit cost of medical
services in one department. Various costing methods, including departmental allocation methods,
ranged between )85% and +32% against those of the base case. Based on the variation analysis, the
economic-based approach was suitable for capital cost calculation. For the useful life of capital items,
appropriate duration should be studied and standardized. Regarding allocation criteria, single-output
criteria might be more efficient than the combined-output and complicated ones. For the departmental
allocation methods, micro-costing method was the most suitable method at the time of study.
conclusions These different costing methods should be standardized and developed as guidelines
since they could affect implementation of the national health insurance scheme and health financing
management.
keywords costing method, unit cost, medical service, hospital
Introduction
As health care expenditure has been increasing, it is
essential for the public health sector to use existing
resources efficiently through improving and controlling the
management of hospital operations. Information regarding
unit cost analysis is important for hospital administrators
to make decisions for planning, budgeting, controlling and
assessing the organization (Newbrander et al. 1992;
Shepard et al. 2000). In some developing countries with
middle income economies where there has not been a
reference unit cost and/or standard hospital costing system
for medical services, individual hospitals conduct unit
cost analysis employing different methods. For example,
methods of capital cost calculation are based on
554
accounting-based approaches (averaging the capital
purchase prices throughout their useful life) and economicbased approaches (combination of depreciation cost and
interest on undepreciated portion over the useful life),
various direct cost distribution criteria, various indirect
cost allocation criteria, and various methods of departmental allocation. Different methods result in different
calculation outcomes. The problem comes up when
efficiency is compared because we do not know what the
effect of different costing methods on the variance is.
Information on unit costs of medical services is also needed
for performance-based budgeting systems and financing
methods of insurance schemes. Some developing countries
have introduced health reforms. For example in Thailand,
hospitals directly receive provider payments from the
ª 2007 Blackwell Publishing Ltd
Tropical Medicine and International Health
volume 12 no 4 pp 554–563 april 2007
A. Riewpaiboon et al. Effect of costing methods on unit cost of hospital medical services
Social Security Office, the Comptroller General’s Department and the National Health Security Office, for private
employees under the Social Security Scheme (SSS), civil
servants under the Civil Servants Medical Benefit Scheme
(CSMBS) and others under the Universal Coverage of
Health Care Scheme (UC). The hospitals that provide
services for patients under the CSMBS are reimbursed by a
retrospective fee-for-service model (Sriratanaban 2002).
The rest of health insurance schemes pay to hospitals based
on negotiated capitation. To negotiate appropriate rates of
payment or budget based on the results of hospital cost
analysis, costing methods have to be standardized.
Recently, the Centre for Health Economics of the
University of York published a review on methodologies of
costing health care services (Mogyorosy & Smith 2005). The
theoretical foundation of costing is accounting vs. economic
cost; economic and accounting assessment apply different
costing methodologies. An example of potential differences
between the accounting and the economic approach in
valuing resources consumed is the costing of capital assets.
The accounting approach uses historical acquisition price;
the economic approach uses replacement value. Practically,
costing studies to value resource use in production goods or
services can be classified into five general ways: (a) direct
measure of costs; (b) cost accounting methods; (c) standard
unit costs; (d) fees, charges and/or market prices; and (e)
estimates/extrapolations. The review covered various costing methods but did not provide empirical data of their
effects on unit cost of services.
To our knowledge, in the hospital industry of Thailand
there was only one report studied on costing methodology.
This study proposed standard and quick methodologies of
unit cost analysis (Tisayaticom et al. 2001). The standard
costing methodology consists of five steps: (1) organization
analysis and cost centre classification; (2) direct cost
determination; (3) indirect cost determination; (4) full cost
determination; and (5) calculating unit cost of medical
services. We did not find any study comparing on
alternative methods employed in the standard costing
methodology. The purpose of this study was to explore the
variance of unit costs of hospital medical services given by
different costing methods employed in the analysis. The
conceptual frameworks of costing methods tested are
represented in Figure 1. The results of this study could be
used as information for establishing standards or recommended methods of unit cost analysis of medical services
for hospital management, and for budgeting and insurance
payment systems.
Methods
Study design and study population
This study was designed as a retrospective descriptive cost
analysis based on a provider perspective in the fiscal year
2002. The study population was district hospitals (30–60
beds) in Thailand. Kaengkhoi Hospital in Saraburi Province in central Thailand was selected by convenience
method.
