Management accounting and healthcare - Essay Example

?Management accounting and healthcare This paper talks about the interaction of research in management accounting and the healthcare sector.With the availability of a rich body of literature from various journal articles the paper focuses on a number of complex and important aspects of the topic in terms of accounting management risks, costs, regulations as well as existing opportunities in the dynamic environment of the healthcare sector. Furthermore the potential the health sector holds as far as management accounting research hold is discussed and facilitated with the description of the current developments in healthcare. Introduction Research in the management accounting of the health care sector primarily comprises of investigating the accounting and the control systems that are used by decision makers within the organization. A key component of the research in the accounting and healthcare sector is that which revolves around the cost associated with the everyday operations that are undertaken by these organizations. The rich body of literature available in this area has focused on a number of complex and important problems that arise in budgeting, contracting, cost accounting, management and reporting (Luft and Shields, 2003). Extant literature in the field of accounting published primarily approach the issue using an economics based theoretical framework, and focus on the study for-profit organizations. This paper discusses the distinct advantages and research opportunities offered by the healthcare industry that can be used by management accounting researchers. We look at the scope as well as the role played by the accounting practices mainly centered on cost management and risks in the healthcare sectors. Then we look at the implications of cost shifting and revenue constraints by hospitals operating in a changing regulatory environment and the impact that competition has on the need for accounting information. Next we view the advantages of using healthcare data for management accounting research. In the last section we look at the current development in the health care industry. Opportunities for Managerial Accounting Research in Health Care A setting that comprises of organizations with a large number of attributes as well as diversity provides researchers with considerable potential to study complex issues. The health care sector which consists of a multitude of hospitals in every country in the world has prevalent attributes such as multi dimensional objective functions, complex production functions and a huge number of diverse stakeholders. Furthermore major shifts in the regulation of this sector can be observed in the way it has moved from cost plus to fixed price reimbursement in many countries namely UK, Germany and Taiwan. Most notable is the move of the focus of competition from non price factors like quality to price-and-cost based competition, showing a major alteration to not only the revenue functions but also financial risk. Due to these changes the various aspects of hospital accounting, reporting and control systems are all impacted. This can simply be seen when you view the dilemma that surrounds health care contributing to both regulatory and normative pressures. It is required that hospitals provide patients with the best quality care regardless of their ability to pay while on the other hand it is imperative that they remain financially viable. This dilemma adds complexity to other aspects such as motivation, compensation, and evaluation of performance by hospital managers. If we view the aspect of compensation in isolation we will notice another critical element contributing to its complexity. This being ownership types such as non profit, for profit or public providing the same service and competing for the same customer base (Dranove, 1988; Hoerger, 1991; Pauly and Redisch, 1973). There are three distinct aspects of the healthcare sector which have a great influence on behavior as well as outcomes. These are regulation and competition, contracting and performance measurement issues, and ownership differences. The importance of regulation can be seen in the way a large proportion of revenue of hospital revenue is obtained from public insurance that covers patients, such as Medicaid in the US. Over the years regulatory changes in regard to reimbursement mechanisms show a shift in the accounting practices in the sector. Moving on to competition and its impacts on price-cost margins an increase in hospital financial risk can be observed. Performance measurement has an impact on the objective hospital function as well as decision making due to the presence of multiple stakeholders, such as doctors, nurses, administrators (Lambert and Larcker, 1995). Managing risks in the healthcare sector According to Okoroh, Gombera & Alani (2002) in the last decade business opportunities and operations in the hospitals have been progressively increasing and expanding. As a result of these managers are always looking for the latest business approaches that would rejuvenate their operations and at the same time fulfill customer demands. Hence it becomes critical to discover and learn about organizations present and future risks. For the purpose of conducting research about the risk factors which brought up the costs associated with operations the researchers observed that the current state of business opportunities in the health care suggested that more of the government resources such as, finance, expertise and information technology) were being put into the management of clinical and support services whereas there lied a continuous increase in business knowledge distribution regarding the management of risk in the healthcare sector. Keeping this in mind the researchers aimed to investigate business risks faced by purchasers of support services in the UK National Health Service. The research methodology adopted by Okoroh et al (2002) involved the collection of data by the use of a structured questionnaire as well as interviews with leading health care managers. These comprised of providers, purchasers and customers. Participants in the research were 365 healthcare executives at NHS within England and Wales. The selection of the participants was based on a ‘non-randomised’ controlled study (Moon et al, 1999). In addition to the surveys, primary and secondary sources from the NHS were used to supplement and validate the findings. The calculation of the risk factor weight was based on an input to the final weighting index that was adapted from the work of Kometa et al (1995). First the relative importance of the risk factors was determined, followed by a correlation analysis that aided arriving at an in depth understanding of the relative importance of the factors. The last step was to analyze the interaction between groups of factors using the Principal Component Factor Analysis (PCFA) technique which would effectively pin the decision by the purchaser to manage support services risks, and thus improve the non core performance in care operations in the health care sector. The