Undoubtedly, the recent enactment of the Fair Costs and Prices Law has caused a stir in the country. However, and abstracting from the economic and political approaches and consequences that its application entails and considering only what refers to the obligation to determine a cost structure on the part of all companies, and although the approaches expressed below are applicable to the entire manufacturing industry, I am going to refer in this article, in particular, to companies that provide health services.
In the aforementioned law it is indicated in article 17 that:
“ For the determination of the fair price of goods and services, the competent body or entity may be based on: 1. Information provided by the companies…. (and that) said information must be in accordance with its direct and indirect cost structures, general, administrative, distribution and sales expenses, when applicable, as well as the expected profit…. 2. Elements that, due to their connection with the case submitted for consideration to determine the fair price of a certain good or service, make merit to be presumed valid for the determination of the aspects that make up the price, or the cost that comprises it ”.
Additionally, the law tells us that: "The costs and expenses reported to the Automated Price Administration System may not exceed those recorded for accounting purposes" (art. 19)
Well, seen from a strictly technical point of view, we should take this opportunity to think about a system of continuous improvement and development of our business economy, by implementing an effective cost system, since it would serve not only as a basis for setting prices, but also to achieve a better management of our companies and incorporate them into the modern managerial and business trends that are in vogue worldwide; Such fact would allow us to develop highly competitive and productive companies, and through this mechanism, achieve cost reductions and, in turn, set the best prices and rates in the market, and all of this would favor patients.This process of continuous improvement will be a reality from the determination of the degree of unproductiveness existing in our companies (products and services outside the quality standard, excessive losses of materials and time in the production of the product or service, excess personnel to maintain poorly designed organizations or due to the lack of adequate information systems for the provision of the service and as a consequence, also the excess of personnel required to process the information, loss of man-hours as a result of the bad organization, the hiring of staff lacking the skills required to perform the corresponding position, among other situations that generate unproductiveness). Where all these elements give rise to low quality products and services and make them more expensive.
Well, if we ignore the political aspects of the law and concentrate on seeing the opportunity that is presented to us: that of developing effective cost systems within our companies with the aim of improving all our processes and the quality of our products and services., we can not only achieve a lower cost, but also a higher profitability.
We are struck by the fact that when the need to present the cost structure of care centers arises in the health sector, we are informed that it is made up, in an imprecise way, by:
- Consumables: 30%
- Staff: 30% 40%
- Others: 20% - 30%
- Profit: 10% - 5%
The law tells us that the cost structure must be made up of: direct, indirect costs, general, administrative, distribution and sale expenses and elements that make merit to be presumed valid for the determination of the aspects that make up the price, or the cost that composes it.
As we can see, one thing is the information requested by law and another is the information presented by the health sector. I wonder, how can we determine the cost, or set the price or rate for an hour in the operating room or a day of hospitalization with the information presented above?
Cost Systems
We must consider that the traditional cost systems were developed between 1870 and 1930, in full development of the second industrial revolution, and all of them were oriented to respond to the industrial and business situation existing at that time: the production of tangible goods; since the development of the services was quite precarious. The important thing was to produce goods and not services. Additionally, they are systems aimed at exclusively measuring the costs of producing a good and are not capable of measuring the incidence of administrative, marketing and financial expenses on the cost structure of the products, for this reason they are called, as of today, “partial cost systems”.After almost a century, the trends in the production of goods and services at the world and national level have changed: at the macroeconomic level, an epidemic appeared, which in our country has become an endemic: inflation. At the microeconomic level, services emerged as the activity that captures the greatest amount of labor and the greatest demand from society. Additionally, both in the production of tangible goods and in the provision of services, are the indirect costs, those that are not applied directly in the production of the good or service and represented by materials, labor and the outsourcing of other activities, they are monopolizing the largest cost component within the price structure of goods and services.which in our case country, has become an endemic: inflation. At the microeconomic level, services emerged as the activity that captures the greatest amount of labor and the greatest demand from society. Additionally, both in the production of tangible goods and in the provision of services, are the indirect costs, those that are not applied directly in the production of the good or service and represented by materials, labor and the outsourcing of other activities, they are monopolizing the largest cost component within the price structure of goods and services.which in our case country, has become an endemic: inflation. At the microeconomic level, services emerged as the activity that captures the greatest amount of labor and the greatest demand from society. Additionally, both in the production of tangible goods and in the provision of services, are the indirect costs, those that are not applied directly in the production of the good or service and represented by materials, labor and the outsourcing of other activities, they are monopolizing the largest cost component within the price structure of goods and services.both in the production of tangible goods and in the provision of services, are the indirect costs, those that are not applied directly in the production of the good or service and represented by materials, labor and the outsourcing of other activities, which are monopolizing the largest component of cost within the price structure of goods and services.both in the production of tangible goods and in the provision of services, are the indirect costs, those that are not applied directly in the production of the good or service and represented by materials, labor and the outsourcing of other activities, which are monopolizing the largest component of cost within the price structure of goods and services.