Study procedures
The study procedure consisted of two parts. Part 1 was a
base case calculation employing the standard five-step
Unit cost of medical services
Average
Department allocation
Ratio of cost to charge
RVU
Micro – costing
Full cost of ACC
Direct cost
Indirect cost
Allocation of
indirect cost
Method
Criteria
ACC
TCC
Direct cost of cost centers
Combined
Distribution criteria
Discrete
Single
Single
Combined
Shared
Value of resources
Capital cost
Accounting-based
Economic-based
Figure 1 Conceptual framework of the
study. ACC ¼ absorbing cost center;
TCC ¼ transient cost center; RVU ¼
relative cost center.
ª 2007 Blackwell Publishing Ltd
Quantity of recurrent
resources consumed
Labour
Material
Quantity of
capital items used
Building Construction Equipment Vehicle
555
Tropical Medicine and International Health
volume 12 no 4 pp 554–563 april 2007
A. Riewpaiboon et al. Effect of costing methods on unit cost of hospital medical services
Table 1 Variation of total annualized capital cost due to approaches and discount rate
Base case*
Accounting-based approach
6% Discount
Change
Cost centre
Administration
Clerical works
Transportation
Accounting
Purchasing
Maintenance
Nurse administration
Medical record
Registration
Central supply
Catering
Health education
Counsellingà
Pharmacyà
Laboratoryà
Radiologyà
Physical therapyà
Operating roomà
Emergency roomà
Dentistryà
Outpatientà
Male wardà
Female wardà
Sanitationà
Health promotionà
Total
US$
US$
US$
Change
%
US$
US$
%
25 342
1579
8707
1579
2643
4243
590
1803
7629
12 167
4312
3015
1044
7178
11 596
6517
4754
3451
6760
9077
12 011
17 223
22 160
10 535
2959
21 770
1378
7745
1378
2336
3568
505
1577
6661
10 446
3690
2646
913
6162
10 447
5767
4093
2946
5857
7995
10 574
14 783
19 240
9236
2559
)3571
)200
)962
)200
)307
)675
)84
)226
)968
)1722
)623
)368
)130
)1016
)1149
)750
)661
)505
)904
)1081
)1437
)2440
)2920
)1299
)400
)14.09
)12.70
)11.04
)12.70
)11.60
)15.91
)14.29
)12.51
)12.68
)14.15
)14.44
)12.22
)12.46
)14.15
)9.91
)11.51
)13.90
)14.63
)13.37
)11.91
)11.96
)14.17
)13.18
)12.33
)13.51
26 068
1653
9385
1653
2810
4249
611
1887
8086
12 522
4418
3169
1096
7410
12 485
6987
4891
3544
7051
9694
12 809
17 797
23 152
11 352
3078
726
75
678
75
167
6
21
84
458
355
105
154
53
232
889
470
137
94
290
618
798
574
992
817
119
2.87
4.72
7.79
4.72
6.33
0.14
3.55
4.68
6.00
2.92
2.44
5.10
5.07
3.23
7.67
7.21
2.89
2.71
4.29
6.81
6.65
3.33
4.47
7.76
4.03
188 872
164 276
)24 596
)13.02
197 858
8986
4.76
*Base case: economic-based calculation with 3% discount and 5-year useful life of equipment.
Transient cost centre; àabsorbing cost centre.
costing approach outlined above (Rigden 1983; Drummond et al. 1997; Tisayaticom et al. 2001) with the
following steps (Riewpaiboon 2003). Organizational
structure was analysed and classified as cost centres. All
cost centres were classified into two groups: transient cost
centres and absorbing cost centres (Table 1). Direct costs
of each cost centre were determined by summation of its
capital costs, labour costs and material costs. Capital cost
consists of two components: costs of capital items, and
opportunity costs of land and stocked materials. Labour
cost of individual refers to the summation of salaries,
wages, incentives and fringe benefits such as accommodation, training expenses, and healthcare expenses. Then
individual labour cost was assigned to cost centres based
proportion of time spent for each cost centre. Material
costs cover drug and medical material (e.g. scientific
materials and medical supplies), office materials, household
materials, petrol and utilities (electricity, water, telephone
and mail). Maintenance costs of equipment, vehicles and
556
buildings are classified as material cost because they recur.
The specific methods employed for base case analysis were
as follows:
The economic-based approach of capital costing covers
both depreciation cost (the rate at which the capital is ‘used
up’) and opportunity cost (interest) of making the investment (the funds tied up in the asset) (Edejer et al. 2003).
The calculation is to divide current price by annuity factor.
Current price is the result of adjusting purchase price by
consumer price index (Kumaranayake 2000). The annuity
factor is calculated based on useful life and discount rate
(Drummond et al. 1997). The discount rate, as recommended by WHO guide (Edejer et al. 2003), was 3% for
base case and 6% for sensitivity analysis.
