Health Economics
Topic Objective
• Critically discuss health economics and
financial management as applied to hospital
environment.
Content
• 1. Discuss and elaborate on health economics and
clinical research.
• 2. Critically discuss on clinical economics and
clinical decision making.
• 3. Discuss and elaborate on corporate and
business finance.
• 4. Elaborate health care accounting and
budgeting.
• 5. Discuss and elaborate on performance
measurement; clinical and nonclinical.
1. Discuss and elaborate on
health economics and clinical
research
.
• The evolution of the discipline of
economic evaluation in health care
shows that clinicians must play a decisive
role if we are to achieve the target of
having a more efficient health service.
• Interventions are not efficient or
inefficient per se, their efficiency is
determined when they are used in
clinical practice.
• Even if the practice of personalized medicine may
seem challenged by ethical issues, social and
individual value judgments are not mutually
exclusive.
• Health economics is not the end of clinical freedom
but the start of it. Doctors take up a central position
in the health care system and they may contribute to
finding the right balance between clinical freedom
and social responsibility..
• The pressure for health care systems to provide more
resource-intensive health care and newer, more
costly therapies is significant, despite limited health
care budgets.
• It is not surprising, then, that demonstration that a
new therapy is effective is no longer sufficient to
ensure that it can be used in practice within publicly
funded health care systems.
• The impact of the therapy on health care costs is also
important and considered by decision makers, who
must decide whether scarce resources should be
invested in providing a new therapy.
• The impact of a therapy on both clinical
benefits and costs can be estimated
simultaneously using economic evaluation,
the strengths and limitations of which are
discussed.
• When planning a clinical trial, important
economic outcomes can often be collected
alongside the clinical outcome data, enabling
consideration of the impact of the therapy on
overall resource use, thus enabling
performance of an economic evaluation, if
appropriate.
Introducing Health Economics
• Economics, Health and Health
Economics
• Key Economic Concepts
• Exercise
• Seminar Allocation
Economics, Health and Health
Economics
1. What is “Economics”?
2. What is “Health”?
3. What is “Health Economics”?
What is “Economics”?
Economics is …
• concerned with money?
• the same as accountancy?
• only practised by economists?
• objective?
Economics in a nutshell
•
•
•
•
Resources are scarce
What we “want” is unlimited
Therefore involves “choice”
Max. bens/min. resources = efficiency
Pessimist:
bottle ½ empty
Optimist:
bottle ½ full
Economist:
bottle ½ wasted
inefficient!
Economics and Money
ECONOMICS
=
costs (resource use)
benefits
choice
efficiency
MONEY
=
store of value
means of exchange
Economics  Accountancy
ECONOMICS
= costs (resource use)
benefits
choice
efficiency
ACCOUNTANCY = monitor of financial
transactions
Only Economists Practice
Economics?
ECONOMICS
= costs (resource use)
benefits
CHOICE
efficiency
Weigh-up relative benefits of each course of
action and choose the action which maximises
well-being.
Economics  Objective
All decisions are based on subjective value
judgements.
Economics makes these explicit.
Topic Versus Discipline
TOPIC
=
area of study
DISCIPLINE
=
conceptual apparatus
Health economics is the discipline of economics
applied to the topic of health.
What is “Health”?
World Health Organisation:
Health is a “state of complete physical, mental
and social well-being
“Health Economics” is often “Health Care”
Economics.
Task of Economics
Descriptive
Predictive =
Evaluative =
=
quantification
identify impact of change
relative preference over
situations
What is health
• Health is a multifaceted concept and not
easily measurable.
• WHO definition:
– Health is a state of complete physical and mental
well-being and not merely the absence of disease
or infirmity (WHO, 1948)
• Refer to peoples’ health status (how healthy
they are).
What is health
• Important part of human capital
– Human capital: value of learning, experience and
ability embodied in workers which increases
productivity and income.
– Asset: accumulates and depreciates
• Individual or households can improve their
health through use of health care, diet ..
– Production of health
• Health Production Functions
• Determinants of health
What is health care?
Definition: The prevention, treatment, and
management of illness and the preservation of
mental and physical well-being through the
services offered by the medical and allied
health professions.
