BHIMA
Basic Hospital Information Management Application
Bhima is a free, open source accounting and hospital information management system (HIMS) tailored for rural hospitals in Africa. We are an international team based in the Democratic Republic of the Congo.
Cost Centers
Hospital Finances
In order for a hospital to operate successfully over time, the managers must have a clear understanding of whether the hospital is taking in enough money to cover its costs. If not, the hospital management needs to take corrective actions. That requires the financial manager to understand the income of the hospital as well as the costs that the hospital incurs during is operations.
In a hospital or clinic there are usually several services or departments that perform services for patients or to support the operations of the hospital. We also call these centers in BHIMA. For example, some typical departments are Administration, Surgery, Pharmacy, Maintenance, etc.
Larger hospitals might have all of these departments (or more). A rural clinic would probably have fewer departments since they offer fewer services.
While aggregate totals of income and costs for the whole hospital have value in the financial analysis of the hospital, it is more important to have a granular understanding of the costs for each department as well as the income of each department. Then the hospital manager can make decisions about reducing the costs of specific department and modifying the prices of the services the hospital offers to make the operation of the hospital sustainable over the long run.
The BHIMA software supports these types of financial analysis:
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Basics of cost allocation using the step-Down Approach
Determine the total cost to operate each department using the “step-down” cost allocation technique. -
Implementing step-down cost allocation analysis in BHIMA
Demonstrate how to set up and perform step-down cost allocation analysis in BHIMA.
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Break-Even Analysis (TBD)
Cost Center Cost Analysis
Operational Costs
When we consider the operating costs of individual departments or centers, we must consider the direct costs and the indirect costs.
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direct costs - are costs that are directly link-able to a specific department of the hospital. For example, this would include salaries for the personnel of the department, purchases specifically for the department, and other operational costs specific to the department.
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indirect costs - are costs that are required for the department to operate but are not explicitly charged to the department. Examples of indirect costs include hospital-wide “overhead” services such as hospital administration and maintenance.
We also use similar terms to distinguish departments based on whether they provide services or goods directly to patients or outside entities.
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direct departments - are departments which offer services or sell goods to patients or other organizations. These are also called revenue or profit departments (or centers).
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indirect departments - are departments which provide services or goods to other departments of the hospital but not directly to patients or other organizations. These are also called Non-revenue or service departments (or centers).
Based on these definitions, we can now classify various typical hospital departments (cost centers):
| Cost Center | Revenue? |
|---|---|
| Administration | Non-revenue / indirect |
| Emergency Room | Revenue / direct / profit |
| Dental | Revenue / direct / profit |
| Facilities | Non-revenue / indirect |
| Housekeeping | Non-revenue / indirect |
| Human Resources | Non-revenue / indirect |
| IT (Information Technology) | Non-revenue / indirect |
| Laundry | Non-revenue / indirect |
| Maintenance | Non-revenue / indirect |
| Nursing | Non-revenue / indirect |
| Obstetrics | Revenue / direct / profit |
| Ophthalmology | Revenue / direct / profit |
| Pathology | Revenue / direct / profit |
| Pediatrics | Revenue / direct / profit |
| Pharmacy | Revenue / direct / profit |
| Radiology | Revenue / direct / profit |
| Surgery | Revenue / direct / profit |
| Transportation | Non-revenue / indirect |
Note that the concept of a cost center is potentially broader than a department. It might be useful to combine more than one department into a cost center. For instance, it might make sense to consider Surgery and Dental as a combined cost center.
Cost Allocations
One of the questions that we will address with the BHIMA software is how to allocate (or divide) the indirect costs to specific departments (centers) in order to determine the the actual, overall cost to operate each department.
In order to allocate costs to departments, it is necessary to chose an allocation basis. For instance, the costs of administration are often allocated to specific cost centers (departments) based on the number of employees in the department. For various indirect costs there is often more than one possibility for an allocation basis. For maintenance, it might make sense to allocate maintenance costs to departments based on the number of the number of machines in the department, the area of the space occupied by the department, or the total cost of machinery in the department. Choosing an appropriate allocation basis is important.