Useful life was taken as 5 years for capital items and as
20 years for buildings (Creese & Parker 2000; Tisayaticom
et al. 2001). According to the Comptroller General’s
Department of Thailand useful life of medical equipment is
3–8 years and of buildings, 8–40 years. Creese and Parker
ª 2007 Blackwell Publishing Ltd
Tropical Medicine and International Health
volume 12 no 4 pp 554–563 april 2007
A. Riewpaiboon et al. Effect of costing methods on unit cost of hospital medical services
(2000) stated that ‘For consistency, it is best to use the
same time period for a given type of vehicle for the entire
analysis’. Therefore, in practice, we use the average of
5 years for equipment and 20 years for buildings. Base case
allocation criteria of indirect cost allocation followed the
simultaneous equation method (Drummond et al. 1997).
Micro-costing of departmental allocation (Leaner et al.
1985; Suver & Cooper 1988) starts by determining direct
cost of each service (amount of countable resources directly
used in providing such services). Then indirect cost of
services (the result of the full cost of each department
subtracted by sum of total direct cost of all services) is
allocated to each service based on proportion of direct cost
of each service.
Part 2 comprised analysis of cost variance employing
various costing methods and assumptions as follows:
Accounting-based approach of capital costing: this is the
financial cost calculated by averaging the capital purchase
prices throughout their useful life (Creese & Parker
2000; Tisayaticom et al. 2001), vs. the economic-based
approach.
Useful life was taken as 10 years vs. 5 years for
depreciable assets, excluding buildings and construction.
Ten years is the approximate average of useful years of
capital assets recommended by the Comptroller General’s
Department (Riewpaiboon 2003).
Proposed allocation criteria vs. base case allocation
criteria of indirect cost allocation: for the Clerical Works
supporting cost centre, number of documents was used
as allocation criteria instead of weighted criteria of
number of document and person-year equivalent. Number
of person-months involved in payroll operations was used
instead of weighted criteria of payroll and patient-service
charging for the accounting cost centre (Table 2).
Ratio of costs to charges (RCC) and relative value unit
(RVU) (Finger 1982; Suver & Cooper 1988) vs. microcosting of departmental allocation. RCC is computed when
we know the full cost of the department, prices and total
number of services produced. First, total expected charge is
calculated using unit prices and total number of services
produced. Then, full cost is divided by total expected
charge resulting in the RCC. Finally, the ratio is used to
multiply unit price, resulting in unit cost of each service.
For example, if the total charges are US$100 000 and total
costs are US$75 000, the RCC is calculated as 0.75. The
RCC is then used for determining the costs of services.
Charge (unit price) of individual service is multiplied by
0.75 resulting in unit cost of each service. RVU is a
weighted procedure method. This method concentrates on
each production or service cost of individual department.
Each service is assigned a number of relative units which
represents its relative resource consumption or how much
time each one uses. In order to construct the RVUs,
resource consumption or cost for each service is determined
and all of them are computed. A service which is twice
as costly as another will be assigned a relative value
twice as high as that of the comparison service. In some
methods of establishing the RVU, standard time of
each activity or service is used. In application, for example,
a blood gas test might have a weight of 40, whereas an
acetone test might have a weight of 10. Thus, if a
laboratory performed 100 blood gas tests and 200 acetone
Table 2 Allocation criteria
Cost centre
Base case criteria
Proposed criteria
Administration
Clerical works
Man–year equivalent
Number of document and man-year equivalent
(estimated time spent 5:1)
Distance (km) of transportation
Number of man–month salary paying and number of
patient-service charging (estimated time spent 6:1)
Monetary value of office materials to each cost centre
Job requested by cost centre
Man–year equivalent of nursing personnel
Number of inpatient
Patient visit
Number of big materials supplied, number of small
material supplied, and weight of clothes supplied
to each centre (estimated time spent 2:1:2)
Number of general meals and number of special meals
(cost of meal 1:1.6)
Number of answer the questions, educating, and admission
patient from OPD (estimated time spent 1:6:2)
Same as base case
Number of document
Transportation
Accounting
Purchasing
Maintenance
Nursing Administration
Medical record
Registration
Central supply
Catering
Health education
ª 2007 Blackwell Publishing Ltd
Same as base case
Number of man–month salary paying
Same as base case
Same as base case
Same as base case
Same as base case
Same as base case
Number of material (package) supplied: weight
of clothes (km) supplied to each centre (1:1)
General meal:special meal (1:1)
Number of education services
557
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volume 12 no 4 pp 554–563 april 2007
A. Riewpaiboon et al. Effect of costing methods on unit cost of hospital medical services
tests, there would be a total of 6000 RVUs (40 units · 100
tests ¼ 4,000; 10 units · 200 units ¼ 2000;
4000 + 2000 ¼ 6000). If the full cost of the laboratory
(both direct costs and those assigned through the allocation
process) were $9600, the cost per RVU would then be
$1.60 ($9600/6000 total units). Therefore, the cost of a
blood gas test would be $64 (40 units · $1.60) and acetone
test would be $16 (10 units · $1.60). In this study,
material costs were used to calculate RVU of Laboratory
Department. Time spent in giving services was calculated
as a proportion of the remainder of the cost.