What is health care?
• Important difference between health and
health care
– Health care can be traded on the market but
health cannot.
• Demand health care to improve our health
– Demand for Health Care
• Health care markets differ from markets for
other commodities
– Role for Government
Roots of health economics
Emerged as a sub discipline of economics in
the1960s with the publication of two
important paper:
1.
2.
•
Kenneth Arrow (1963) “Uncertainty and Welfare
Economics of Medical Care” The American Economic
Review.
Mark Pauly (1968) “The Economics of Moral Hazard:
Comment” The American Economic Review.
Concerned with the health market not with health or
health status.
What is health economics?
1. Health economics is the study of how
(scarce) resources are allocated to and
within the health economy.
•
•
•
Production of health care (doctors, specialists, or
nurses).
How do we distribute health care across the
population?
– Based on who can pay or who needs it or
some combination.
How much money should the government spend
on health care?
What is health economics?
2. Demonstrates the magnitude and
importance of the health sector
e.g. How fast it might be growing and why
3. What makes it different from other markets
and how our analysis may need to adjust
4. Models the determinants of health status
and looks and how government policy might
improve health status in short and long run
Why is it important?
1. The size of the health economy is large and
growing
2. Role of government in the health care markets
3. Health care market is difference from other
markets
4. Externalities
Why is it important?
1. Health economy is large and growing
Figure 1-1
US Health Expenditures Shares, 1960-2003
16
Expenditures as a % of GDP
14
12
10
8
6
4
2
0
1960
1965
1970
1975
1980
1985
1990
Year
Source: Organization for Economic Cooperation and Development, Health Data 2005.
1995
2000
The size of US health economy
•
GDP: The market value of final goods and
services produced within the borders of a
country in a year.
1980s: Rise in shares
•
–
–
•
1990s: Expenditures flattens out
–
•
Increase in insurance coverage and FFS system
Introduction of more market based policies
Managed care introduced
Could just be an decrease in the
denominator.
National US Spending on Health Care
Year
NHE
1960
36.7
1970
73.1
1980
Growth % GDP
Per Capita
Nominal Real
5.1
143
483
10.6
7.0
245.8
12.9
8.8
348
1067
897
1295
1990
696.0
11.0
12.0
2,738
2095
1995
990.3
7.3
13.4
2000
1310.0 7.0
13.4
3,698
4,672
2427
2713
2006* 2077.5 7.3
16.0
6,830
N.A.
Numerator is increasing (In billions of dollars); * = projection
NHE = National Health Expenditures
Out-of-Pocket and Federal
Expenditures -Table 1-5 FSG
Total
Out-of-
Third
Federal
Pocket
%
Party
%
%
1960
25.0
12.9
52
12.1
48
2.2
9
1970
67.3
25.1
37
42.2
62
15.6
23
1980
233.5
58.2
25
175.2
75
66.1
28
1990
669.6
137.1
20
532.3
80
181.9
27
2003 1614.2
230.5
14
1384
86
507.5
31
(In billions of dollars)
Medical care prices (CPI), 19602004
Hospital
services
Presc. drugs
ALL
1960
1980
2004
Personal Consumption, 2001
Food and Tobacco
15.3
Housing
14.3
Medical Care
18.2
Hospital and nursing
7.3
Transportation
11.4
Household Operation
10.7
Recreation
8.5
Clothing
5.9
Other
15.6
Source: FSG Table 1.2
Personal Expenditures
• Medical care is the largest category.
– Most of this is for hospitals/nursing homes
– Need to think how policy affects this category
• Uninsured go to emergency rooms
• In 1960 food was 25%, housing 15%, and
medical care 5%.
• There has been a big shift in spending
patterns. May represent a richer society.
Personal Expenditures
What have we not accounted for in personal
expenditures?
• Opportunity cost of your own time
– Time spent caring for sick or disabled
– Decreased with more spent on nursing home?
– Very important in developing countries
US compared to OECD countries
Table 1-1: health expenditures % GDP, OECD
• Health expenditures grew rapidly between
1960-1980 for most countries.
• Rates continued to rise in1990s in US.
• US is the biggest spender.