In general, we would like to allocate the costs of all indirect departments to the direct departments so we have clear understanding of the total cost for each direct department.
In the BHIMA software we provide a way to allocate indirect costs using the Step Down cost allocation method. This process works by sequentially allocating the costs of each indirect department to the rest of the succeeding indirect departments and direct departments until all of the costs of indirect departments have been allocated (distributed) to the direct departments. During each step, the costs for the department being distributed are allocated on the basis of the allocation basis chosen for that cost center. A simplified example will help clarify this.
Step-Down Cost Allocation Example
Suppose we have a small hospital or clinic with administration, housekeeping, laundry, surgery, and pharmacy. In “surgery” we are considering all the medical staff and the services that they perform. Here is some information about these departments over a set period:
| Department | Direct Costs | Num Employees | Area (m2) | Washed (kg) |
|---|---|---|---|---|
| Surgery | $40000 | 4 | 100 | 40 |
| Pharmacy | $100000 | 2 | 100 | 20 |
| Administration | $20000 | 2 | 100 | 20 |
| Housekeeping | $5000 | 2 | 50 | 5 |
| Laundry | $7000 | 2 | 50 | 5 |
Our goal is to distribute the overhead costs of the Administration and Housekeeping to the revenue departments (Surgery and Pharmacy) to better understand the total of direct and indirect costs for the revenue departments.
These numbers are artificial and unrealistic, but serve to show the computations involved in determine overhead costs for revenue departments using the step down approach.
First we need to pick what allocation basis should be used for distributing the costs of the non-revenue departments. Here is one possible choice:
- Administration - Number of employees
- Housekeeping - Area
- Laundry - Amount washed (kg)
In the step-down cost allocation process, the order of how the departments are distributed must be chosen appropriately. In general, the departments that should be processed first are the ones that receive the least amounts of services from other departments. In this example, this would probably be either Housekeeping or Laundry. We will start with Laundry.
For the Laundry department, we will allocate costs to other departments based on the amount of clothes washed. The total direct cost for the Laundry service is $7000. Based on the table, 85 kg of laundry were washed (for other departments) during the period. So we would distribute the laundry costs as follows:
| Department | Old Cost | Washed (kg) | Distribution | New Cost |
|---|---|---|---|---|
| Laundry | $7000 | 5 | ||
| Housekeeping | $5000 | 5 | $7000 * (5/85) = $412 | $5412 |
| Administration | $20000 | 20 | $7000 * (20/85) = $1647 | $21647 |
| Surgery | $40000 | 40 | $7000 * (40/85) = $3294 | $43294 |
| Pharmacy | $100000 | 20 | $7000 * (20/85) = $1647 | $101647 |
| Total | $172000 | 90 | $172000 |
The following table shows the step down process repeated for each department in order. Note that when we distribute all of the non-revenue departments, the process stops and the resulting totals for the revenue departments show the combined direct plus indirect costs.
| Department | Direct Cost | Laundry (kg) | Housekeeping (area) | Administration (#emp) | Total |
|---|---|---|---|---|---|
| Laundry | $7000 | 0 | |||
| Housekeeping | $5000 | $412 | |||
| Administration | $20000 | $1647 | $1803 | ||
| Surgery | $40000 | $3294 | $1803 | $15634 | $60732 |
| Pharmacy | $100000 | $1647 | $1803 | $7817 | $111268 |
| Total | $172000 | $7000 | $5412 | $23451 | $172000 |
From this analysis, we can see that the Surgery has $20,732 of indirect costs and that the Pharmacy has $11,268 of indirect costs.
If we had chosen to process the Housekeeping first, the results would be a little different. Furthermore, if we had chosen a different allocation basis for any of the non-revenue departments, that would also change the results. So it is important to chose allocation bases that best represent the cost drivers for those departments. As long as the choices for allocation bases and step-down order are reasonable, the results will probably be similar and will be useful for financial planning.
Visit step-down cost allocation analysis in BHIMA For details on how to set up and perform step-down cost analysis in BHIMA.