Results
Effect of different capital costing methods
For base case, total hospital cost was million US$1.17
(US$1 ¼ 38 Thai baht). Capital, labour and material
costs accounted for 17.8%, 54.4% and 27.8%, respectively. In recalculating, we used the accounting-based
approach of capital costing rather than the economicbased approach. The results indicated a decrease of total
annualized capital costs of the hospital of US$24 596 or
13.02% (Table 1). The effect on unit cost of medical
services is shown in Table 5. The unit costs of surgery
services fell by 3–4%.
Effect of different discount rates
The sensitivity analysis of discount rate was tested using a
6% discount rate in the calculation instead of 3% of the
base case. This resulted in an increase of total annualized
capital cost by 4.76%. The changes by cost centres ranged
between 0.14% and 7.76% (Table 1). Effect on unit cost
of medical services is demonstrated in Table 5. The unit
costs of surgery services rose by 4%.
Effect of different useful lives
When useful life is extended, the capital cost of new items
falls. Meanwhile, some items that are supposed to have no
capital cost because they are over the short useful life have
a capital cost based on longer useful life. In this study,
when useful life of depreciable assets, excluding buildings
and construction, was changed from 5 years to 10 years,
429 additional items had to be calculated in the cost. In the
end, total annualized capital costs of these assets fell by
US$468.48 (17.28%) (Table 3). At department level, the
changes of departments’ total cost ranged from )46% and
+70%. The effect on unit cost of medical services is
demonstrated in Table 5. The unit costs of surgery services
fell by 1–2%.
558
Table 3 Variation of total annualized capital cost due to useful lives
Cost centre
Administration
Clerical works
Transportation
Accounting
Purchasing
Maintenance
Nursing
administration
Medical record
Registration
Central supply
Catering
Health education
Counselling
Pharmacy
Laboratory
Radiology
Physical therapy
Operating room
Emergency room
Dentistry
Out patient
Male ward
Female ward
Sanitation
Health promotion
Total
Depreciation costs*
(US$)
Cost change
5-year
useful life
US$
10-year
useful life
%
219
22
205
22
50
2
6
299
17
194
17
51
1
11
80.04
)5.24
)10.23
)5.24
0.21
)0.83
4.43
36.53
)23.29
)5.00
)23.29
0.42
)46.31
70.21
25
138
107
32
46
16
70
268
142
41
28
88
186
241
173
299
247
36
17
93
120
21
28
10
48
182
144
24
19
130
117
139
129
221
184
26
)8.82
)44.73
13.26
)10.94
)18.62
)5.86
)22.11
)86.05
2.38
)17.86
)9.20
42.21
)69.69
)101.36
)43.63
)78.19
)62.89
)9.54
)34.67
)32.37
12.39
)34.48
)40.11
)36.71
)31.56
)32.07
1.68
)43.07
)32.61
48.19
)37.39
)42.09
)25.20
)26.13
)25.50
)26.50
2712
2243
)468.48
)17.28
*Capital assets except building and construction.
Effect of different allocation criteria
In this study, supporting departments (or transient cost
centres) were General Administration, Clerical Works,
Transportation, Accounting, Purchasing, Maintenance,
Nursing Administration, Medical Records, Central Supply,
Catering and Health Education. Combined-output criteria
for indirect cost allocation were changed to the singleoutput criteria. For example, in the Accounting cost centre,
the number of person-months for payroll combined with
number of patient-service charging (6:1) was substituted by
the number of person-months for payroll. This result
indicated that variation occurred in decreases of counselling ()0.29%), physical therapy ()0.57%), dental
()0.81%), outpatient ()6.99%). Emergency service
(+4.05%) was the cost centres with the highest increase in
full costs. There were some absorbing cost centres with
constant full costs (Table 4).The effect on unit cost of
ª 2007 Blackwell Publishing Ltd
Tropical Medicine and International Health
volume 12 no 4 pp 554–563 april 2007
A. Riewpaiboon et al. Effect of costing methods on unit cost of hospital medical services
Table 4 Variation of production cost centres’ full cost due to
different allocation criteria
Full cost (US$)
Cost centre
Base case
Proposed
allocation
criteria
Counselling
Pharmacy
Laboratory
Radiology
Physical therapy
Operating room
Emergency room
Dentistry
Out patient
Male ward
Female ward
7308
206 802
69 071
26 455
15 426
16 431
131 877
56 686
163 963
182 419
203 160
7287
208 008
69 475
26 755
15 337
16 598
137 213
56 225
152 497
182 880
205 529
Cost change
US$
%
)21
1206
404
300
)89
167
5336
)461
)11 466
461
2369
)0.29
0.58
0.58
1.13
)0.57
1.02
4.05
)0.81
)6.99
0.25
1.17
medical services is shown in Table 5. The unit costs of
surgery services were increased by 1%.