– Twice as much as the UK (national health
insurance).
Questions for you to think about
1. Why do you think health care spending is
higher in the US than in other countries?
2. Is the fact that the US population spends
more per capita on health care than people
in any other developed country evidence of
a failure of the US system?
Why is it important?
1. The size of the health economy is large and
growing
2. Role of government in the health care markets
Role of Government
Participate because of market failures
• Demand side
– Provision of insurance
– Effort to affect health behavior
•
Supply side
–
–
–
–
Price controls
Restriction of entry/exit
Subsidize research
Tax policy
and much more …
US health care spending, 2003
Government is 45 % of total health spending
Source: DHHS, http://www.cms.hhs.gov/statistics/nhe/historical/chart.asp
Percent of health care expenditure
80%
60%
40%
20%
Private
Federal
State and local
Why is it important?
1. The size of the health economy is large and
growing
2. Role of government in the health care markets
3. Medical Market is difference from other
markets
How is the medical care market
different from other markets?
1. Presence of Uncertainty
• Demand is irregular and uncertain
–
Accidents, can you deny someone lifesaving
care if they don’t have the money?
How is the medical care market different
from other markets?
• Supply–hard to understand the product
–
Asymmetric information
 When we are sick we don’t understand the treatment
we need and must trust our doctor in their diagnosis.
Different doctors may suggest different
treatments due to uncertainty of outcome.
– Hard to judge quality
–
 Governments establish licensing requirements to
ensure minimum level of quality
How is the medical care market
different from other markets?
2. Prominence of Insurance
– People buy insurance to cover themselves
against the risk of illness.
– With third party financing most of the cost of
medical care, individuals are insulated from
the full cost of the care they receive.
– Demand for medical care may rise if you don’t
pay the full cost.
– Treatment recommendations are adjusted to
insurance status.
How is the medical care market
different from other markets?
3. Large role of not-for-profit providers
– Economists usually assume firms maximize
profits.
– There are many not-for-profit hospitals (85%).
How should economists model their behavior?
4. Role of equity and need
– Belief that people ought to get health care
whether or not they can afford it.
– Economists need to take this feature of the
good into consideration.
Why is it important?
1. The size of the health economy is large and
growing
2. Role of government in the health care markets
3. Medical Market is difference from other
markets
4. Externalities
Externalities
• Communicable disease
– A disease that is transmitted through direct
contact with an infected individual or indirectly
through a vector (e.g. mosquito).
– Significant reduction in their spread account for
much of the improvement in health in developed
countries
• Malaria, TB, vaccine preventable diseases
– Still a significant problem in less developed
countries
Externalities
• Individual behaviors (smoking, over eating)
– Direct impact on health of person and others
– Impacts the cost of health
• premiums –i.e. lung cancer
– Impact on demand for health care
Cause of death
Communicable
Non-communicable
Source: http://ucatlas.ucsc.edu/health.php
Injurie s
Causes of Death in US, 2000
Source: Mokdad et al, 2004
Activities for MN candidates
What questions do health economics
ask?
• What role should the government play in
health?
• What health care investments should a
developing country make?
• What advertising should be banned?
• What is the optimal design for health
insurance?
• Why has health care become so expensive?
What questions do health economics
ask?
• Does health care early in childhood lead to
improved cognition and higher incomes in the
future?
• Have Medicare and Medicaid increased
utilization and improved health outcomes?
• Do different methods of doctor payment
change quality of care, outcomes or costs?
2. Critically discuss on clinical economics and
clinical decision making.
• .
3. Discuss and elaborate on corporate
and business finance
4. Elaborate health care accounting
and budgeting.
5. Discuss and elaborate on performance
measurement; clinical and nonclinical
Cost Analysis in Healthcare
DR Kithsiri Edirisinghe
MBBS , MSc, MD ( Medical Administration )
Managing Director,
International Institute of Health Sciences ,
Green Healthcare Pvt Ltd
Objectives of Today's presentation
1. Overview to cost analysis in
healthcare
2. Identification of cost centers
3. Allocation of cost to relevant cost
centers
4. Assignment on cost centers
Cost Analysis of Healthcare
services
• In a world of limited resources, those that are allocated to the
health sector cannot be allocated to other services such as
education, transport and environmental protection.
