Activity Based Costing Application in Healthcare

This paper presents a summary of a longitudinal study of an Activity Based Cost (ABC) application in a UK healthcare organization (Arnaboldi, 2005).   The  study provides additional in-site and knowledge regarding the adoption and enactment of innovative costing applications in the healthcare industry.  It examines the entire trajectory from inception to implementation, and adoption of ABC to improve efficiency by one healthcare organization in the UK. The entire trajectory of the ABC creation took  place between 1993-2001. (Arnaboldi, 2005)

1. Company Name: Regional Blood Transfusion Service (RBTS), UK
2. Company Industry:  UK health care industry, and more specifically the blood services sector. RBTS is involved in blood collection, and a wide range of activities related to blood processing and by-products production;  blood supply chain, protein fractionation, clinical diagnosis manufacturing, and clinical services.
3. Description of  the ABC Application:  Implementation of an ABC system is challenging, and although rewarding and advantageous, the challenges associated with its implementation and maintenance have proven difficult for some companies to find success in the ABC system.  The RBTS ABC application is unique in that it is an attempt to implement a company-wide ABC system rather than a division by division approach within the organization. Since 1980 there has been an increase in costs within the blood transfusion service industry in the UK.  The advent of HIV, and Creutzfeldt-Jakob disease significantly altered the relationships between donors, transfusion centers, and patients.  These two major health events caused across the board increases in costs. Costs increased because of the increased safety protocols followed throughout RBTS’s processes and also a reduction in the number of readily available donors as a result of the improved blood screening processes.  Management’s focus on cost controls during this time had become a top priority. The RBTS ABC project went through three implementation stumbles throughout the time line trajectory. This was mostly a result of re-organization efforts at RBTS and other externalities that distracted resources and management’s focus away from the ABC project.  RBTS undertook an ABC implementation project for the entire institution across its four major blood processes.  Creating and implementing the RBTS ABC system consisted of four stages: 1. Activities mapping and  identification; 2. Definition of each activity’s resources and costs; 3. Identification of the activity drivers; 4. Selecting the activities and drivers which will define the ABC operating system.

The many dimensions of this particular project such as the trajectory taking place over time and across all ABC creation phases, the complexity of the transfusion service field, and management’s commitment to complete the endeavor made for a challenging ABC endeavor . There was a need to analyze different levels and units within RBTS. This included the organization as a whole, the subunits in which the system had been developed, as well as the individual participants within the organization.

        There were four sources for data; public documentation in the form of annual reports, governmental studies, and published literature, personal interviews with twenty-six key actors across senior managers, operations managers, business managers,  laboratory directors and technical staff.  The interviews took place as part and parcel of onsite visits,  and which also facilitated RBTS assisted access to their site related information systems. Each of the interviewees had roles in the ABC development as part of the project team, as users,  or as observers.  

1. Discussion of the Implementation of an the ABC Project.

        The RBTS ABC case presented numerous challenges to the design, implementation, and utilization of the ABC system particularly in a health care system.  This is due to the numerous entities within health care systems, and the diversity of objectives and environments within each entity.  Many authors suggest focusing the ABC  system to specific subunits in order to reduce the multitude of problems in creation, identification of activities, identification of cost pools and definition of drivers across all subunits (Ramsey, 1994).  The highly differentiated subunits within a health care system, along with the highly diversified skill sets between personnel of the different units represent some of  the many challenges to developing an ABC application to a large health care system. In addition, lack of a singular and thus cohesive objective between subunits of a large health care system can also make the design, implementation, and utilization of a seamless ABC system for the entire organization extremely costly and cumbersome.  The obstacles and challenges to large organizational ABC applications may support identifying the most critical sub-unit and implementing an ABC system to those units first.  In addition, the RBTS ABC system was intended as a routine system rather than an ad hoc exercise and this also made for a difficult challenge.  RBTS identified four divisions or sub units within RBTS and assigned individual ABC teams with different competencies to each sub unit. This resulted in different development times for each of the four sub units.  Challenges also resulted from the differences between the open market attitudes of some units and the state healthcare system attitudes of other units.  There were also different management choices between and within the sub units over the nine year life of the project. Actual use of the ABC was additionally influenced by effective interaction with existing information systems.  This particular study highlights the complexity and challenges of healthcare organizations as environments for adopting an ABC accounting system over existing traditional based accounting systems.

1. Discussion of the implementation of an ABC project.

The UK study pointed out the challenges and complexities encountered when attempting to implement and utilize an ABC system. Complex organizations may derive the most benefit of an ABC system because the costing information and subsequent control and decision making become more simplified and identifiable once the ABC is implemented and a smooth utilization process has been installed.  

             Potential gains of an ABC system must be weighed against the overall cost of  adoption and utilization of the ABC system. In large organizations each division or unit would need an ABC champion, a readily available source of expertise in ABC design and implementation, and a trusted project manager to oversee the project from beginning to end.  The organization will also need strong team builders and leaders to spread and maintain a positive culture among the employees. The need to maintain the current accounting and management state is crucial while also dedicating time and resources to building and implementing a new ABC system.  Outside consultants with technical competence in dealing with the complexities of accounting systems throughout the ABC design and implementation phase may be necessary.  The success of an ABC system is reliant on the measurable gains to management from the utilization of the ABC system.