Effect of different departmental allocation methods
Operating room cost centre producing surgery services was
selected for testing effect of departmental allocation
methods. Comparing results calculated by micro-costing
method to the ratio of cost to charge method (RCC)
revealed that unit costs of the surgery services varied from
an 85% decrease to a 32% increase (Table 5). Analysis of
the RVU ()25% to +15%) showed that the variation of
unit costs of medical services was less than that of the RCC
method (Table 5).
Discussion
Accounting-based approach vs. economic-based approach
of capital costing
Unit costs from the hospital cost analysis are used for price
setting, reimbursement and other payment negotiations.
Therefore, the revenue covers capital cost, which will be
accumulated for equipment replacement in the future. In
Thailand, most studies have used the accounting-based
approach due to its simplicity. The practical accountingbased approach is simply a division of purchase price of a
capital item by its useful years. However, it ignores the
concept of opportunity cost and costs in time difference
(Drummond et al. 1997). This can distort the reality. This
study, for instance, capital cost of buildings and capital
items calculated by accounting-based approach was 13%
less than that calculated by the economic-based approach.
If the results were used for price setting or financial
ª 2007 Blackwell Publishing Ltd
planning, the hospital would lose by US$24 596 per year.
The bigger hospitals with more capital items would lose
more. These results confirm WHO guidelines that the
economic-based approach is appropriate for calculating the
capital costs of hospital cost analysis (Shepard et al. 2000).
Effect of different discount rates
In addition, the amount of difference also varied based on
the discount rate employed in the calculation. The discount
rate is based on nominal interest and inflation rate in the
future (Kumaranayake 2000; Walker & Kumaranayake
2002). This study showed that the change of discount rate
from 3% to 6% resulted in 4.76% (US$8986) increase of
the total annualized capital cost. The change of discount
rates affected the total hospital cost by 0.77% (US$8986 of
million US$1.17). In terms of business management, the
country specific rates should be employed. To analyse
efficiency of hospitals, value of resources consumed are
compared. To avoid effect of discount rate, although the
effect is not much, discount rates employed in the
calculations should be the same. Therefore, the rates
proposed by reference organizations e.g. WHO, World
Bank, are quoted (Walker & Kumaranayake 2002).
Recently, it was suggested that 3% be used as a base case
and 6% for sensitivity analysis (Edejer et al. 2003).
Comparison of the variation of capital costs calculated by
using different useful lives
Because of the changes of the durable goods’ useful life from
5 to 10 years, more items could be included in the analysis.
These were the items that had been used for >5 years but
not >10 years at the time of analysis. It was discovered that
the additional number of capital items to be calculated was
26% (an increase from 1620 items to 2049 items). In
contrast, the average annual capital cost of each item
decreased due to the longer useful life. In summary, the
capital costs of the hospital decreased by 17.28% from base
case. At department or cost centre level, both decreases and
increases in cost can happen. This depends on the number
of capital resources in use for 6–10 years in each department. Care should be taken with generalization of the
results because capital items in different settings might be
different in quality and useful life period. Analyses conducted in the same country should employ the same useful
life guidelines. Due to different productions, prices and,
then, working years in various countries, each country
should develop its own guidelines with specific useful life
for each item. As a model, U.S. guidelines could be
consulted because they are quite specific and comprehensive
detailed (American Hospital Association 2004).