• Reducing health costs and improving the health of the
population by setting up a more effective health network are
strategic moves for a country that wishes to increase the
efficiency of the health system.
• Economic analysis of health systems are complex and the
related indicators are difficult to measure, such as quality of
care and health status in line with financial data that are often
more precise and of limited comparability.
Source : Brailer & Van Horn, 1993
Reading – books
• Cost Analysis Of Primary Health Care ; W.H.O. Creese, A. &
Parker, D. (1994)
• Analysis of hospital costs: a manual for managers; W.H.O.
Shepard, D.S., Hodgkin,D., Anthony,Y.(2000):
• Public Hospitals in Developing countries, Kutzin, J. and
Barnum, H. ,1993
• Costing Health Services, Jones. I.R.(1998)
• Health Economics in Developing countries, Witter, S. ,Ensor,
T.. Jowett, M. & Thomson, R. (2000)
Reading – Research in Sri Lanka
• De Silva, A.H., (1992) Cost Analysis of Patient Care At The Lady Ridgway
Hospital For Children;
•
Samarasinghe, D. & Akin,J.S. (1995) Health strategy and financing study
in Sri Lanka;
• De Silva,A. Dlpatadu, K.C.S. Samarage, S.M.& Das, A.M. (1997)
Assessment of the prospects of paying wards in government hospitals as
complementary financing for Hospitals
• Edirisinghe,K (2002), Cost Analysis of Hospital Services , District Hospital
Dompe;
Significance of Cost Information
A vital a management tool for
1.
2.
Planning
–
Forecasting & Budgeting
–
Allocation of funds
–
Prioritize interventions
Monitoring
–
Assess accountability
–
Measure efficiency
–
Measure effectiveness
Within programmes and between .
Significance of Health Cost
Information
1.
Accountability
– To asses how much has been spent and what is the effect and the
finances available to the manager
– As controlling monitory system as a that finances are spent as
intended.
2. Assessing efficiency
– The unit cost can be compared within the organizational units or with
other similar units of local or international cost profiles.
3. Assessing effectiveness - Cost effective analysis / Cost benefit analysis
/ Cost utility analysis
4. Assessing equity
– Good indicator in a district to asses equity when compared with other
districts and national figures.
5. Assessing priorities
– Future Health care cost can be assed for by policy making and
planning
6. Considering cost recovery
– in health reforms such as User fees, social insurance, public private
mix services
7. Management information system
–
Dynamic environment this is the most vital tool
– Source : Creese, A. & Parker, D. (1994), Cost Analysis Of Primary Health Care ; W.H.O
Methods of Cost analysis
1. Classification by Input cost data
– the resource inputs are calculated in relation to service
provision or output.
– Ex : Cost of OPD care , Inward care etc.
– This is the best method due to the intangibility of
healthcare services
2. Classification by Function / Activity
– Asses the cost of each activity or function
– Ex : Cost per tetanus toxoid in an antenatal clinic.
– Ex : Cost per training programme
Methods of Cost analysis
3. Classification by level of health care provision
– National, Provincial, Divisional & local etc.
4. Classification by source of funding
- National or Provincial.
5. Classification by currency
- local or foreign.
Source : Creese.A, Parker D.( 1994 ) :Cost Analysis Of Primary Health Care ; W.H.O.
Fundamental rules in cost analysis
in Healthcare
1. The cost must be relevant to the particular
situation.
2. The cost categories must not overlap (avoid
repetition of cost )
3. The cost categories chosen must cover all
possibilities.
4. Assumptions made for unavailable data must
be realistic.
Unit Cost Analysis
Unit Costing – using input cost data
1. Study the service units in the hospital
2. Identification of Service units that are Key
Result Areas
– KRAs – Wards , Critical care , Out door care
3. Categorization of cost centers as :
– Directly related services of the each unit
• Clinical services of wards
– Indirectly related services of the unit that are
common to other units as well
• Utility
• Administration
• Supportive units -
Utility cost
• Diet – (Patients / Staff)
• Linen and laundry
• Sanitation
– Waste disposal –STP / incineration
– Water supply
– Ward cleaning
• Landscaping- The laborers according to a roster prepared by the overseer
perform this task.
