Managing Costs through Structural Re-arrangement of Hospitals: An Activity Based Management Perspective

We examine a structural deficiency in the healthcare system that hinders implementation of a meaningful cost accounting system, and suggest an alternative organizational arragement that can facilitate introducing cost control mechanisms. We argue that hospitals need structural rearrangement so that cost-driving activities can be traced, and their costs allocated to responsibility centers. We suggest that this structural rearrangement is a precondition for implementing any meaningful activity-based cost management system. We also suggest a basic framework for value analysis of activities for healthcare providers, and discuss how this framework can be used as a vehicle for controlling diagnostic costs.