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Tropical Medicine and International Health
volume 12 no 4 pp 554–563 april 2007
A. Riewpaiboon et al. Effect of costing methods on unit cost of hospital medical services
Table 5 Unit costs and variation due to costing methods of surgery services
Costing method
Capital costing
Discount rate (%)
Useful year
Allocation criteria
Departmental allocation
Economic*
3
5
Base case
Micro-costing
Economic
3
5
Base case
RVU
Economic
3
5
Base case
RCC
Accounting
3
5
Base case
Micro-costing
Economic
6
5
Base case
Micro-costing
Economic
3
5
Proposed
Micro-costing
Economic
3
10
Base case
Micro-costing
Unit cost
Service
US$
US$
Change
(%)
US$
Change
(%)
US$
Change
(%)
US$
Change
(%)
US$
Change
(%)
US$
Change
(%)
Tubal resection
Skin graft
Excision
Debridement
Incision and
drainage
Curettage
113.16
296.17
152.55
99.70
153.42
130.34
220.82
141.56
97.93
132.07
15
)25
)7
)2
)14
149.03
149.03
29.81
89.42
22.35
32
)50
)80
)10
)85
109.10
286.14
147.19
96.13
148.13
)4
)3
)4
)4
)3
118.00
308.28
158.96
103.96
159.78
4
4
4
4
4
1
1
1
1
1
110.86
293.06
150.05
97.76
151.37
)2
)1
)2
)2
)1
)12
74.52
)26
97.45
)3
105.17 4
99.45
)1
100.96 89.19
114.32
299.18
154.10
100.72
154.98
101.99 1
*Base case scenario. Calculations of the changes are compared to the base case scenario.
RCC, ratio of cost to charge; RVU, relative valued unit.
Proposed allocation criteria vs. combined allocation
criteria of indirect cost allocation
Proposed criteria of indirect cost allocation were selected
and tested. The proposed criteria were simpler and easier
than those of the base case. This change does not affect the
total cost of the hospital but the variations occur only to
indirect cost of each cost centre, full cost of each cost
centre, and finally unit costs of medical services. Total
increase of some cost centres is equal to total decrease of
the rest. In this study, the variation of full costs of cost
centres were not great – between )6.99% and +4.05%.
Therefore, it might not be efficient to employ the combined
and complicated criteria.
Ratio of costs to charges and relative value unit vs.
micro-costing of departmental allocation
Analysis of RCC revealed that the variation of unit costs of
medical services was high, ranging from )85% to +32%,
which suggested that the existing prices (charges) of
medical services were not relevant to real costs of medical
services. This result was consistent with previous research
by Chotiwan et al. (1996). This could be due to the fact
that the hospital set the prices based on only direct material
cost and proportions of material cost in total unit costs and
the prices varied among services. In addition, public
hospitals are non-profit organizations and subsidized by
government. So prices do not always reflect cost.
560
Analysis of RVU showed that the variation of unit costs
of medical services was less than those of the RCC method.
The unit costs decreased by 25% and increased by 15%.
Ideally, RVU was calculated based on the very detail of
consumption of supplies, equipment or personnel as cost
drivers. However, in this study focusing on practicality, a
major resource consumed was selected as a cost driver. For
example, the emergency room had labour costs of 80.22%
of total direct costs. So, RVU was weighted based on time
used for producing one service. Direct time study or stopwatch is a technique usually applied to analyse the time.
For cardiopulmonary resuscitation (CPR) service, its
labour cost was US$2.7 out of US$65.7 (4.07%) of the
total direct cost of this service. Therefore, labour time was
not an appropriate cost driver for this service. Thus, the
variation of unit cost decreased by 93.73% from the microcosting method, while the variation of nebulization service
decreased by only 5.81% from the micro-costing method
because labour cost of this service was US$2 of US$3.3
(61.18%) of total direct cost of this service. Therefore, the
RVU method was suitable for calculating the unit costs,
and all services in cost centre had similar cost drivers.
Otherwise weighted RVUs are needed (Berlin et al.
1997a,b).
Implications for the national health insurance scheme
The variations of costing results given by different cost
methods could affect the implementation of national health
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Tropical Medicine and International Health
volume 12 no 4 pp 554–563 april 2007
A. Riewpaiboon et al. Effect of costing methods on unit cost of hospital medical services
insurance schemes. This is demonstrable in the case of
Thailand. Regarding health reform, the government
established the Universal Coverage of Health Care Scheme
(UC) managed by the National Health Security Office
(NHSO) in 2001. Until 2004, the UC covered approximately two-thirds of the Thai populations (Srithamrongsawat 2004). NHSO pays contracted providers based
on a capitation basis.
Capitation payment is estimated based on services
provided, i.e. outpatient care, inpatient care, prevention
and promotion services, high cost care, accident and
emergency care, capital replacement and emergency medical services. To estimate the payment rate, unit costs of
services are retrieved from studies available (Tangcharoensathien et al. 2001). The amount of payment has been
adjusted continuously based on revised unit costs of health
services (Patcharanarumol et al. 2004). For instance, capital replacement was increased from US$2.19 to 2.24 per
capita per year during 2003 and 2004 (Srithamrongsawat
2004). Capital replacement was based on the capital cost
of depreciable items used for providing services. These
amounts are to save up for replacement of the capital
assets. While there is inflation, accounting-based approach
employing purchase price will understate the amount
required to replace a given asset (Shepard et al. 2000).