findings in the study indicate that there were seven major classes of strategic and competitive management risks faced by purchasers. These were commonly classified as financial and economic, commercial, legal, facility transmitted, business transfer and corporate. An emphasis was placed on the advent of decision making central on profit maximization, customer-focus and responsive services to be implemented and undertaken in order to facilitate alternative decision-making options in the healthcare support services provision. A further adaptation of quantitative risk analysis techniques, such as decision trees, probability and simulation, sensitivity and scenario analysis, was equally suggested to develop possible outcomes and impacts of risk factors on health care. Managing costs in the healthcare sector Street and Dawson (2002) looked into the development of an English measure of hospital casemix which resulted in the creation of healthcare resource groups (HRGs) an analysis of which focuses on the funding of hospitals and the use of HRG costs to set hospital efficiency targets. The researcher’s investigation further looks at the responses of hospitals to efficiency targets that are based on the implementation of HRG costs, including the options of improving data quality, reducing costs, and target focus. By the use of a Cost allocation process the findings of the researchers suggest that Casemix information tends to be used in two main ways. The first is that of defining hospital activity and costing. England, the prime location for randomly picking various hospitals in different regions in order to conduct the study, showed that the use of HRGs to describe hospital activity, spread costs, allocate resources and formulate strategies, was gradually increasing. In fact HRGs were being used to define particular health care activities for the development of treatment protocols, such as the National Service Framework (NSGs). This in turn defines in detail the planning aspects of business operations, such as staffing, intensity of care, health care tests etc, that are considered as best practices for particular conditions with the general intention to move all hospitals in the health care to a prescribed pattern of care. However, despite the potential for using HRGs to describe treatments in NSFs, HRG costs will be of limited use in assessing the resource implications of shifts in service provision. HRG costs are primarily historic average accounting costs, bear no relation to the marginal cost information required for the costing of NFS proposal. Despite its limitations the HRG cost information could be used in a variety of ways, such as an input into purchasing negotiations to remunerate basis for benchmarking exercises that can prove helpful to managers in the decision making process. In England HRG cost information is extensively utilized to inform the purchasing process mainly because it is the purchaser who is in a position to move a substantial amount of their activity from one hospital to another which will directly have an impact on the revenue generation capability of hospitals. Factors affecting the need for accounting system management in the healthcare sector Accounting guidelines and a dynamic environment There is extensive literature that looks at the hospital accounting guidelines that prevalent in the changing regulatory environment. Watts and Zimmerman (1986) encourage researchers to consider accounting choice as a dependent variable and Demski and Magee (1992) further challenge researchers to "try to understand accounting choice in its natural environment." The health care environment, with regulation based on hospital budgets and actual results, provides a unique setting in which researchers can examine the actual budgeting behavior of hospital managers and check whether information biasing is taking place. In 1991, it was estimated that around $21.5 billion of unsponsored and undercompensated hospital costs were incurred (Morrisey, 1993). This was mainly because as long as diverse payers and modes of payment for hospital reimbursement are present, hospital managers may attempt to shift these costs among payers to maximize their revenues. It is this method that has mainly come into state and national scrutiny because it reduces the effectiveness of cost containment efforts. This brings us towards the role played by contractual adjustments, which basically are an allowable deduction from revenue that reflect the difference between gross charges and amounts of reimbursements. Eldenburg and Soderstrom (1996) study this accounting method and how it has permitted cost shifting to take place and examine how effective state regulation has been in eliminating such behavior. The approach that the researchers explore the incentives to bias budgeted information, which permits cost shifting to take place and allows hospitals to relax revenue constraints. The sample comprises of hospitals in Washington State across a period of time (1977 – 1992). During this period observable changes in the regulatory regimes in the national and state level. These changes can be categorized into three phases: a period of state revenue regulation, a period of state revenue regulation that is combined with a changing in federal reimbursement regulation and a third period in which state deregulation with the change in federal reimbursement regulation takes place. The findings of the study indicate that hospitals with more need to shift costs have larger positive forecasting errors in their budgeted contractual adjustments; this points towards a key role played by inflation in these contractuals. It was also found that hospitals that showed this kind of behavior lied mostly in the non profit, government, teaching and rural sections of the healthcare sector. Another key finding suggested that the presence of forecast errors were positively related to charges, this indicates that the biasing behavior allowed higher charges which in turn allows more cost shifting among payers. It is this behavior escalates as a result of discounting of charges that are permitted by the state and again after deregulation. Finally, the empirical evidence also suggests that the budgeted estimates of patient volumes as well as variable costs were biased as hospital managers responded to the regulatory environment. This behavior was occurring simultaneously with that of the biasing of contractuals. Changing regulation and competition Krishnan (2005) examines whether the type of competition in a market has an impact on the association between intensity of competition and demand for accounting information. Previous studies in investigating into this very aspect have come up with mixed results. While some argue that an increase in competition increases the demand for accounting information (Cooper, 1995; Kaplan, 1983) whereas others have found inconsistent or no linkages between the two factors (Libby and Waterhouse, 1996); the reason for this inconsistency being the fact that competition is a multidimensional construct which can be characterized in a variety of parameters. These