Activity-based management accounting in the health care sector, with specific reference to private hospital groups in South Africa

Abstract

The health care sector, worldwide, is characterised by increasing patient loads, more complex procedures - and ever-increasing medical costs, with the cost of hospitalisation being the predominant cost factor absorbing the most resources. Leyenaar (1997: 14) maintains that the health care market has shifted from revenue to a cost focus. Increases in private hospital cost of between 13 and 15 percent at the beginning of 1999 were, according to Bisseker (1999: I), not justified, especially in the light of the healthy fmancial results achieved by many of the listed private hospital groups. Administrators of large medical aid schemes and of managed care companies are having great difficulty in explaining these increases to their members. Member contributions increased by as much as 20 percent, this despite promises that managed care would bring these costs under control (Bisseker, 1999: I ). Another problem facing South African hospitals is currencY related. Since the beginning of 1999, the Rand has lost a great deal of ground against foreign currencies, making it very expensive for hospitals to purchase any medical equipment from the overseas market. Hospitals purchase much of their technologically advanced equipment and medication from foreign countries and with the depreciating Rand, these items become even more expensive. The hospitals must bring this currencY component into their pricing policies. Another factor contributing to the recessionary climate existing in South Africa is one of medical inflation. Medical inflation rates have, over the past few years been much higher than the average inflation rate. An increased emphasis on cost management and cost contaimnent in hospitals, together with managed health care, has created an urgent need amongst health care providers for relevant, accurate, timeous and meaningful cost information (Williams, 1997: 16). In this regard Canby (1995:51) is of the opinion that by tracing healthcare activities and costs back to the events that generate and cause the cost, and by focusing on the process that drives cost, a more accurate measurement of financial information and performance is obtained. This, in tum, will enable private hospital groups to make necessary price changes only if these changes are justified by the information obtained from the new system. The health care industry may use the ABC technique, developed by manufacturing organisations to enhance their profitability, eliminate unnecessary costs and plan for change (Schuneman, 1997: I). This technique, which identifies the relationship between the activity and the source needed to complete it, can thus also be applied successfully to the medical practice. Hospital management systems may use all the components associated with ABMA to effectively control, plan, administer and monitor the activities and resources in the hospital.