While most international publications recommend the
economic-based approach of capital costing (Rehabilitation unit division of health promotion 1997; Creese &
Parker 2000; Shepard et al. 2000; UNAIDS 2000; Edejer
et al. 2003), in Thailand there have been guidelines
recommending the accounting-based approach (Kongsawatt 1995; Tisayaticom et al. 2001a,b). If the payment for
capital replacement mentioned earlier was estimated
employing the accounting-based approach, hospitals
would face problems on shortage of budget for purchasing
depreciable goods for substitution. The NHSO might use
the information for budget planning of capital replacement. An additional US$24 596 per year are required for a
district hospital. For high cost care, and accident and
emergency, parts of the budget are managed by the NHSO
regarding hospitals’ reimbursement. Hospitals are reimbursed based on cost of services provided. The reimbursement amounts are calculated based on unit cost of services
and quantity of services used by patients. This shows how
unit cost of medical services can affect the national health
insurance scheme. Therefore, the NHSO should provide
practice guidelines for hospital cost analysis.
Conclusion
The appropriate costing methods of unit cost analysis are
proposed as follows. Depreciation cost of buildings and
ª 2007 Blackwell Publishing Ltd
capital items calculated by accounting-based approach
was 13% less than that calculated by the economicbased approach. If the results were used for price setting
or financial planning, a similar hospital would lose by
US$24 596 per year, whereas the bigger hospitals with
more capital items would lose more. Therefore, the
economic-based approach is more appropriate. When the
useful life of capital items is changed, the capital cost of
hospital changes considerably. Therefore, the appropriate
useful life of all capital items should be studied and
standardized. Regarding indirect cost allocation criteria,
using one output of a supporting or transient cost centre
as indirect cost allocation criteria (then called singleoutput criterion) did not have much affect on the change
of unit cost of each cost centre. Given the constraints
and limitations of current practice and knowledge in
Thailand at present, and in terms of efficiency of
analysis, the single-output allocation criterion would
seem to be an appropriate tool. For departmental
allocation method, at the time of this study, microcosting method was the most accurate method in
calculating the unit cost of medical services since it could
reflect best the resources consumption. However, the
RVU method would be suitable for calculating the unit
costs, if all services in cost centres had similar cost
drivers. In the future, standard RVUs should be formulated based on the results of the micro-costing method.
Similarly, RCC would be an efficient method after the
prices have been adjusted based on the results of microcosting method.
Particularly as regards policy implications, standard
costing methods are needed for implementation and
planning of the national health insurance scheme. This is
because results from hospital unit cost analysis could affect
budget estimation. An appropriate budget would affect
hospital financial management and thus the sustainability
of the national insurance scheme.
Acknowledgements
We would like to thank Dr Prasitchai Mungjit, the
director of Keang-khoi Hospital and the hospital staff for
giving us the great opportunity to study at the hospital,
and the valuable suggestions. We also appreciate the
kind comments of Asst. Prof. Dr Rungpetch Sakulbumrungsil, Faculty of Pharmaceutical Science, Chulalongkorn University and Dr Usa Chaikledkaew, Faculty of
Pharmacy, Mahidol University for their advice on
improvement of analysis and manuscript preparation,
respectively. We are grateful to the Faculty of
Graduate Studies, Mahidol University for partial
financial support.
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volume 12 no 4 pp 554–563 april 2007
A. Riewpaiboon et al. Effect of costing methods on unit cost of hospital medical services
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Corresponding Author Arthorn Riewpaiboon, Department of Pharmacy, Faculty of Pharmacy Mahidol University, 447 Sri Ayutthaya
Road, Ratchathevi, Bangkok 10400, Thailand. Tel./Fax: +662 644 8694; E-mail: pyarp@mahidol.ac.th
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volume 12 no 4 pp 554–563 april 2007
A. Riewpaiboon et al. Effect of costing methods on unit cost of hospital medical services
Effet des méthodes d’analyse des coûts sur le prix unitaire des services médicaux d’hôpital
objectif L’objectif de cette étude a été d’explorer les variations dans les coûts unitaires des services médicaux d’hôpital selon différentes méthodes de
calcul de coûts utilisées pour l’analyse.
méthodes Etude rétrospective et descriptive entreprise à l’hôpital du district de Kaengkhoi dans la province de Saraburi en Thaı̈lande, au cours de
l’exercice budgétaire de l’année 2002. Le processus a commencé par une analyse des coûts unitaires des services médicaux en situation de base. Ensuite,
les coûts unitaires ont été re-analysés selon diverses méthodes. Enfin, les variations des résultats obtenus à partir des diverses méthodes et de la situation
de base ont été analysées par ordinateur et comparées.
