Analysis of Costing In National Health Service - Case Study Example

A Report Analysis on Costing In NHS Student’s Name Course Date 1.0 Introduction Medical entities such as the National Health Service have continued to face a significant level of challenge that is attributed to customising its services to fit that of a patient-centred organisation but still manage to cut down on unnecessary costs and save resources. Indeed, the process of managing care more efficiently would require that the NHS adopt modern systems for purposes of evaluating possible financial challenge. As such, this report indicates that the health facilities should now transform from using of references costing technique to immediate adoption of Patient-Level Information and Costing Systems (PLICS) as well as Service Line Reporting (SLR) (Chapman & Kern, 2010). The focus of this paper is to examine the proposed findings of the report; define the concept of ABC and thereafter; provide recommendations related to critical appraisal on the implementation of the findings at UHW that do not currently enjoy ABC costing technique. 2.0 Discussion & Analysis The report proposes a great number of aspects that are discussed as follows; first, it is ascertained that the overall NHS operations should seek to adopt fundamental principles of ABC for trusts that are currently exploring the need to invest in robust PLICS and SLR in order to enjoy greater level of benefits from these systems (Chapman & Kern, 2010). It is noted that effective implementation of PLICS and SLR would need a basis shift in the analysis of costs behaviours to ABC. This means that, under the new costing framework, the overheads will now not be perceived as being unmanageable elements but rather; they will be broken down and analysed through activity platforms. Secondly, the report propose that in order to gain significant level of awareness of the underlying principles of ABC then there should be immediate integration of the entire costing system into the organisation culture of NHS as a whole (Chapman & Kern, 2010). The report notes that for a long period of time, such hospital costing aspects as HRG; PbR and management budgets formed a part of a decade long culture for purposes of eliciting central level of control. However, with the new proposition of ABC basic principles, the culture of allocating overheads and indirect costs into clinical units or activities is about change completely. Under the conventional model of costing, the culture then dictated that overheads were to be allocated across a number of HRGs. The computations involved in this process were so complex and unclearly connected to clinically-relevant categories so that the clinicians were unfairly positioned to gain an understanding of the relationship that existed between their decisions; resource consumption and clinical outcomes as a whole. In consequence, the output that was derived from this rather sophisticated process could not be used as imminent information for purposes of improving performance or even drive value for money. Third, the report has found out that the existing traditional systems have failed miserably to provide any form of assistance in decision making process by clinicians in the course of controlling costs. It is certainly established that the design phase of ABC, NHS trusts have for a long period struggled to comprehend the aspect related to the activity-implementation process (Chapman & Kern, 2010). In fact, while in modern NHS setting, activity refers to specific outputs that are mostly in terms of clinical procedures that involve a great deal of work processes. In the conventional setting, activities possess a different meaning altogether. In addition to this, it has been determined that not all of the existing trusts engage in availing pertinent accounting information to both operation managers and clinicians; who are perceived as important decisions makers. Of great importance to note, the report has found out that there is a need for identification of the most effective adoption of ABC introduction process as relates to PLICS and SLR (Chapman & Kern, 2010). At the present time, there is a lack of basic education initiatives that can foster decision makers to clearly ascertain components of ABC whenever it is implemented. Furthermore, there is a lack of follow-ups on education programmes or rather advanced training to decision makers on the how best to adopt and utilise ABC information whenever it is retrieved. As such, the report thus proposes a paradigm shift from the conventional top-down full cost, where costs are basically tagged as being direct, indirect and overhead to Activity Based Costing where costs pools are translated from a general ledger levels to a structure that depicts different activities making costs transparent and manageable for that matter. Activity-Based Costing is a costing system where costs pools are transformed from aspects of general ledger categories to a platform that portrays distinct forms of activities that make costs transparent and manageable (Porter, 2009). It is important to note that this type of costing provides a pertinent framework for easier evaluation processes hence defines the aspect