Faced with such a situation, traditional cost systems (partial cost systems) have been losing their validity as adequate systems to measure the costs of products and services within an acceptable margin of reliability.
It is not until the end of the eighties, of the last century, and more specifically, at the beginning of the nineties, when methodologies appropriate to the challenge arise. Robert S. Kaplan, and Robin Cooper, developed the Activity Based Costing methodology (“global cost systems”) and they think as follows: “We use two very important concepts - first, the accurate measurement of the costs of the activities, and second, the reduction of costs through continuous improvements and reengineering - which allow the accounting function to go from being a passive informer of the past, to being something that influences the future proactively "
It is through a methodology of "global cost systems" that we can more effectively measure all direct and indirect costs that are part of the cost structure of a good or service, as required by the Law of Costs and Fair Prices.
Therefore, when we refer to the cost structure, in terms of the new law, we must identify:
- What is the cost object: specific product or service that satisfies the client's need: operating room time, hospitalization day, equipment cost, among others.
At this point we must emphasize that currently private health centers include in their billing, a series of concepts that constitute elements that make up the cost of the service provided, but they are not in themselves, billing objects, specifically I refer to all those services, that although they are necessary for the provision of the service and generate costs, they are part of the main services provided to patients, and should not be billed separately but should be part of the rate charged for these main services, which if they are billable, I mean the services of admission to the clinic, admission to the operating room, service of lingerie (when not disposable), television service and others like that.
1. What are the materials that are directly consumed to produce the product or provide the service and that are subject to billing, for example: medicines, medical surgical material (Direct Materials)
2. What are the processes or activities that are required to be carried out indirectly to carry out the service, and therefore, are cost generators:
- Support activities: lingerie, waitresses, pharmacy, logistics (General expenses of materials and indirect labor)
- Administrative activities: Management, Administration, Human Resources, Maintenance, and others (materials and indirect labor)
- Other Costs: interest, uncollectible losses and others.
- Generic Costs, which are all external services or supplies that are necessary for the provision of the institution's services and whose consumption is by all or most of the units that make up the organization: electricity, telephones, surveillance (external service) and others. (Materials and Indirect Labor).
3. What are the main services or final activities: surgery, hospitalization, diagnostic tests, use of medical equipment, among others. Which constitute the goods and services subject to invoicing (materials and direct labor)
We must consider that not only the objective of the Activity-Based Costing (ABC) system, as we said before, is oriented to the measurement of the costs of the services provided, but that within the framework of a statistical information structure, it will provide us information that will allow us to determine the level of productivity or unproductiveness of the different areas or activities of the organization, and additionally, we will be able to have information on the traceability of the cost, through which we will be able to know what the basic components are and in what amount of the cost of each main service or object of billable cost: Materials, direct labor, indirect labor, discriminated general expenses, expenses of the different administration units,of the human resources unit and other units of the organization and financial expenses among others.
Through traceability we can convert the historical cost system into a simulation model, where we can perform future cost analysis based on estimated variations in its basic components, for example, what will be the expected costs of the different services if the next year's inflation is 30% or 35%; or if we increase the salary of the staff by 10%. In other words, take advantage of the opportunity to obtain something more than the cost of the products or services, go further, a cost system is to have a business management tool that allows us to achieve continuous improvement in our organizations, improve our negotiation processes rates and better decision making
Requirements to develop a hospital cost system based on the ABCosting methodology:
- An adequate accounting system that allows us to obtain the necessary information to process the costs of services and products, where, among others, an accounting plan of accounts and appropriate accounting procedures for Cost management is developed. We must remember that the Law of Fair Costs and Prices tells us that " Costs and expenses… may not exceed those recorded in the accounting."
- A payroll system that allows us to group personnel expenses by cost centers.
- An appropriate Technological platform: Networks, equipment, servers, database, among others.
- Design of a statistical information system that allows us to obtain information on medical assistance activities (pathologies and execution times, among others)
- Incorporation of an ABC cost system
- A multidisciplinary proactive team for the implementation, start-up and monitoring of the project.
Finally, until recently this methodology was difficult to apply in our country, due to the lack of knowledge and the necessary technical support represented in a specialized software or computer system and trained personnel, however, in the context of globalization, this technology it is within reach in the Venezuelan market.
Today it is possible to have a hospital cost system installed and showing its results within the framework of the Law of Costs and Fair Prices in a period of time of about six or eight months, regarding a first basic stage.