résultats Les coûts financiers totaux, annualisés pour les bâtiments et les équipements, analysés par l’approche de comptabilité (i.e. en étalant la
valeur du prix d’achat sur la durée de vie utile des équipements) était 13,02% inférieure à ceux analysés par l’approche économique (i.e. en tenant
compte des coûts des amortissements et des intérêts sur la valeur fixe des équipements sur leur durée de vie utile). Un changement du taux d’escompte
passant de 3% à 6% mène à une augmentation de 4,76% des coûts financiers totaux annualisés de l’hôpital. Lorsque la durée de vie utile des
équipements durables est fixée à 10 ans plutôt qu’à 5 ans, les coûts financiers totaux annualisés de l’hôpital diminuaient de 17,28% par rapport à la
situation de base. Selon les critères alternatifs d’attribution des coûts indirects, les coûts unitaires des services médicaux variaient sur une échelle allant
de )6.99% à +4.05%. Nous avons exploré l’effet sur les coûts unitaires des services médicaux dans un département. Diverses méthodes d’analyse des
coûts tenant compte des méthodes d’attribution départementales varient entre )85% et +32% comparés à celle de la situation de base. Basé sur l’analyse
de variation, l’approche économique convenait mieux au calcul des coûts financiers. Pour la durée de vie utile des équipements, une durée appropriée
devrait être étudiée et standardisée. Pour les critères d’attribution, les critères à sortie unique seraient plus efficaces que ceux à combinaison de sorties et
compliqués. Pour les méthodes d’attribution départementale, la méthode par microanalyse des coûts était la plus appropriée au moment de cette étude.
conclusions Ces différentes méthodes d’analyse des coûts devraient être standardisées et développées pour servir de directives car elles pourraient
affecter l’implémentation du programme national de la sécurité sociale et de la gestion financière de la santé.
mots-clés méthode d’analyse des coûts, prix de revient unitaire, service médical, hôpital
Efecto de los métodos de cálculo de costes en los costes unitarios de los servicios médicos hospitalarios
objetivo El objetivo de este estudio era explorar las discrepancias, en los costes unitarios de los servicios médicos hospitalarios, debido a la utilización
de diferentes métodos para calcular el coste durante el análisis.
métodos Este estudio descriptivo y retrospectivo se realizó en el Hospital Distrital de Kaengkhoi, Provincia de Saraburi, Tailandia, durante el año
fiscal del 2002. El proceso se inició con el cálculo de los precios unitarios de los servicios médicos como caso base. Después de ello, los costes unitarios
fueron recalculados utilizando varios métodos. Finalmente, las variaciones de los resultados obtenidos a partir de varios métodos y el caso base fueron
computados y comparados.
resultados El coste total del capital por año de edificios y bienes capitales se calculado mediante un enfoque contable (sacando el promedio de los
precios de compra del capital, a lo largo de su vida útil) fue un 13.02% más bajo que el calculado utilizando un enfoque económico (combinación entre
el coste de la depreciación y los interese de la porción no depreciada a lo largo de la vida útil). Un cambio en la tasa de descuento del 3% al 6% resulta en
un aumento del coste total del capital por año del 4.76%. Cuando la vida útil de los bienes durables se cambió de 5 a 10, el coste total del capital por año
del hospital disminuyó un 17.28% con respecto al caso base. En lo que respecta a criterios alternativos de asignación de costes indirectos, el coste
unitario de los servicios médicos cambió en un rango de )6.99% a +4.05%. Exploramos el efecto de los costes unitarios de servicios médicos en un
departamento. Varios métodos de coste, incluyendo métodos de asignación departamental, estaban en un rango entre )85% y +32% comparado con
aquellos en el caso base. Basándose en los diferentes análisis, el enfoque económico era el más conveniente para el cálculo de costes de capital. Para
calcular la vida útil de bienes capitales, se deberı́a estudiar y estandarizar una duración apropiada. En cuanto a los criterios de asignación, aquellos con
un solo resultado (single-output) podrı́an ser más eficientes que los que tiene resultados varios (combined-output) y son más complicados. En el caso de
los métodos de asignación departamental, el método de micro-costes fue el más adecuado al momento del estudio.
conclusiones Estos diferentes métodos de calcular el coste deberı́an estandarizarse y desarrollarse como guı́as, puesto que podrı́an afectar la
implementación de los esquemas nacionales de seguros de salud y el manejo de los presupuestos sanitarios.
palabras clave métodos cálculo de coste, coste unitario, servicio médico, hospital
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