can either be in terms of type, that is, the firm’s price, quality or service variety, or the intensity, which is a function of the number of firms in a market and their sizes. Krishnan (2005) uses longitudinal data from a sample of 1,578 hospital- year observations from hospitals in California. He then provides empirical evidence that when competitions is based on non price attributes, these being quality, the association between competitive intensity and a firms demand for accounting information does not exist. However if the competition is based on price, the association found between the two elements is positive. In addition, the change in the unit of analysis in the hospital industry from the payer to the ailment resulted in an increase in the demand for accounting information for all the hospitals in California. The findings highlight the importance of making this distinction mainly because the intensity of competition and the demand for accounting information is greatly influenced by the type of competition. The factors he had singled out for the use of his investigation were that of price and quality for determining the demand for accounting information based on type of competition. This goes to explain the previous mixed results obtained by the other researchers. Advantages of using health care data in the management accounting field The health care sector offers publicly available data sources which are useful for testing the theories developed by analytical researchers. This overcomes the biggest barriers that economic research in management accounting faces in terms of firms being unwilling to release their proprietary cost data. Hence with the data provided by the healthcare sector researchers can provide empirical support for accounting theories and increase our understanding of hospital operations at the same time. Let’s look at a example that might clarify this advantage. Data from California hospitals include cost report information that has been used numerous times to study accounting issues that include compensation, outsourcing, governance and the impact that competition and ownership have on investments (Duggan, 2000; Krishnan, 2003; Balakrishnan et al. 2009;) Also data from Washington State hospitals include budgeted and actual information that has been used to look at cost structures and its impact on regulation and management behavior such as cost shifting (Eldenburg and Soderstrom, 1996). There are several other advantages that make health care data relevant for the application of management in accounting research. With view of the hospitals in the healthcare sector one can come to the conclusion that there are basic similarities in all these organizations in terms of hospital production technologies for diagnostic, surgical and ancillary procedures. Furthermore the production function is underlined with several similarities too in terms of being labor intensive, with doctors and medical staff performing similar procedures and the same kind of protocols. So what underlines the differences between various hospital lies in key characteristics across various firms; these being size, investments, patient-mix and illness severity, all of which can be controlled. Hence it is easier to identify differences that are caused by factors such as ownership, governance or differences in the behavior of the management. This factor is further aided by the fact that the hospitals fall into the category of an industry that is singled out which helps control for regulatory, legal and competitive forces. Current developments in healthcare The health sector currently aims to reduce overall health care costs and at the same time improve the quality of health of the population. Keeping this goal in mind several countries have begun to take appropriate measures such as paying hospitals and physician’s bonuses for meeting specific types of medical practices related targets. An example of this can be seen in the way the U.K implemented a bonus system for physicians that was titled ‘Quality and Outcomes Framework’ (British medical association, 2010). With substantial data gathered to test the effects of this bonus on behavior and to estimate cost savings from their implementation. It is these changes that go in turn to have an impact on the accounting systems and the contracting issues in the health sector. This can be seen in the way when a bonus is based on preventative care goals motivate preventative measures by physicians. However it may lead to a decrease in patient volume and occupancy rates leading to a drop in hospital operating performance simply because some fixed costs may not be amortized. Thus showing a prevalent gap between public policy goals of improved preventative care and a reduction overall health care cost for the whole economy, and reduced occupancies and problems with breaking even or perhaps even recovering fixed cost for the individual hospital. Another development in the healthcare sector is that of the introduction of value based purchasing (VBP) introduced by Medicare (2011) as a performance assessment model to score hospitals on a series of quality measures. These could be in terms of process of care, a patients experience, efficiency or level of coordination. Furthermore Medicare introduces a number of pilot projects that reimburse healthcare entities solely on basis of treatment procedures and quality indicators. For example, a nursing home VBP project will offer financial incentives for organizations that perform well or show a high level of improvement. These schemes aim to improve overall performance but at the same time might result in unhealthy competition or collusion among the hospitals operating within a sector. Conclusion A view of the healthcare sector and how it interlinks with management accounting elements in various modes of operations that are undertaken in the daily basis of hospitals is seen. We view how the business opportunities in the healthcare sector have progressed and expanded due to which managers constantly remain updated with the latest business as well as accounting approaches that aim to rejuvenate their operations, minimize risks, as well as fulfill customer demands. With Street and Dawson (2002) analysis by adopting a cost allocation process we look at the development of an English measure of HRGs that looks at the funding of hospitals and their efficiency. Eldenburg and Soderstrom (1996) look at the effect of accounting guidelines in a dynamic business environment whereas Krishnan (2005) investigates into the factors that effect regulation and competition on the demand for accounting information by the healthcare sector. The advantages and the current state of the healthcare sector facilitates our understanding of the implications and the scope for management accounting research as far as the healthcare sector is concerned and how it is laden with potential for future opportunities and an ideal setting to validate accounting theories and concepts. References British medical association. (2010). Quality and outcomes framework. 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