• Communication- Telephone and the postal services
• Ambulance service
• Security
Administrative services
• Medical Administration
– Quality and risk management
• General administration, establishment functions & supervising
functions.
• Financial management.
• Management of Drug supplies.
• Medical records
Supportive units
•
•
•
•
Investigation units
Blood bank
Medical records
Sterilization
Unit Costing – using input cost data
4. Define the costs centers and costs
– EX . Inward patient care - Summation of costs of all
wards
5. Define the unit of measurement
– Monthly cost in rupees
– EX. Total Inward care cost for a month in RS.
( Total cost of all wards per month )
6. Calculate for each cost center
– Man power cost
– Equipment cost
– Supplies
– Cost of the infrastructure
7. Define capital and recurrent cost for each:
– Man power cost
•
•
Capital – initial training
Recurrent
–
–
–
Direct - monthly salary
Indirect – hourly cost
Equipment cost
•
•
Medical / non medical
Capital
–
•
Depreciation of the purchased cost /replacement cost
Recurrent
–
–
–
maintenance cost
Supplies cost or month
Power – Watt Hours & cost
» Watts per hour X cost of watt hour
– Supplies
•
•
Retail price of the supplies
medical / non medical
– Cost of the Infrastructure
•
•
Capital - depreciated price / monthly rental ( per
SQFT) of the building or the cost separately the land
price and depreciated value of the building
Recurrent – Electricity , water , maintenance &other
• Allocate the cost to cost centre per month
– Directly related cost
– Indirectly related cost
• Calculate the unit cost per month
8. Allocation of cost in to Cost Centers
– Directly related cost
– Indirectly related
Cost approximation & Allocation to
a cost centre
• Realistic , simple & logical assumption
• Indirectly related cost
– By number of tests
– Number patients
– Number of hours spent
9. Calculation of Monthly unit cost
Unit cost of patient care =
Consolidated cost items of the respective cost centre
Total inpatient days / patient visits / number of tests
of the cost center
Private sector Healthcare costs
Important indices needed for cost
analysis in Private hospitals
1.
2.
3.
4.
5.
6.
Census
Revenue
Service charge /taxations
Cost of sales
Manpower cost
Administrative expenses
1. Patient census
• Revenue driven by census
• IPD
– Adult / Paediatric /Nursery / General wards / special
Avg. Daily Inpatient Census = Patient Days / 30.4
In-Patient census = Avg. length of stay x No. of admissions
• OPD
– GP/ Specialist Clinics/ A&E - Number of visits
2. Revenue
• Census
– IPD/ OPD
• Utilization
– Labor/OT/ICU/ Dialysis/NICU
• Ancillary Services – Utilization
– Lab/Physio/Eye/Audimetry/EEG/Cardiology/Xary/
MRI…..etc.
• Sales of Medicines and Consumables
– Pharmacy
2. Revenue
• Census
– IPD/ OPD
• Utilization
– Labor/OT/ICU/ Dialysis/NICU
• Ancillary Services – Utilization
– Lab/Physio/Eye/Audimetry/EEG/Cardiology/Xary/
MRI…..etc.