of value more widely. To be effective, Activity Based Costing systems should define each and every form of activity that is conducted by each of the organisational personnel. Activity Based Costing is made up of a number of distinctive steps that include; identification of company’s most crucial activities; determination of overhead costs that are associated with each of the activities identified; determination of the cost of a given activity and later label them as cost drivers; and the final step, lies in application of the already established overhead costs per unit costs driver to underlying cost objects (Ittner, Lanen, &Larcker, 2002, p.713). In most instances, a great deal of application of ABC system is associated with the hierarchical structures of distinct identified activities and cost drivers and would normally be made up of five levels; unit, batch, product, facility, and customer levels (Cokins,1996). Modern ABC approaches have been applied to assist new ways of pricing decisions, profitability analysis, and internal level of performance measurement as well as cost management activities. There are three fundamental advantages associated with ABC system. First, it allows for the quantification of internal production issues that are a result of a given service vendor and thus, present an objective measurement of the criterion that conventionally was deemed to be non-financial in nature (Chan, 1993). Secondly, it provides imminent solution to the multi-objective optimisation issues related to minimisation of invoice costs, delivery time maximisation of quality and service after sales. This is achieved by of comparing underlying absolute cost figures (Kaplan & Porter, 2011). Certainly, ABC system foster the immediate identification of relative importance of different cost components that allows a firm to formulate relative benefits of different costs components thereby providing an opportunity to design strategies needed for purposes of reducing costs drivers rates hence improving overall efficiency (Chan, 1993) . In a real life example, a vendor is likely to benefit a lot from the adoption of ABC system since it allows for an objective indication of customer’s satisfaction and importance of different criterion that is involved in the course of making purchases. Through the immediate valuation of a client’s feedback, the vendor at hand is compelled to evaluate its overall strategies related to operations. Vendors will also likely benefit from improved relationship created between vendors and purchasers. In fact, in modern production concept, there is a great deal of emphasis that is put towards formulating and sustaining a close relationship between a purchaser and reliable suppliers or creditors. Considering that that parties in this relationship enjoy similar incentives, there is need for developing inter-organisational cost management systems altogether. For that reason, the adoption of ABC for the existing NHS Trusts is paramount. Clinicians and operational managers will likely achieve higher level of efficiency in decision making since entire process will be dependent on cost drivers associated with different activities of the facilities at hand. They will also likely enjoy immense comprehension of cost system since ABC is not as complex and unclear as the use of a top-down analytical approach that was used in the past (Zott, & Amit, 2010). 2.0 Conclusions & Recommendations To sum up the discussion above, the paper has successfully provided three fundamental findings of the report. It has been established that greater degree of adoption of fundamental principles of ABC (PLICS and SLR) is thus far needed for gaining benefits; ABC principles should be embedded in the culture of NHS as a whole as well as there is a need for identifying effective utilisation of ABC in NHS trusts. It is suggested that the adoption of ABC principles in relation to PLICS and SLR should go ahead. This is attributed to the fact that the new models will assist NHS trust achieve high level of quality service provision while still managing the aspect related to costs associated with the process. References List Cokins, G., 1996. Activity-based cost management: making it work. Chicago: Irwin. Chapman, C, S & Kern, A. 2010.Costing in the National Health Service: from Reporting to Managing, Imperial College London Business School. Retrieved from http://www.cimaglobal.com/Documents/Thought_leadership_docs/R226%20Costing%20in%20the%20National%20UPDATED%20%20 (PDF).pdf Chan, Y.C.L., 1993. Improving hospital cost accounting with activity-based costing. Health Care Management Review, vol.18, no.1, pp.71-77 Ittner, C.D., Lanen, W.N. & Larcker, D.F., 2002. The association between activity‐based costing and manufacturing performance. Journal of Accounting Research, vol.40, no.3, pp.711-726 Kaplan, R.S. & Porter, M.E., 2011. How to solve the cost crisis in health care. Harvard Business Review, vol. 89, no.9, pp.46-52. Porter, M.E., 2009. A strategy for health care reform—toward a value-based system. New England Journal of Medicine, vol.361, no.2, pp.109-112 Zott, C. & Amit, R., 2010. Business model design: an activity system perspective. Long Range Planning, 43(2), pp.216-226 Read More