Measuring diagnosis and patient profitability in healthcare: economics vs ethics

Abstract

Abstract. This paper focuses on issues relating to gauging profitability under circumstances in Czech healthcare organizations. At present, the trend in healthcare management is for more frequent utilization of advanced economic and cost accounting tools. These qualitatively improve the decision-making process in healthcare establishments, as well as aiding provision of accurate data on the cost and revenue of the outputs of hospital organizations, such as the various diagnoses and types of patients. Herein the authors present analysis of the profitability of such patient and diagnose-types (DRG) in selected hospital departments of Czech regional hospital. Revenue from insurance payments is compared with costs calculated via the Activity-Based Costing method so as to discern more accurately the proceeds of a given DRG and patient. The results of the study highlighted crucial differences between the income generated by individual cost objects (i.e. patients and DRGs). Utilizing such information could greatly benefit decision-making and enhance cost effectiveness of the hospital services. However, any healthcare establishment worldwide is strictly curtailed in this by the ethical standards it must uphold when making decisions on potentially raising profitability. The final part of the study discusses the findings of the profitability analysis performed by the authors in the given context of general healthcare organizations management.Keywords: healthcare organization, hospital profitability, costing, hospital management, Activity-Based Costing, patient costJEL Classification: I11, M41(ProQuest: ... denotes formula omitted.)IntroductionDiscerning the profitability of decentralized business units has long been an issue for management accounting (Drury 2001, Garrison et al. 2010). The accountants' objective is to support managers of an organization by providing data for the decision-making process; to wit any information on the profit generated by the sections of the business is highly crucial. Recent decades have witnessed a rise in the application of various managerial techniques by hospital organizations. They often rely on profitability analyses, performance measurement or accurate costing techniques in order to inform decision-making, increase profitability and heighten the cost efficiency of the various activities conducted.Many academic studies related to the healthcare management issues provide extensive evidence on the increasing cost of healthcare in numerous countries. For instance, Chernew (2003) states that, for the majority of the post-WWII period, healthcare costs with adjustment for inflation rose at a much faster rate than GDP. Increased demands on the quality and extent of healthcare go hand-in-hand with reduced spending on healthcare systems, primarily caused by the finite resources of the public purse. Under such conditions, hospital organizations are pressurized to effectively manage their activities and outputs on restricted budgets. Similar experience we can observe in developing economies with relatively low healthcare insurance coverage (Rodriguez 2014).Joumard et al. (2010) state that exploiting efficiency gains in healthcare will prove crucial to meeting the rapid growth in demand, without placing public finance on an unsustainable course. The efficiency of a hospital cannot be discerned as easily as that of a business enterprise, due to factors influencing the process of health provision (complexity of services, difficult cost and revenue allocation, etc.). The revenue for a medical establishment is generally based on funds from insurance payment systems, thereby not permitting simple price negotiation as would otherwise occur in business.One of the greatest difficulties experienced by such an establishment when measuring profitability is the ability to perform accurate cost assignment using a proper cost calculation or costing technique. Many authors have highlighted the crucial matter of the costing methods (cost calculation) applied within hospital organizations. …