• Sales of Medicines and Consumables
– Pharmacy
3. Economic Service Charge
• Economic Service Charge
– 1 0.25% of Gross Revenue
4. Cost of Sales
Service
Margin
•
Room Services
70%
•
•
•
•
•
•
•
Procedures (OR)
Medical Supplies
Pharmacy
Radiology
Laboratory
Physiotherapy
Others
70%
30%
18%
75%
70%
90%
85%
5. Manpower Cost
• Total Number of Employees per department & cost
• EPF & ETF
• Staff Benefit cost
– Provident Fund
– Contribution
– Gratuity
– Health/P.A Insurance
– Housing For nurses
– Travel / Car Allowance Uniforms/Shoes Training/CME
Programs Bonus Overtime Others Benefits/Basic Pay
6. Administrative cost
•
•
•
•
•
•
•
•
Contract services
Utilities and tanked water
Insurance
Communications
Office supplies
Repair & Maintenance
Traveling and entrainment
Marketing
• IT Related Expenses –
software / hardware
• Provision for Doubtful Debt
0.25% of Gross Revenue
• Stock Adjustment/Write
Off
• Depreciation Buildings
5.0% Equipment 12.5%
• Others
Others
•
•
•
•
•
•
•
•
•
•
Credit Card Commission
Bank Commission and Charges Donations
Rent-Equipment
Rent-House
Rent-Motor Vehicles
Legal Fees - Trade Related / Non-Trade Related
Prof.Fee-Non Advisory Miscellaneous Expenses
Audit Fees
Management fee
Accreditation
Importance of Financial management
• Capital intensive infrastructure , equipments
• High Labour intensive – high
cost
• Obedience of Doctors for
finance policies & other
relation with suppliers
• Part time HR & its effects
• Lack of qualified Medical
administrators
• Equipments
– Depreciation of equipments
in 3 to 5 years
– Rarely reach break even level
– High obsolescence rate
• New regulations
• High risk in the service
levels
• Unpredictability in the
demand levels
End is profit
1.
Profit is the end result of long chain of management process
2.
Profit is a rate of return to the investor
3.
Profit is the essence of many financial transactions
4.
It should be clearly planned , implemented and monitored and evaluated
5.
In true sense of a market economy profit can make organization healthy
and but should not draw “Sick “ to the “Graveyard “
Important financial
measurements of the hospitals
Important financial measurements
of the hospitals
• Financial objectives are achieved through
– Increase revenue
– Reduce current expenses
– Managing current assets
– Managing current liabilities
• Monitoring the achievement is essential
though the financial measurement of the
hospital
Financial measurements of the
hospitals
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Average length of stay
Age of the plant
Bad debts
Case mix
Free patient ratio
Competition
Debt utilization
Intensive care index
Ownership
Labor yield
11. Occupancy
12. Days sales outstanding
13. Inventory turnover
14. Current ratio
15. Profitability ratio
16. Pre-tax profit to sales
17. Pre- tax profit to
investment
1. Average Length of Stay
• Revenue of proportional to the average
number the patient stay in the hospital
• High revenue in first 48 hours and gradually
decline
• End up in just a room rent
• Faster turnover of patients = efficient asset
utilization
• Ideal ALS = 3 days max. 06 days
2. Age of the plant
• Older equipments / hospital – lower
depreciation – lower operating costs – higher
profitability compared to a new hospital
• Dominate market with low cost structure
• But older equipments/ hospitals needed
replacement , servicing , frequent breakdown
and higher maintenance cost
3. Bad debts
• Sound credit policy to avoid :
– Investment cost of funding
– Over due of payment of loans
– Cost of bad receivables
– Average length of the receivables
4. Case Mix Index
•
•
•
•
Average revenue per patient day
Average revenue per bed day
Average profitability per patient or bed day
All these will differe with case mix
– Cardiac / Maternity / General surgical / medical / Pediatric/
Eye / ENT /
• Case mix index ( CMI)
• Ratio of High value cases / low value cases
• Profitability may vary even with 100% occupied hospital
Therefore the most important indicator is the CMI
Compare CMI / ALS/ OCCUPANCY RATE with Financial Results
4. Competition
• Hospitals making profits can do many things to upgrade its
market share , hence to dominate in the competition
– Opening a cardiac centre in a nursing home
• Hospital at breakeven state and working below breakeven
level are very vulnerable to competition
• Therefore new hospital should establish in areas where other
competitors are at Break even stage or below
5. Debt Utilization
• Higher the debt / equity ratio , higher the risk for the hospital
• Young hospitals debt is a killer in the first few years, due
increase operational cost in first few years
• Hospital working above break even stage should go debt for
expansion
6. Intensive Care index
• Intensive care beds will give more revues and profits
