The Association Between Activity-Based Costing System Adoption and Hospital Performance

Abstract

This study explores the relation between activity-based costing (ABC) information use and four measures of hospital performance - profitability, revenue enhancement, cost containment, and societal commitment. Specifically, we address the issue of whether, relative to non-adopters, hospitals enhance revenues, reduce costs, increase profitability, and display a greater commitment to the community after the implementation of activity-based costing strategies. We further explore whether the adoption of ABC affects performance and utilization differently depending on ownership type (for profit, non-profit, or government). The empirical evidence suggests that activity-based costing procedures produced mixed results in the two ownership groups. The presence of an advanced cost management strategy in the for-profit sector was associated with increased profitability (return on beds). In contrast, activity-based costing procedures in the government/non-profit sector were associated with enhanced revenue-producing activities, such as increased inpatient admissions and outpatient visits. While no evidence of improved cost controls was uncovered, government/non-profit adopters maintained pre-adoption levels of direct medical care, while non-adopters reduced costs by eliminating value-adding medical personnel. Society does not appear to benefit, however, from the adoption of ABC in the government/non-profit sector through the purchase of larger amounts of productive assets or the provision of added amounts of charity care. Indeed, adopters and non-adopters, alike, displayed positive changes in their community involvement in the post-adoption period. To sum, healthcare providers in both sectors utilized advanced cost management strategies in different ways to adapt to adverse changes in their unique environments.