• Ratio of Intensive care patient days / total inpatient days is a
very good indicator
• Higher the ICPD/ TIPD better hospital performance
7. Ownership
• Hospital ownership directly affects its
efficiency
• Proprietorship organizations are better than
corporate and other ownerships
• Personal attention
• Centralized decision making
• High level of control over operations
Derden's vs, Asiri
8. Labour Yield
• Hospital HR cost 40%
• Salaries are proportional to skill possessed by
the employee
• Yield could be measured
– Revenue per employee ( MO in the OPD)
– Profit per employee
– Patient days per employee
If these ratios are high good HR management & vice
versa
9. IPD /OPD mix
• More revenues from IPD than OPD
• IPD/ OPD Higher the ratio higher the
performance
• Very high level may indicate high referrals and
may a risky
10. Occupancy
• Indication of the capacity utilization of the
hospital through its beds
• Actual number of patient bed days / available
patient bed days for the calendar year
• Case mix index needed to be considered
11. Day Sales outstanding
• Measure of control
• Check on the quality of the accounts
reversible's
• Higher ratio = over due accounts
• Overdue accounts – bad debt lossescollection of expenses- tie-up funds
• This will lead to short term liquidity problem
12. Inventory Turnover
•
•
•
•
Second largest cost
Make various items available
Maintain the minimum stock hence the cost
More stocks
– Carrying cost
– Storage of material and pilferage
– Unnecessary investment
• Ratio of sales /stocks is good indicator
• Higher the ratio higher the efficiency of the operations
13. Current ratio
• Ratio of current asset / current liabilities ,the traditional belief
is 2: 1 is good
• Idea is to make the assets could be made cash before
liabilities mature
• This along is not enough
– This should be supported by days sales outstanding, inventory
turnover ratio, amount in cash in total current assets
– These will together determine the liquidity position of the hospital
14. Day Sales outstanding
• Measure of control
• Check on the quality of the accounts
reversible's
• Higher ratio = over due accounts
• Overdue accounts – bad debt lossescollection of expenses- tie-up funds
• This will lead to short term liquidity problem
15. Profitability ratio
• Pre tax profit / Sales
• Pre tax profit/ Investment
1. Pre tax profit / Sales
• How well the organization has managed its costs and
generated revenues
• Controlled Sales are exogenous and market determinant
• Cost are endogenous and controlled by the management
• This is a very good indicator of performance of the
management
15. Profitability ratio
2. Pre tax profit / Investment
• How well the organization has utilized its facilities and
investment during a given period
• Can study with the occupancy rates and case mix index
• They tend be higher in profitable organizations
Thank you!
Few definitions in Health Costs
• Fixed costs
– Cost that are does not change with the volume of out put
•
Rent , Security , Janitorial
• Variable costs
– Cost that are directly related volume of output and vary significantly
• Drugs, Supplies , food
• Semi-variable costs
– Cost that does not change immediately with volume but change after
some time
• Staff cost
Few definitions in Health Costs
• Total cost of production
– Fixed cost + Variable cost + semi variable cost
Measuring Health Cost
performance
Cost Effective Analysis
• Cost effectiveness analysis is defined as “the ratio of net
change in the health care cost to the ratio of net change in
health care outcomes.
CFA = Net change in healthcare cost / Net change in healthcare outcomes
• EX: Anti-malaria programme
– Healthcare total cost before the programme intervention
=X
– Healthcare total cost after programme intervention = Y
– Patient outcomes health
• number of cases / deaths of malaria averted N
• number of life years gained by health care programs M
• Ratio of net change in cost = X – Y
• Ratio of net change in outcomes = N or M
• CEA = X – Y / N or M
Cost utility analysis
• This is a similar to cost effectiveness analysis
but it considers the alternative strategies to
improve the quality of life as well as morbidity.
• Net change in health outcomes = Disability
adjusted life years ( DALY) is taken as a
measure and compared between alternative
strategies for intervention !
Source : Witter, S. ,Ensor, T.. Jowett, M. & Thomson, R. (2000) Health Economics in
Developing countries
Cost benefit analysis
• This is more expanded version than cost
effectiveness analysis. Here the monetary
values of benefits of a project are compared
with monetary costs of the project. It enables
comparisons between projects and is vital in
decision-making.
• Project cost Vs Project outcomes
Source : Jones, .I.R. (1998): Costing Health Services
Thank You !